IPO analysis: Austral coke, Resurgere Mines Minerals

Mining for more?

COMPANY : AUSTRAL COKE & PROJ ISSUE
SIZE : Rs 119.1-142 .3 CRORE PRICE BAND : Rs 164-196
DATE : AUGUST 7-13 , ’08 RATING: ***

Austral Coke looks attractive at the current offer price. Investors are advised to subscribe to this issue Austral Coke & Projects, a metallurgical coke manufacturer and provider of construction equipment on lease, has come out with a public issue of 7.26 million equity shares and another 1.09 million shares will be available under a greenshoe option. It plans to use the funds mainly to set up a metallurgical coke plant of 1.5 lakh tonne capacity and an 8-mw captive power plant. Post-issue , the promoters’ holding in the company will decline from 87.41 per cent to 63.18 per cent.

BUSINESS:

Austral manufactures coke and refractory, and provides construction equipment on lease to medium/large construction companies. Around 55 per cent of the company’s topline comes from the coke division and 25 per cent from equipment. But the coke business accounts for 80 per cent of its operating profit, compared to 15 per cent contributed by equipment. Austral has a current met coke capacity of 3.75 lakh tones, which will rise to 5.25 lakh tonnes by the end of FY09. Its captive power plant will also come up at the same time. The company’s customer base is welldiversified and is thus, insulated from any slowdown in a particular industry. Its customers include Jindal Saw, Essar Steel, DCW and Nirma. The company plans to get away from its leasing business and focus on acquiring coking coal mines and manufacturing coke. It also plans to start mining from its mine in Mozambique.

FINANCIALS :

Austral’s revenue from manufacturing has almost quadrupled in the past three years. Its focus on coke manufacturing and use of advanced technology (stamp charging) has improved its operating margin by five times in the past three years to 35 per cent. In fact, this is higher than 27 per cent for its closest competitor, Gujarat NRE Coke (GNCL). Though the company has made many investments in recent years, the average RoCE for the past three years works out to a modest 17 per cent. Traditionally, Austral’s debt-equity ratio (DER) has remained slightly below 1, while the interest coverage ratio is well above 5. Post-issue , the company’s DER will further fall to around 0.5.

GROWTH POTENTIAL :
Huge demand for coke from steelmakers has pushed up price to $700-800 a tonne. Given huge expansion plans by steel companies, demand is set to stay robust, as there’s not enough supply of this commodity globally.

VALUATIONS :
The company’s closest listed peer is GNCL, which was originally promoted by the current promoters of Austral. By end-FY 09, Austral will have a met coke manufacturing capacity equal to 42 per cent of that of GNCL. The latter has an m-cap of Rs 3,500 crore. So, Austral should have a market value of around Rs 1,500 crore . Though both companies have mining assets abroad, in case of Austral, mining from these assets has not yet started. Even after discounting this value by 50 per cent, the fair value per equity share of Austral is almost double that of the offer price. At the upper price band, Austral’s trailing P/E is close to 15.4, which is at par with its peers. We have assumed full exercise of the greenshoe option and its diluting effect on shares for these estimates . Considering its attractive valuations , investors can subscribe to this issue.

RISKS:
Austral sells in the spot market; hence, it is subject to spot price fluctuations. Further, any downturn in the commodity cycle will hit the company’s profitability.
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COMPANY :
RESURGERE MINES & MINERALS
ISSUE SIZE : Rs 117-121 CRORE PRICE BAND : Rs 263-272
DATE : AUGUST 11-13 , ’08 RATING : ** 1/2

Negative cash flow from operations is a major concern for Resurgere Mines. Only investors with high risk appetite should consider the IPO Resurgere Mines & Minerals, an iron-ore miner , has come out with a public issue of 4.45 million shares, which includes 0.25 million shares reserved for its employees. The company plans to use the IPO proceeds to purchase mining equipment to set up extraction and crushing facilities at mines. It will also invest in six railway rakes to set up transportation logistics facilities for captive purposes. Post-issue , the promoters’ holding will decline to 56.12 per cent from 66.5 per cent.

BUSINESS:
The company produces iron ore of different sizes and trades iron ore fines. Currently, it operates in three mines - two in Orissa and one in Jharkhand. But it carries out mining activities in the area of third parties, who have the original mining lease. Resurgere has also got a bauxite mining lease through one of its wholly owned subsidiaries. The total amount of iron ore and bauxite reserves in the current mining area of these mines is estimated at 74.82 and 4.92 million tonnes (mt), respectively.

FINANCIALS:
Resurgere’s revenue from mining and trading activities has more than quadrupled in the past three years, while operating profit has risen by more than seven times. The company’s operating margin (currently 26.7 per cent) has remained volatile due to the variation in trading amounts. Once export of iron-ore fines commences , margins are set to improve further. One major concern for the company is the negative operating cash flow in the past five years. The company has tried to maintain a low debt-equity ratio (currently 0.24). With the IPO, this ratio will fall further.

VALUATIONS:
The company’s enterprise value (EV) is close to Rs 820 crore at the upper price band. A discounted cash flow approach reveals that even at 30 per cent of capital cost and 20% growth rate, it will take only 5-6 years to recover the EV from operating cash flow . Further, an estimated inventory of iron-ore fines worth Rs 34 crore is lying idle, which can be used once the company obtains railway rakes from next year. The bauxite mine, with estimated reserves of 4.9 mt in 43 acres out of a total 661 acres will add further value. All these facts indicate reasonably good valuations at current offer price. But the main concern lies in the company’s ability to convert its revenue into cash flow, since it has failed to generate cash from operations in each of the past five years. We believe the issue is risky and only investors with above-average risk appetite should subscribe to it.

RISKS: Any downturn in the commodity cycle will majorly impact the company’s profitability.

Source:ET