INVESTMENT IDEA Kalyani Steels
Updated
This post is not for traders who want to trade with stop loss. This is for long term investors who wants to buy fundamentally strong beaten down names at a good entry points.
KSL
Kalyani Steels Ltd, a part of Kalyani Group, is primarily engaged in the business of manufacture and sale of Iron and Steel Products.
The product portfolio of the Co consists of camshaft, connecting rods, gears, transmission shafts, axle beams, steering knuckles etc. for Automotive Industry, round cast for Seamless Tube Industry, rolled bars for Engineering Application etc.
Why is it a good buy right now?
(Excerpts from Rating Update of Kalyani Steels by CARE Ratings)
1. Industry outlook
India is the second-largest crude steel producer in the world. India’s crude steel production fell by 5.59% and finished steel production was flat at 95.12 MT in FY21 against 102.62 MT in FY20. Domestic steel demand was impacted by a slowdown in manufacturing activities during H1FY21 due to Covid-19 pandemic. However, post lockdown, the global commodity markets witnessed a sharp rebound with a continuous increase in prices. While the demand recovery, especially in China and other economies, was on the back of substantial government stimulus, the lockdowns and restrictions caused significant supply-side headwinds in terms of difficulty in procurement and movement of key raw materials resulting in reduced production across steel mills. The double whammy effect resulted in one of the sharpest and perhaps the fastest recoveries in the global steel prices, which was considered beyond the market's expectation. CARE Ratings expects the domestic steel demand to grow at a compounded annual growth rate (CAGR) of about 7.5% during the next 2-3 years. CARE Ratings further expects net sales realization to remain healthy. As far as volumes growth is concerned, demand improvement and the low base effect of FY21 is likely to help improve the volumes of the domestic players. The solvency ratios of steel companies are expected to improve on account of accretion to net worth and healthy cash accruals along with continuous reduction in debt levels.
2. Strong promoter group coupled with long track record in iron & steel industry
KSL is a part of the Kalyani group and is spearheaded by Mr B.N Kalyani in the strength of Chairman. He is also the Chairman and Managing Director (CMD) of Bharat Forge Limited. The Kalyani group, established in mid 1960s, has wide capabilities across varied industries including Engineering, Automotive, Industrial, Renewable Energy, Urban Infrastructure and Specialty Chemicals. In a span of more than four decades, KSL has grown from being a primary iron and steel manufacturer to a preferred steel supplier for engineering, auto, seamless tubes, etc., companies mainly catering to forging industry serving the auto and allied sectors. The promoters are supported by a team of professionals including, Mr RK Goyal (MD) and Mr Balmukand Maheshwari (CFO) who are associated with KSL since more than eight years.
3. Established selling arrangements
KSL was promoted as backward integration unit of the Kalyani group from which majority of the requirements for the group companies is met through KSL. Moreover, long-standing relationship with major OEMs along with approved vendor status continues to garner KSL with repeat orders. The Kalyani group companies accounted for around 53% of the total revenue in FY21 (refers to the period April 1 to March 31).
4. Arrangement with suppliers for procurement of raw material albeit absence of long-term contracts continues
KSL has diversified raw material procurement source wherein raw materials are procured both from the domestic and overseas market. The key raw materials used by KSL include coke/coke fines, iron ore/iron ore fines and ferro alloys. However, majority of the raw materials have been sourced from few suppliers representing concentration risk; but the risk is partially mitigated as the company takes quotes from various suppliers before placing orders. Furthermore, KSL has not entered into any long-term contracts with the suppliers.
5. Robust capital structure and comfortable debt coverage metrics
Capital structure of KSL remained robust with 0.02 (nil) debt to equity and overall gearing (including LC backed creditors) of 0.22x (0.19x) as on March 31, 2021 (2020). The overall gearing marginally increased on account of ECB taken by the company during FY21 to fund the projected capital expenditure of Rs.211 crore. As on March 31, 2021, the company has long-term debt of Rs.18.37 crore. The debt is projected to increase further, however, the overall gearing is expected to remain comfortable. The fund-based working capital utilization is also minimal. The net worth of the company stood at Rs.1,153.42 crore as on March 31, 2021, as against Rs.962.71 crore as on March 31, 2020. The gearing when adjusted to investments in group companies also stayed strong (adjusted overall gearing of 0.25x) as on March 31, 2021. PBILDT interest coverage and total debt/gross cash accrual remained comfortable at 43.24x and 1.11x in FY21 from 10.08x and 1.12x in FY20, respectively.
6. Improvement of Profitability Margin
KSL improved its profitability margin majorly on account of improvement in gross margins. The company’s PBILDT (PAT) margins have remained in between 14.90% and 24.04% (8.2% and 15.59%) over the past five fiscal years through FY21. KSL’s PBILDT margin improved to 24.04% in FY21 from 18.93% in FY20 majorly on account of lower raw material and consumable costs. The company is undertaking a backward integration project amounting to Rs.211 crore, to set up a new 200,000 TPA coke oven plant and 17-MW waste heat power plant. The project is expected to be commissioned by September 2022 which shall lead to reduction in cost of production with further improvement in profitability.
7. Average ROE (Return on Equity) for last 3, 5 and 10 years are 16%, 17% and 16% respectively (all above 15%)
8. TTM (Trailing 12 months) Sales and Profit growth at 51% and 82%
9. Dividend Yield at 2.57% (consistent dividend payer since 2010)
10. Debt to equity at 0.18 (less than 1 is good), Interest Coverage at 27 (greater than 3 is good), Current ratio at 2.11 (greater than 1.5 is good), FCF to CFO at 64% (company won’t have to raise debt for expansion)
11. Current PE at 5.08 is less than 10-year average PE of 7.06
12. It can be seen that the stock price is trading near a good demand zone which is a confluence of strong support and resistances.
If anyone consider it for buying, put only 3% of your capital right now, buy with another 3% if it falls another 40% and invest the rest 4% (don't invest more than 10% of your entire capital in one stock) when the share closes at a 52 week high.
KSL Kalyani Steels Ltd, a part of Kalyani Group, is primarily engaged in the business of manufacture and sale of Iron and Steel Products.
The product portfolio of the Co consists of camshaft, connecting rods, gears, transmission shafts, axle beams, steering knuckles etc. for Automotive Industry, round cast for Seamless Tube Industry, rolled bars for Engineering Application etc.
Why is it a good buy right now?
(Excerpts from Rating Update of Kalyani Steels by CARE Ratings)
1. Industry outlook
India is the second-largest crude steel producer in the world. India’s crude steel production fell by 5.59% and finished steel production was flat at 95.12 MT in FY21 against 102.62 MT in FY20. Domestic steel demand was impacted by a slowdown in manufacturing activities during H1FY21 due to Covid-19 pandemic. However, post lockdown, the global commodity markets witnessed a sharp rebound with a continuous increase in prices. While the demand recovery, especially in China and other economies, was on the back of substantial government stimulus, the lockdowns and restrictions caused significant supply-side headwinds in terms of difficulty in procurement and movement of key raw materials resulting in reduced production across steel mills. The double whammy effect resulted in one of the sharpest and perhaps the fastest recoveries in the global steel prices, which was considered beyond the market's expectation. CARE Ratings expects the domestic steel demand to grow at a compounded annual growth rate (CAGR) of about 7.5% during the next 2-3 years. CARE Ratings further expects net sales realization to remain healthy. As far as volumes growth is concerned, demand improvement and the low base effect of FY21 is likely to help improve the volumes of the domestic players. The solvency ratios of steel companies are expected to improve on account of accretion to net worth and healthy cash accruals along with continuous reduction in debt levels.
2. Strong promoter group coupled with long track record in iron & steel industry
KSL is a part of the Kalyani group and is spearheaded by Mr B.N Kalyani in the strength of Chairman. He is also the Chairman and Managing Director (CMD) of Bharat Forge Limited. The Kalyani group, established in mid 1960s, has wide capabilities across varied industries including Engineering, Automotive, Industrial, Renewable Energy, Urban Infrastructure and Specialty Chemicals. In a span of more than four decades, KSL has grown from being a primary iron and steel manufacturer to a preferred steel supplier for engineering, auto, seamless tubes, etc., companies mainly catering to forging industry serving the auto and allied sectors. The promoters are supported by a team of professionals including, Mr RK Goyal (MD) and Mr Balmukand Maheshwari (CFO) who are associated with KSL since more than eight years.
3. Established selling arrangements
KSL was promoted as backward integration unit of the Kalyani group from which majority of the requirements for the group companies is met through KSL. Moreover, long-standing relationship with major OEMs along with approved vendor status continues to garner KSL with repeat orders. The Kalyani group companies accounted for around 53% of the total revenue in FY21 (refers to the period April 1 to March 31).
4. Arrangement with suppliers for procurement of raw material albeit absence of long-term contracts continues
KSL has diversified raw material procurement source wherein raw materials are procured both from the domestic and overseas market. The key raw materials used by KSL include coke/coke fines, iron ore/iron ore fines and ferro alloys. However, majority of the raw materials have been sourced from few suppliers representing concentration risk; but the risk is partially mitigated as the company takes quotes from various suppliers before placing orders. Furthermore, KSL has not entered into any long-term contracts with the suppliers.
5. Robust capital structure and comfortable debt coverage metrics
Capital structure of KSL remained robust with 0.02 (nil) debt to equity and overall gearing (including LC backed creditors) of 0.22x (0.19x) as on March 31, 2021 (2020). The overall gearing marginally increased on account of ECB taken by the company during FY21 to fund the projected capital expenditure of Rs.211 crore. As on March 31, 2021, the company has long-term debt of Rs.18.37 crore. The debt is projected to increase further, however, the overall gearing is expected to remain comfortable. The fund-based working capital utilization is also minimal. The net worth of the company stood at Rs.1,153.42 crore as on March 31, 2021, as against Rs.962.71 crore as on March 31, 2020. The gearing when adjusted to investments in group companies also stayed strong (adjusted overall gearing of 0.25x) as on March 31, 2021. PBILDT interest coverage and total debt/gross cash accrual remained comfortable at 43.24x and 1.11x in FY21 from 10.08x and 1.12x in FY20, respectively.
6. Improvement of Profitability Margin
KSL improved its profitability margin majorly on account of improvement in gross margins. The company’s PBILDT (PAT) margins have remained in between 14.90% and 24.04% (8.2% and 15.59%) over the past five fiscal years through FY21. KSL’s PBILDT margin improved to 24.04% in FY21 from 18.93% in FY20 majorly on account of lower raw material and consumable costs. The company is undertaking a backward integration project amounting to Rs.211 crore, to set up a new 200,000 TPA coke oven plant and 17-MW waste heat power plant. The project is expected to be commissioned by September 2022 which shall lead to reduction in cost of production with further improvement in profitability.
7. Average ROE (Return on Equity) for last 3, 5 and 10 years are 16%, 17% and 16% respectively (all above 15%)
8. TTM (Trailing 12 months) Sales and Profit growth at 51% and 82%
9. Dividend Yield at 2.57% (consistent dividend payer since 2010)
10. Debt to equity at 0.18 (less than 1 is good), Interest Coverage at 27 (greater than 3 is good), Current ratio at 2.11 (greater than 1.5 is good), FCF to CFO at 64% (company won’t have to raise debt for expansion)
11. Current PE at 5.08 is less than 10-year average PE of 7.06
12. It can be seen that the stock price is trading near a good demand zone which is a confluence of strong support and resistances.
If anyone consider it for buying, put only 3% of your capital right now, buy with another 3% if it falls another 40% and invest the rest 4% (don't invest more than 10% of your entire capital in one stock) when the share closes at a 52 week high.
Note
A good move may have already started.
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