High risk Multibagger stock idea:-
Scripscan:Jai balaji Industries ltd
Target:No targets(Targets are hard to assign in turnaround stories and makes no sense)
Duration:Play it for any term with your own targets.
Quote:Often you will find its not the profitable companies which turn out to be multibaggers but mostly its the turnaround cases that provide multi times return,provided they are caught early.
Business:The company is an integrated steel player with four manufacturing facilities having a capacity of over 1MTPA. It is engaged in manufacturing of sponge iron, pig iron, ferro alloys, billets/MS ingots, DI pipes and steel bars/rods (TMT bars),besides having backward integration for sinter and power.Apart from manufacturing activities, the company is also engaged in trading of steel products.
Note:Company which traded at 325 bucks even 3 odd years ago presently quotes at just 14 bucks,a price erosion of a pathetic 96%.
What went wrong:-
1)Its expansion plan of Purulia went to a backburner as GOVT changed in west bengal.
2)The raw material prices went up(iron ore,coking coal and non coking coal) while the product prices shifted sharply lower.
3)Demand dried up and interest rates kept going higher and higher.Even USD hit 20% to 60$ which ballooned Jai balaji's raw material import bill(it purchases low ash Met coke in bulk through merchant importers on high sea basis)
4)Coal scan and subsequent deallocation of coal blocks took the toll away of the steel companies.
5)Markets are afraid of pledge shares and this company has over 84% of its promoter holding pledged to lenders.
6)Company reported losses of over 200crs in the fiscal 2013-14.
7)Due to accumulated losses,the Networth kept eroding which presently makes the debt-equity ratio looks scary to say the least.
8)Company operating at 40% capacity with its ductile iron pipe operating at a mere 20-25% capacity.
9)Till last quarter its interest cover was less than half,which in simple words mean,your gross profit is much lower than your interest costs which is alarming and increases the chances of default(86crs interest vs 24crs gross profit)
10)The CFO resigned,a CFO resigning suddenly without notice is not a good sign as puts question mark on the company.
Now am analysing the problems and trying to find the positives out of it:-
1)Purulia plant(probably not on anymore) though was one of the reasons for brokerages to go gung-ho on the stock in actual is a blessing in disguise.Under the environment, it would have only surmounted its debts and increased the costs,as the cost of raw materials went up multi fold.Management can concentrate more on the installed capacity.
2)Raw material prices over the last few months have come down quite sharply.Coking coal is almost hitting 6 year lows.Iron ore and non coking prices too have seen some softening.This should help in its working capital needs.Margins would increase too.
3)Demand has increased a bit and also the company has been to able to squeeze better realization from its product prices.I don't foresee interest rates going much higher from the present levels.However say a 2 notch points reduction over the coming couple of years can help it in saving around 50crs of interest costs.
4)Coal scam chapter has probably ended for good now.Most of the coal blocks allotted to the parties got cancelled.However all the coal blocks of the company are intact.I ain't bothered about the remaining ones but my area of interest lies on its two coal blocks,i.e,Dumri and Rohne.They are awaiting final stage clearence from the govt and got till 31st of November to get the same done.On operation,both together will add over 350crs of EBITDA.I have no updates on dumri but there seems to be some good news on the Rohne coking coal mine front.JSW and Bhushan steel are partners of the company as far the Rohne mine is concerned.Jsw as per the recent news have got the nod from coal India to use its infrastructure for the mining.Since the mining will be done at the same place, its easy to assume the partners would pluck out the coal at the same point of time.It would be prudent to note that JSW Steel on last Jan 2013 gave the guidance of starting the rohne coal production after a period of 18-24 months(search google for Jsw conference call Jan 13).With 15 months done now,mining can start by the end of this year.Jai balaji will save 250crs of inputs from the rohne mine alone.
5)Even when the price collapsed from 325 to 7 bucks,not a single pledged shares got sold.As per the management,pledge shares would never get sold as per their agreement with the lenders.Now even after 96% erosion,if the pledge shares are intact,we ought to believe in the statement of the management.
6)Company expects a much better year of fy14-15.The worst is over as per their words.
7)Its definitely scary but the coming quarters will probably help it to service its debt more efficiently.
8)Company as per my recent words with the management has seen an uptick in capacity levels.Its operating at near 50% capacity now vs 40% even a quarter ago.Ductile iron pipes demand are expected to grow 15% CAGR till 2017.Company is hopeful of utilizing the most of its DI pipe capacity.At even 85% capacity(25% now),DI pipes would add up over 150crs of EBITDA.
9)I believe from this quarter or maybe from the next, company would actually be in a better position to service its debt.
10)That was actually a part of the reorganization of the management team.The CFO got demoted to the post of GM finance(If I can use the word demotion here in place of shifted).Sanjiv Jajodia is presently serving the CFO duties as well the wholetime director duties.He is regarded as a very efficient finance guy who has been with the company from scratch.It would be prudent to note that MR Jajodia was the CFO till 2010 and under his reign company clocked record profits.
Coverage aspect:Even 2-3 years ago as many as around 8 reputed research houses covered the stock at over 200 bucks putting huge targets(UBS even went on to assign a target of as high as 450 bucks and kept the company on their high conviction list).The company had hardly anything then(coal block clearance was 4 years away,no ductile plant,no coal washery plant,no coke ovens),it got most of the things in place now but those guys who covered the company may have forgotten it or sold it off as a super flop bet.Probably its the best time to get into the counter.
Creeping acquisition part:Promoters know the most of their company.They bought shares worth 12crs from market at around 180,further bought 6.5 lakhs shares at around 40 bucks from market in the earlier years(between 2011-2012).Again chipped in with a massive 50crs(50rs per share-1cr warrants)to hike up their stake at a premium to the market price when they could have taken the same at 36rs.Though CDR stuff but at a 40% premium to the guideline price speaks volume about the commitment and confidence of the promoters.
Conclusion:The company presently may be fighting for survival but it still got the distinction of probably being the only entity to set up an integrated million tonne capacity at just 1600crs vs today's benchmark of 3500-4000crs.At full capacity this company can deliver a turnover of over 4000crs.At 100rs Marketcap you are getting the 8th largest steel manufacturer in the country(2nd or 3rd largest coal based steel manufacturer).Its a classic high risk high reward play.NAV or the bankruptcy value of the company would be much higher at over 50 bucks(replacement cost of assets at 4000crs vs debt of 2500crs).Its been a high beta play,moved up and down over the years in a huge manner.Other companies from this sector like Tata metalliks came out with great turnaround numbers recently.Jai Balaji has always been within the striking distance of the hot metal cost of Tata Metaliks which is an industry benchmark.With everything looking up,Jai balaji should too deliver much better numbers.If you got some risk appetite with penchant of high returns,park on some fund in the counter.Again a play for any term- short,medium or long term.
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