Religare puts 'buy' on Sarda Energy for target Rs 574
MUMBAI: Religare Securities has recommended a ‘buy’ on Sarda Energy and Minerals Ltd for target price of Rs 574. At the current market price of Rs 463, the stock trades at EV/EBITDA of 4 times and P/E multiplies by 5.4 times.
Religare has valued Sarda Energy using the average of EV/EBITDA and P/E valuation methods. Applying target multiples of 5.5 times EV/EBITDA and 6.5 times of P/E on 2009-10 estimates, the brokerage has set a target of Rs 574.
The brokerage has assumed captive power generation of 60MW in FY09 and expects further valued accretion once the entire expanded capacity of 213MW comes on stream. The commencement of operations at the five Chhattisgarh mines represents a further long-term trigger to valuations. Additionally, the proposed 1,100MW thermal power plant to be set up in Chhattisgarh could yield dividends on commissioning.
Sarda Energy is engaged in manufacturing sponge iron, ferro alloys and steel rolled products. Currently, the company has 2,10,000 tonne per annum sponge iron plant along with a 1,40,000 tonne steel melting capacity and a 66,000 tpa capacity for ferro alloys. Raw material for these plants has been partially secured via a captive iron ore mine with reserves of 20 million tonne and 48MW captive power plant.
The company is increasing its sponge iron and steel melting capacities by 70 per cent in FY09 to 3,60,000 and 2,40,000 tpa respectively. The company is also foraying into pellet sales via by setting up 0.6 million tonne pellet at a cost of Rs 1.3 billion by April 2009. The increased production levels will drive volume growth for the company at a time when the steel cycle is on marketed trend.
Since the steel melting capacity is being raised, Religare expects captive production of sponge iron to service 60 per cent of the input requirements for rolled out products by FY10 compared to the current 40 per cent. It has increased focus on rolled products it expected to raise their revenue share to 41 per cent in FY09 an FY10 from 31 per cent in FY 07.
The company has obtained a prospective license for five iron ore mine in Chhattisgarh with estimated reserves of 230 million tonne. The management expects these mines to be operational in three to four years.
Religare believes the key to success for the company will remain captive ownership of key raw materials like iron ore, coal or ferro alloy ore. The ability of the company to convert the prospective license into mining licenses will be crucial going forward.
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