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Equity Research

July 15, 2009

BSE Sensex:13854
Adhunik Metalliks Unrated
Prudent foray Rs83
Metals Reason for report: Mines & steel plant visit
We visited Adhunik Metalliks’ (AML) fully-owned subsidiary – Orissa Manganese
& Minerals’ (OMM) – iron-ore & manganese mines at Jharkhand & Orissa and
Shareholding pattern
came back positive. We also visited AML’s special/alloy steel plant at Orissa. AML
Sep Dec Mar
'08 '08 '09 has made an aggressive foray into merchant-mining space and obtained seven
Promoters 64.0 64.0 64.0
environmental & forest clearances within 12 months, an unprecedented
investors 16.3 14.6 13.5 achievement in Mining. While on one hand AML has been able to ramp up
MFs and UTI 7.5 5.6 3.9
Insurance Cos. - - - volumes to the optimum level in the special/alloy steel industry, it has evidently
FIIs 8.8 9.0 9.7 shifted focus to Merchant Mining, with high-quality ~90mnte iron-ore & ~50mnte
Others 19.7 21.4 22.5
Source: NSE manganese reserves. Further, AML has forayed into Merchant Power via its
subsidiary, Adhunik Power & Natural Resources (APNRL), which is setting up a
540-MW power plant at Jamshedpur. We expect AML’s consolidated earnings to
double, given: i) partial integration obtained in its steel business, aided by dip in
Price chart raw-material prices and ii) rapid ramp-up in OMM’s iron-ore production from
merchant mines. Stretched financials with consolidated debt of Rs12bn (D:E of
2.3:1) remains a short-term concern. At current market cap of Rs9bn, the stock
trades at FY10E P/E of 5.3x; we do not have a rating on the stock at present.
80 f OMM – Uniquely placed in merchant mining space. With high-quality iron-ore &

60 manganese reserves as well as expected cashflow of ~Rs1bn in FY10E (on

40 production at ~50% of approved mining plan), OMM is emerging as the growth cash
20 cow for its parent, AML. The cashflow would be used to fund AML’s incumbent
power operations and immediate short-term financing requirements. We expect



profits in OMM to increase 4.7x YoY in FY10E.

f Foray into merchant power space via APNRL. AML is setting up a merchant
power plant of 540MW (270x2) capacity at Jamshedpur for Rs25bn via its 100%
subsidiary, APNRL. The company has already placed order for a boiler turbine &
generator (BTG) with Bharat Heavy Electricals (BHEL) in phase I (zero date August
1; best date 30 months). AML plans raising Rs3bn through an equity issue and hold
60% stake in APNRL via itself and OMM.
f Special/alloy steel plant to take backseat. AML recently increased capacity of its
special/alloy steel plant at Rourkela to 0.46mnte and has a premium set of niche
customers. Though margin expansion could happen due to efficiency improvement
and further integration, AML’s steel business is likely to gradually take a backseat as
the company shifts focus to Merchant Mining and Power.

Market Cap Rs8.7bn/US$180.8mn Year to March FY06 FY07 FY08 FY09

Reuters/Bloomberg ADME.BO/ADML IN Revenue (Rs mn) 4,238 7,440 10,345 12,703
Shares Outstanding (mn) 105 Net Income (Rs mn) 337 771 820 467
52-week Range (Rs) 123/24 EPS (Rs) 3.1 7.0 7.4 4.2
Free Float (%) 36.0 % Chg YoY 374.9 128.9 6.3 (43.0)
FII (%) 9.7 P/E (x)* 27.5 12.0 11.3 19.6
Daily Volume (US$/'000) 500 CEPS (Rs) 3.7 8.1 9.6 7.9
Absolute Return 3m (%) 56.6 EV/E (x) 14.5 11.8 11.2 10.3
Abhijit Mitra Absolute Return 12m (%) (17.6) Dividend Yield (%) 0.6 1.2 1.4 1.2
+91 22 6637 7289 Sensex Return 3m (%) 22.8 RoCE (%) 12.9 16.3 11.9 NA
Sensex Return 12m (%) 9.3 RoE (%) 27.7 31.7 26.6 NA

Please refer to important disclosures at the end of this report

Adhunik Metalliks, July 15, 2009 ICICI Securities
OMM, uniquely placed in merchant mining space
With high-quality iron-ore & manganese reserves as well as expected cashflow of
~Rs1bn in FY10E (on production at ~50% of approved mining plan), OMM is
emerging as the growth cash cow for its parent, AML. The cashflow would be used to
fund AML’s incumbent power operations and immediate short-term financing
requirements. We expect profits in OMM to increase 4.7x YoY in FY10E.The
subsidiary’s iron-ore mines are located at Ghatkuri (Jharkhand) and the manganese
mines at Patmunda and Orahuri (Orissa).

Ghatkuri Mines (West Singhbhum in Jharkhand)

Reserves and resources
OMM has high-quality ~90mnte iron ore reserves in the hills of Ghatkuri, Jharkhand.
The mines are spread along two strips (B&C), with the patch in between (~40ha)
being mined by the Rungtas. Of the 241ha mine area, 141ha has received
environmental and forest clearance; the central government body, Minmac, has
validated the reserves and resources. There are several patches of continuous
deposits across the mine that are still unmined.

Production and mining

Currently, mining is carried out in four quarries that are spread across the two
aforementioned strips; OMM has plans to introduce four more quarries. Further, the
subsidiary plans mining 1.3mnte of lumps (ex fines) in FY10E. At present, ~30%
production (in the form of 10-40mm lumps) is absorbed by its parent, AML. Once the
eight quarries become active, mining is likely to be ramped up to ~2mnte by FY11E.
Also, the current mining plan of 2mnte has been approved by the Indian Bureau of
Mines (IBM), Nagpur. We believe that obtaining approval for expansion of mining from
IBM is not difficult. Currently, mining is delegated to contract miners (NSPL and JNR);
mining cost stands at Rs340-350/te at present.

Quality of retrieved ore

The mine is currently producing 58-62% Fe, with low-alumina and high-silica content.
Mine composition is 70% lumps and 30% fines. Of the lumps, 20% is further
converted (crushed), 60% of which becomes fines. Currently, four screeners are
deployed in the four quarries that sort mined ore in sizes of 40-80mm (for blast
furnace-BF + crushing), 10-40mm (BF + crushing) and 5-18mm (direct reduced iron-
DRI). Current capacity of a screener is 60,000te. Also, the modular crushing plants
can produce requisite dimensions, as per industry demand. OMM is setting up
modular beneficiation plants supplied by Sandwick & Metso for beneficiation of 58%
Fe fines. Also, as the ore is largely haematite, thermo-cyclone process would be used
for beneficiation. Check ponds are used to detect pollution resulting from exit flow of
fines in the form of slurry.

Adhunik Metalliks, July 15, 2009 ICICI Securities
Logistics ─ Orissa’s bane
The nearest sliding (Gua Railhead) is 5km from the mines. OMM is setting up a
captive sliding unit in the next 18 months. Poor road infrastructure results in high-cost
road transportation of iron ore, given general freight rate of Rs10/te/km. Rails, on
other hand, are a cheaper option, with freight rate for domestic consumption at
Rs1/te/km. Major offtake of ore from Ghatkuri is by Bhushan Steel, Electrosteel
Casting, Maheshwari Ispat etc. The nearest ports are Haldia and Paradip, which are
380km and 600km respectively from the mines. Rourkela, where AML’s steel plant is
located, is 140km from the mines.

OMM realises ~Rs1,600/te for lumps and Rs2,200-2,400/te for sized ores at present.
On the back of ~1.3mnte of lump production in FY10E, we expect ~Rs1,442mn
EBITDA from OMM’s iron-ore operations. Also, the mines do not have many large-
scale merchant miners in their vicinity, with Rungta and Usha Martin being the only
companies with merchant mining licences.

Patmunda & Orahuri Mines (Koira in Sundergarh, Orissa)

Reserves & resources
OMM has 50mnte manganese reserves spread across six mines (estimation of
reserves conducted by Orissa government body, Genome). Patmunda Mine, spread
over 807ha and a broken area of 92ha, is the largest, with estimated reserves of
45mnte. While Patmunda had 10-20metre of overburden, Orahuri offers low-cost
mining and expansion opportunities, given its location on a hill slope.

Production and mining

Both mines have combined production capacity of 15,000te/mth of high-grade (35-
50%) and ~30,000te/mth of low grade (28-35%) manganese. While OMM plans
scaling up production & sales of the high-grade manganese, sales of the low-grade
reserves (lumps & fines) will gradually decrease. We expect ~0.26mnte manganese
sales in FY10E (with high-grade ore constituting ~55%). While high-grade ore
undergoes screening and jigging (beneficiation), low-grade ore is handpicked and
sorted manually (which will be a constraint for rapid volume pick-up). Fines are further
beneficiated by an indigenous, cost-effective process called jigging (developed by
Manganese Ore India-MOIL). While earlier, OMM employed local contractors to set up
jigging plants, current construction is now being carried out in-house. Current mining
costs (ex royalty of Rs150/te) are Rs1,200-1,500/te.

Quality of retrieved ore

Manganese is usually obtained at some depth from the earth’s surface. OMM has
already mined up to a depth of 40metre at its Patmunda Mines and now plans mining
a further 40metre. The base (at 40metre) has revealed continuous deposits that will
increase quality of ore (lower content of silica, alumina and phosphorus). Orahuri
Mine being on the hill slope has lower overburden (low strip ratio; typically, a
manganese mine would have strip ratio of 1:12). OMM has discovered continuous
deposits in pits only 20metre deep. Typically, ores mined from Patmunda will have
manganese content ranging from 28% to 52%. However, the fines generated can be
further beneficiated (jigged) to produce ~45% manganese.

Adhunik Metalliks, July 15, 2009 ICICI Securities
The mines are 12km from NH215, with SAIL’s Barasua sliding unit at 30km from the
site. Major offtake is being done by ferro-alloy divisions of Jindal Stainless, Rohit
Ferro, Impex Ferro Tech etc. Manganese is sold on an FOB basis, with domestic
pricing being maintained on ex-mine basis.

Manganese mines (though not easily scaleable) provide higher per-tonne margin
compared with iron ore. Also, there are not many private players (besides the
Rungtas) that have a merchant mining licence. The largest miner of manganese in
India is MOIL (supplying 70% of India’s total ore needs), which is currently sourcing
50% of its volumes from the dumps from past operations. Currently, OMM garners
Rs4,500-6,000/te realisations for its high-grade manganese (>35% Mn) and Rs1,200-
1,500/te for its low-grade manganese (=<28% Mn). On a production base of
0.26mnte, we expect manganese operations to generate FY10E EBITDA of

Capex for mines

AML has acquired the iron-ore and manganese mines for Rs700mn (with Rs500mn
as payment to promoters and Rs150mn as other liabilities). Rs300mn was spent as
diversion proposal (DP), which was paid to the government in CY08 as NPV of a 20-
year deposit. Another Rs500mn was spent on roads, medical, hostel and initial
expenses (e.g., advances to equipment providers). ~Rs1,000mn was sourced from
AML as advances/short-term loans. We expect Rs500-600mn capex for mines in
FY10E. However, given the high cashflow nature of mining operations, we expect
OMM to repay its parent debt, post capex, in FY10 itself.

Special/alloy steel plant (Rourkela in Sundergarh, Orissa)

Based in Rourkela and spread across ~200ha, the steel plant has recently ramped up
capacity to 0.45mnte and produces special/alloy steel (long products) for niche
markets. Current production run rate of 0.35mnte constitutes 45% billets, 47% rolled
products and ~5% special & stainless-steel rolled products.

Partially integrated model

AML produces steel via the DRI + BF → EAF (electric arc furnace) route, with 40%
liquid steel, 50% solid DRI and 10% internally-generated scrap as EAF feed. AML has
been allotted iron-ore and thermal coal mines in Orissa. While the iron-ore mines are
expected to commence production by FY10E, we believe there is still some time
before AML’s steel plant starts receiving raw material from captive mines. 50% of
AML’s current iron-ore requirements are sourced from OMM (10-40mm), while the
remaining are sourced from Orissa Mining Development Corporation (OMDC). Low-
grade fines from OMM are further crushed to generate 5-18mm lumps which are fed
to DRI; the fines are fed to the sinter plant. Currently, AML imports its entire
requirement of coking coal. Landed cost for coking coal is likely to be ~US$140/te for

Adhunik Metalliks, July 15, 2009 ICICI Securities
Specialised product offering with low import threat leads to margin
We believe AML would not effect any further capex towards volume expansion in its
steel plant. Also, high yield loss, relatively high fixed cost on account of small-scale
nature of operations and unintegrated nature of operations will arrest margins at 20-
21%. However, the niche group of customers across Automotive (Tata Mahindra),
Power (NTPC, BHEL, Power Grid) and Oil & Gas (Maharashtra Seamless, Jindal
Saw) will help AML generate cashflows of Rs1.2-1.3bn in FY10E. Also, the industry
does not have any major import threat on account of: i) small ticket orders placed and
ii) high lead time for exports, leading to domestic steel becoming a preferred pick.

Financials, a tad stretched

AML has ~Rs5.8bn long-term debt, Rs3.7bn working capital debt and ~Rs2.8bn short-
term debt. Of the total short-term debt, the company plans to repay ~Rs1bn
immediately via dilution of stake in OMM. Stretched D:E of 2.3:1 remains a short-term

Table 1: Facilities in AML steel plant

Facility capacity/reserve Status
SMS 0.45 Fully installed & operational
Rolling Mill 0.22 Fully installed & operational
Power plant (MW) 34 Currently in operation
Sponge iron (7x100tpd DRI) 5x100tpd operating, with 2x100tpd
0.21 coming online in August-September ’09
Blast furnace 0.21 Fully operational
Coke oven 60ktpa operational at 80% utilization; 60% to come by
0.12 June ’10
Coal washery 0.7 Operational, using linkage coal
Sinter plant 0.3 Operational at 60% utilisation
Ferro alloy plant 0.05 Installed
Iron-ore mines, Kulum 25 Not yet started, expected in FY10
Coal mines, Patrapara 42 Approvals not yet obtained
Source: Company data

Adhunik Metalliks, July 15, 2009 ICICI Securities
Chart 1: Steel business model

Facilities improving margins Iron and Steel making Steel processing

Ferro Alloy

Imported coal Coke oven



Captive iron ore EAF & IF LF-VD

CCM Rolling mill

Captive coal Coal washery DRI

Railway siding CPP Derisking

Capturing upside in steel industry on one hand &
protecting from unforseen industry slowdown

Source: Company data

Chart 2: Company structure

Adhunik Metaliks (AML)

Orissa Manganese & Minerals Adhunik Power & Natural

(OMM) Resources (APNRL)
Mining Power

Source: Company data

Adhunik Metalliks, July 15, 2009 ICICI Securities
Table 2: AML – Q4FY09 results review
(Rs mn, Year ending March 31)
% Chg % Chg
Q4FY09 Q4FY08 YoY FY08 FY09 YoY
Sales services & job work 2,469 3,474 (28.9) 11,040 12,815 16.1
Less: Excise duty 170 355 995 1,177
Net sales 2,299 3,119 (26.3) 10,046 11,638 15.8

(Increase)/decrease in stocks 322 (805) (750) 88

Raw materials consumed 601 1,792 3,703 4,537
Purchase of trading goods 280 729 2,655 1,681
Stores & spares consumed 224 306 874 1,065
Personnel expenses 76 57 204 304
Others 480 564 1,758 2,141
Total expenses 1,983 2,642 (24.9) 8,444 9,816 16.3

EBITDA 316 477 (33.8) 1,602 1,822 13.7

Margins (%) 13.7 15.3 16.0 15.7

Other income 52 26 103.6 111 264 138.1

Net operating income 368 503 (26.8) 1,713 2,086 21.8

Interest 235 181 568 1,065

Depreciation & amortisation 109 72 232 369

PBT 24 250 (90.2) 913 652 (28.6)

Current tax 1.1 29.4 104 38
Excess provision for taxation written back - (1.2)
Fringe benefit tax 0.7 1.3 4.5 4.0
Adjusted PAT 23 219 (89.6) 805 611 (24.1)
Extraordinary (foreign exchange fluctuation) 12 - - 309
Reported PAT 10 219 (95.2) 805 301 (62.5)
Source: Company data, I-Sec Research

Adhunik Metalliks, July 15, 2009 ICICI Securities
Table 3: AML – FY09 results review (Consolidated)
(Rs mn, Year ending March 31)
FY09 FY08 % Chg YoY
Sales services & job work 13,912 11,377 22.3
Less: Excise duty 1,210 1,032
Net sales 12,703 10,345 22.8

(Increase)/decrease in stocks 118 (813)

Raw materials consumed 4,410 3,821
Purchase of trading goods 1,650 2,455
Stores & spares consumed 1,082 874
Personnel expenses 395 244
Others 2,682 1,889
Total expenses 10,337 8,470 22.0

EBITDA 2,365 1,875 26.1

Margins (%) 18.6 18.1

Other income 279 123 125.6

Net operating income 2,644 1,999 32.3

Interest 1,201 583

Depreciation & amortisation 402 245

PBT 1,041 1,171 (11.1)

Current tax 225 133
Deferred tax for the year 32 11
Excess provision for taxation written back (1.7) -
Fringe benefit tax 7.5 5.4
Adjusted PAT 778 1,021 (23.8)
Extraordinary (foreign exchange fluctuation) 312 -
Reported PAT 466 1,021 (54.3)
Minority interest (0.7) 0.7
Adjusted PAT after minority 779 1,020 (23.6)
Reported PAT after minority 467 1,020 (54.2)
Source: Company data, I-Sec Research
Exchange loss on
unhedged letter of
credit for imported
coking coal

Adhunik Metalliks, July 15, 2009 ICICI Securities
Table 4: OMM – FY09 results review
(Rs mn, Year ending March 31)
FY09 FY08 % Chg YoY
Sales services & job work 1,097 337 225.4
Less: Excise duty 32 38
Net sales 1,065 299 255.8

(Increase)/decrease in stocks 31 (63)

Raw materials consumed (127) 118
Purchase of trading goods (31) (200)
Stores & spares consumed 17 -
Personnel expenses 91 40
Others 540 131
Total expenses 521 26 1,877.7

EBITDA 544 273 99.2

Margins (%) 51.1 91.2

Other income 14 12 14.0

Net operating income 558 285 95.5

Interest 136 15
Depreciation & amortisation 33 13

PBT 389 258 51.1

Current tax 187 29
Deferred tax for the year 32 11
Excess provision for taxation written back (1) -
Fringe benefit tax 3 1
Adjusted PAT 168 216 (22.5)
Extraordinary (foreign exchange fluctuation) 3 -
Reported PAT 165 216 (23.8)
Source: Company data, I-Sec Research

Adhunik Metalliks, July 15, 2009 ICICI Securities
Summary financials
Table 5: Profit & Loss statement Table 7: Cashflow statement
(Rs mn, year ending March 31) (Rs mn, year ending March 31)
FY05 FY06 FY07 FY08 FY05 FY06 FY07 FY08
Operating Income (Sales) 1,301 4,238 7,440 10,345 Operating Cash flow 152 691 1,114 1,597
Operating Expenses 1,145 3,530 6,281 8,670 Working Capital Changes (89) (798) (814) (656)
EBITDA 156 707 1,159 1,675 Capital Commitments (1,052) (1,056) (3,389) (5,302)
% margins 12 17 16 16 Free Cash Flow (988) (1,163) (3,088) (4,361)
Depreciation & Amortisation 22 69 121 245 Cash flow from
Gross Interest 115 264 583 40 Investing Activities 10 5 (42) (351)
Other Income 2 27 84 123 Issue of Share Capital 581 332 - -
Recurring PBT 106 551 857 970 Buyback of shares - - - (0)
Add: Extraordinaries 0 0 0 0 Inc (Dec) in Borrowings 639 1,220 2,536 5,185
Less: Taxes 35 214 86 150 Dividend paid - - (52) (107)
- Current tax 9 46 95 133 Extraordinary Items - - - -
- Deferred tax 27 167 2 11 Chg. in Cash & Bank
Less: Minority Interest - - 0 1 balance 54 1,120 (846) 201
Net Income (Reported) 71 337 771 820 Source: Company data, I-Sec Research
Recurring Net Income 71 337 771 820
Source: Company data, I-Sec Research
Table 8: Key ratios
Table 6: Balance sheet (Rs mn, year ending March 31)
FY05 FY06 FY07 FY08
(Rs mn, year ending March 31) Per Share Data (in Rs.)
FY05 FY06 FY07 FY08 EPS(Basic Recurring) 0.6 3.1 7.0 7.4
Assets Diluted Recurring EPS 0.6 3.1 7.0 7.4
Total Current Assets 503 3,265 3,986 6,743 Recurring Cash EPS 0.8 3.7 8.1 9.6
of which cash & cash eqv. 59 1,179 333 534 Dividend per share (DPS) - 0.5 1.0 1.2
Total Current Liabilities & Book Value per share (BV) 7.0 19.8 24.2 31.6
Provisions 264 1,212 1,954 3,811
Net Current Assets 239 2,053 2,032 2,932 Growth Ratios (%)
Investments Operating Income NA 225.8 75.6 39.1
of which 1 1 4 412 EBITDA NA 353.4 63.8 44.6
Strategic/Group - - - 402 Recurring Net Income NA 374.9 128.9 6.3
Other Marketable 1 1 4 10 Diluted Recurring EPS NA 374.9 128.9 6.3
Net Fixed Assets 1,527 2,515 5,785 10,846 Diluted Recurring CEPS NA 336.2 119.9 19.3
of which
intangibles Valuation Ratios (x)
Capital Work-in-Progress 977 479 1,963 3,935 P/E 130.8 27.5 12.0 11.3
Total Assets 1,768 4,569 7,820 14,190 P/CEPS 99.7 22.9 10.4 8.7
P/BV 12.0 4.2 3.5 2.7
Liabilities EV / EBITDA 65.1 14.5 11.8 11.2
Borrowings 940 2,159 4,695 9,880 EV / Operating Income 7.8 2.4 1.8 1.8
Deferred Tax Liability 52 219 435 661 EV / Operating FCF 159.9 (96.2) 45.5 19.9
Minority Interest - - 17 28
Equity Share Capital 581 912 912 912 Operating Ratio (%)
Face Value per share (Rs) 10 10 10 10 Raw Material/Sales 51.0 27.7 23.6 28.6
Reserves & Surplus* 195 1,279 1,761 2,577 SG&A/Sales 1.0 0.9 1.5 2.4
Less: Misc. Exp. n.w.o. Other Income / PBT 2.2 5.0 9.8 12.7
Net Worth 776 2,191 2,673 3,621 Effective Tax Rate 33.3 38.8 10.0 15.5
Total Liabilities 1,768 4,569 7,820 14,190 NWC / Total Assets 10.2 19.1 21.7 16.9
Source: Company data, I-Sec Research Inventory Turnover (days) 25.8 58.6 125.8 158.2
Receivables (days) 17.5 43.5 40.8 50.3
Payables (days) - - - -
D/E Ratio (x) 1.3 1.1 1.9 2.9

Return/Profitability Ratio (%)

Recurring Net Income Margins 5.4 7.9 10.3 7.8
RoCE 10.3 12.9 16.3 11.9
RoNW 18.3 27.7 31.7 26.6
Dividend Payout Ratio NA 16.4 14.3 16.2
Dividend Yield NA 0.6 1.2 1.4
EBITDA Margins 12.0 16.7 15.6 16.2
Source: Company data, I-Sec Research

Adhunik Metalliks, July 15, 2009 ICICI Securities

I-Sec investment ratings (all ratings relative to Sensex over next 12 months)
BUY: +10% outperformance; HOLD: -10% to +10% relative performance; SELL: +10% underperformance

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