Share Market Result Update on Sarda Energy and Minerals for 1QFY201

ShareMarket Result Update on Sarda Energy and Minerals for 1QFY2012 with a Buy recommendation and a Target Price of `259 (12 months).

For 1QFY2012, Sarda Energy and Minerals (SEML) reported net sales growth of 17.2% yoy to `254cr. However, adjusted net profit declined by 48.3% yoy to `14cr due to higher costs. We maintain our Buy rating on the stock.

Ferro alloy segment drags SEML’s 1QFY2012 profitability: During 1QFY2012, SEML’s net sales grew by 17.2% yoy to `254cr due to higher realisation in the steel segment coupled with higher sales volume of billets, ingots and power. Blended steel realisation grew by 96.1% yoy to `33,036/tonne on account of improved product mix. EBITDA margin declined substantially by 857bp yoy to 14.4% mainly on account of higher raw-material costs. Thus, EBITDA declined by 26.6% yoy to `37cr. EBIT of the ferro alloys segment declined by 73.0% yoy to `7cr on account of lower realisation coupled with higher prices of key inputs. Interest costs for the quarter increased by 112.6% yoy to `6cr, owing to which adjusted net profit declined by 48.3% yoy to `14cr.

Outlook and valuation: We continue to believe that SEML is well poised to benefit from a) backward integration into coal and iron ore, b) commercial production of pellets and c) increased power and ferro alloy production. Moreover, firm sponge iron and billet prices should lead to higher capacity utilisation in FY2012 and FY2013, thereby leading to higher sales volumes. A key catalyst for the stock would be restarting of its iron ore operations at Rajnandgaon. We recommend Buy with a target price of `259, valuing the stock at 5.5x FY2013E EV/EBITDA.