ICICI Direct rates Visa Steel as OUTPERFORMER

ICICI Direct rated Visa Steel (CMP: Rs 49) as OUTPERFORMER with a price target of Rs 71.

Visa Steel plans to set up its steel manufacturing facility with Steel Melting Shop and Bar & Wire Rod Mill with capacity of 500,000 tons per annum (tpa) by FY10. It is setting up a 300,000-tpa sponge iron plant & 50 MW Waste Heat Recovery Power Plant by FY08. Post capex, the analysts at ICICI Direct expect EBIDTA margins to expand to 23.40% by FY10. The company is also integrating backwards with captive ownership of critical raw materials such as iron ore, chrome ore, steam coal, coke & power, which would enable it to withstand raw material-related pricing pressures and keep its cost under control.

The analysts expect the company to emerge much stronger post completion of capex in FY10. They say that as the benefits of backward integration would start accruing along with higher capacity utilization, the company would align its cost structure to optimal levels. Further, the financial stability would improve from last quarter of FY10
when it value added products units gets commissioned. The company would be able to absorb additional depreciation and interest burden in lieu of the ongoing capex with much ease, as its cash flow situation would improve substantially from current levels. They expect operating margins to expand to a respectable 23.39% in FY10 and net profit margins to be 9.72% in FY10. Operating margins are expected to expand to respectable 23.39%.

The analysts have adopted replacement cost method for valuing the company as PE, EV/EBIDTA or other valuation multiples would not reflect the evolving business model of the company. They believe Visa Steel deserves to trade a premium to its replacement cost despite concerns regarding delays in project execution.