Tata Sponge Iron has a reason to cheer
Rising sponge iron prices, raw material sourcing issues for peers and strengthening rupee may help Tata Sponge Iron to turn around business. Its cheap valuations further makes the stock attractive.
Sponge iron is used in steel manufacturing as a substitute to scrap steel. The domestic price of sponge iron has risen by over 64% to around Rs 18,000 per tonne in April from the lows seen in mid-2016. It has gained over 18% since the beginning of 2017.
In the December quarter, the company’s sponge iron business posted a marginal profit of Rs 7 lakh against losses in the previous two quarters.The March quarter results are yet to be declared.
With 390,000-tonne capacity, Tata Sponge is the leading sponge iron manufacturer. It has been running its plants at almost full utilisation for the last two quarters. According to various reports, other players, mostly unorganised, are struggling with sourcing of iron ore due to re striction on the iron ore production in various regions. Tata Sponge has an edge as it sources mostly from Tata Steel at an arm’s length price.
Further, prices of imported coal (Indonesian), another major raw material, are down 18% in the year till date. This bodes well for Tata Sponge. Sponge is also used as a substitute for pig iron, which uses coking coal for manufacturing, prices of which have run up 80% in the last one month due to floods in Australia.A stronger rupee will also help as the company uses imported coal.
According to estimates, at an average sponge iron realisation of Rs 17,000 per tonne, Tata Sponge may deliver operating profit before depreciation (EBIDTA) of Rs 180 crore in FY18. This also includes the power segment’s EBIDTA of Rs 35 crore (Rs 9 crore in the December 2016 quarter).The company has cash of `650 crore.