Dalal Street Low Priced Scrip: Lloyds Steel Industries
Lloyds Steel Industries
CMP: Rs 12.65
Investment: Medium term to Long term
It hardly ever happens that a company with inconsistent performance on the financial front is recommended as a low-priced scrip to our investors. But this time we are doing just that with Lloyds Steel Industries (LSIL) which has witnessed a bumpy ride on the financial highway in the last two fiscals. In FY08 and FY09, while its topline remained stagnant, the bottomline took a severe beating. The impact of the same was reflected in the counter taking a huge beating on the bourses. However, there are certain unique factors that have guided us to post a thumbs-up sign for LSIL.
First and foremost is the company’s improved financial performance in 9MFY10. The second factor is the diversified business mix of the company. A third factor is that the company is implementing a debt restructuring plan. Here the preferential warrants will be allotted to the financial institution and to promoters at Rs 10 each. With the scrip trading at Rs 11 and promoters infusing money at Rs 10, the downside is capped. Further, with the restructuring happening, interest cost is expected to decline, thereby helping the company witness a better bottomline. Our recommendation is that investors should buy the scrip at its current levels with a target price of Rs 16 in the next one year. As regards the company’s business, it has a 3.50 lakh tonne per annum (LTPA) manufacturing capacity of cold rolled coils, 6 LTPA of hot rolled coils and 2.50 LTPA of galvanized steel. It also has an engineering product division which provides services to the oil and power industries.
As regards the revenue structure, while it earns 71 per cent of its revenues from steel, 15 per cent is earned from the engineering products division while the rest is through trading of materials. In the steel division, HR coils contribute a higher amount (53.19 per cent of total revenues) followed by galvanized products contributing 15.50 per cent. This indicates good diversification in the steel business too. As mentioned earlier, the financial performance of the company for 9MFY10 has been good. For 9MFY10 it posted topline of Rs 2,216.38 crore and its EBITDA was Rs 27.78 crore as compared to Rs 2,018.82 crore and loss of Rs 91.20 crore respectively in 9MFY09. It is quite visible that the topline and operating profit have increased on account of the good performance of its high-margin engineering division.
As a part of the company’s financial strategy, the total outstanding amount (principal as well as interest liability) of Rs 254.15 crore has been restructured and settled for Rs 46.82 crore. Accordingly, the principal amount of Rs 3.05 crore written back has been credited to capital reserve and the balance amount of Rs 204.28 crore has been credited to the profit & loss account. Now the company is issuing 13 crore convertible warrants to IDBI Bank at Rs 10 per share. Further, the promoters have also been issued 16.85 crore warrants at Rs 10 each to be converted in the next 18 months. Such a move indicates the confidence of the promoters in the company and also provides a cushion for any downside. In our opinion, the risk reward ratio is in favour of investors. In addition to this, the interest cost, which was a drag on the company’s bottomline, is expected to decline, thereby resulting in better figures. It is for all such reasons put together that we have been driven to recommend this scrip.
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