Buy Sandur Manganese and Iron for a holding period of 1 year.

This pick is by Investment Advisor, Ashish Chugh.

Sandur Manganese and Iron : BSE ID : 504918 NSE ID : Reco Price Rs. 639.05 CMP: Rs.639.10 (Gain 0.01%)
As against valuation of Rs.15000 crores for the reserves on beaten down valuations, the EV of the company is a mere Rs.470 crores. Also investments made by the company in forward integration will start paying off from September 2010 onwards.

Sandur Manganese and Iron Ores

The Sandur Manganese and Iron Ores Ltd. was incorporated in 1954 is mainly engaged in the mining of Manganese Ore and Iron Ore. The company has a Ferro Alloys plant, Star Metallics and Power Pvt. Ltd., at Vyasankere, near Hospet in Karnataka which is a 74% subsidiary of the company. The company is currently implementing a 32MW Captive Power project which is expected to be operational in September 2010 and with this the company will start its Ferro Alloys plant also in September 2010.

Financials

The latest financials of the company are given as under :-
QUARTERLY – LATEST RESULTS – (Curr: Rs in Cr.) As on 15/08/2010
Particulars Quarter Ended Quarter Ended Quarter Ended Year Ended Year Ended Year Ended
10-Jun 9-Jun % Var 10-Mar 9-Mar % Var
-12 -12
Sales 99.46 54.6 82.2 287.47 427.82 -32.8
Other Income 2.07 0.91 127.5 15.03 2.13 605.6
Other Operating Income
PBIDT 44.67 -4.3 LP 54.97 234.95 -76.6
Interest 0.02 0.03 -33.3 1.54 0.02 7600
PBDT 44.65 -4.33 LP 53.43 234.93 -77.3
Depreciation 2.61 2.55 2.4 10.42 9.89 5.4
PBT 42.04 -6.88 LP 43.01 225.04 -80.9
Tax 13.27 -2.65 LP 13.84 88.47 -84.4
Deferred Tax 0 0 - 0 -10.9 100
PAT 28.77 -4.23 LP 29.17 147.47 -80.2

Latest Data As On 13/08/2010
Latest Equity(Subscribed) 8.75
Latest Reserve 205.15
Latest Reserve (cons.) 197.77
Latest EPS -Unit Curr. 71.05
Latest EPS (cons.) -Unit Curr. 27.01
Latest Bookvalue -Unit Curr. 244.46
Latest Bookvalue (cons.) -Unit Curr. 236.02
Face Value 10
Book Value (BS) – Unit Curr. 280.83

Stock Exchange BSE
Latest Market Price–Unit Curr. 639.05
Latest P/E Ratio 8.99
Latest P/E Ratio -cons 23.66
Latest P/BV 2.61
Latest P/BV – cons 2.71
52 Week High -Unit Curr. 782.8
52 Week High-Date 20/01/2010
All Time High -Unit Curr. 1429.7
All Time High-Date 31/07/2008
52 Week Low -Unit Curr. 315
52 Week Low-Date 17/08/2009
All Time Low -Unit Curr. 17.5
All Time Low-Date 21/11/1995
Market Capitalisation 559.17
Dividend Yield -% 0.47
Dividend Yield -% – cons 0.47
Price Date 13/08/2010

Valuation & Investment Rationale

Sandur Manganese is involved in the mining and sale of Iron Ore and Manganese Ore. Till late 2008/ early 2009, the company was mining around 715 Hectares of Land which had reserves of 5 Mn Tonnes of Iron Ore and 18 Mn Tonnes of Manganese Ore. Thereafter, the company got clearance to develop further mines and the total Mining area now stands at 2005 Hectares with reserves of over 50 Mn Tonnes of Iron Ore and 25 Mn Tonnes of Manganese Ore.

The company has a market cap of Rs.560 crores. The company has a debt of roughly Rs.18 crores towards working capital advances and also has Cash kept as bank deposits and investment in various Mutual Funds of Rs. 125 Crores. Considering Sundry Debtors, Creditors, Inventory and Working Capital Debt, the Enterprise Value of the company comes to roughly 470 crores. The company made an Operating Profit of Rs.235 crores in FY 09 & paid a Tax of Rs.88 crores. The EV of the company therefore is equivalent to the potential operating profits that the company can make in two good years. This is extremely low for a company where reserves can last atleast for a few decades, if not centuries, thus signifying great value and margin of safety.

In FY 09, the company sold 2.95 Lakh tones of Manganese Ore and 14.50 lakh tones of Iron Ore and made an average realization of Rs. 7200 per ton for Manganese Ore and Rs.1450 per ton for Iron ore. The current reserves of the company stand at over 50 Mn Tons of Iron Ore and 25 Mn Tons of Manganese Ore. The valuation of these reserves comes to Rs.15000 crores assuming beaten down valuation of Rs.4000 per ton for Manganese Ore and Rs.1000 per ton for Iron Ore. Assuming Iron Ore and Manganese Ore prices at their highs would make the reserves of the company at over Rs.25000 crores. The Enterprise Value of the company at Rs.470 Crores looks small given the valuation of its reserves even at most conservative estimates. The promoters holding at 75% provides added confidence.

Investment in Star Metallics and Power Pvt Ltd., a 74% subsidiary

Star Metallics and Power Pvt . Ltd., a 74% subsidiary of the company is a joint venture between Sandur Manganese & Iron Ores Limited, Euro Industrial Enterprises Private Limited, and ETA Star Holdings Limited, Dubai. The company has a ferro alloys plant at Vyasankere, near Hospet. and a 32 MW Captive power project is being implemented.

Sandur Manganese has deployed roughly Rs.110 crores in Star Metallics and Power Pvt. Ltd.. This forward integration by the company would lead to high value addition when the plant of Star Metallics goes operational. The plant is expected to become operational in September 2010 as the 32 MW power project becomes operational. The benefits of investment of Rs.110 crores in forward integration will therefore start accruing to the company from the quarter Oct-Dec 10 onwards, with increased cash flow and higher profitability.

Other Initiatives

The company has recently received in-principle approvals from the Government of Karnataka to set up a 2.5 lakh tonnes per year medium sized special alloy steel plant, iron ore beneficiation plant of an optimum feed capacity of 1.7 million tones of Run of Mines and a Ropeway over a length of 4 km from Mines to Railway siding.

Major Concerns

The short term concerns however may be mining restrictions and restrictions on movement of Iron Ore being imposed by Karnataka government currently. Also, imposition of any additional tax on mining by the government is another concern. However, these concerns may be opportunities to accumulate the stock at current levels and on declines for the long term investors.

We believe the stock of Sandur Manganese carries high potential and also provides good margin of safety to the long term investors. The company pays tax at full rates and paid nearly Rs.88 crores Income tax in FY 09 and Rs. 13.25 crores for Q1 FY 10. The market cap of the company is small in relation to the tax payments which it makes. The company has nearly doubled its Sales in the first quarter of 2010 (over the same period last year) and has made an operating margin of 52% and made a PAT of Rs. 28 crores. The performance of the company for the next few quarters may be muted on account of restrictions on mining and restrictions on movement of Iron ore imposed by the Karnataka government. Assuming that for the next 3 quarters, the company does a profit of only 70% of what it has done in Q1, the full year profits can be Rs.87 crores. This would translate into an EPS of Rs.100. The stock is thus available at a PE of around 6.5. The company carries potential to make supernormal profits in boom times for Iron Ore and Manganese Ore. Also, in the event of the company offering a stake to a strategic investor, this can lead to unlocking of value for the shareholders.

Long term investors can choose to accumulate the stock at the current price and on declines.

Ashish Chugh is an equity analyst and investment consultant based at New Delhi, INDIA. At the time of writing this article, he, his firm and dependent family members have a position in the stocks mentioned above. The author, his firm or any of his dependent family members may make purchases or sale of the securities mentioned in the report while the report is in circulation. The author invites readers to send him email and welcomes comments, feedback & queries at nexgenfin@yahoo.com.

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