The Board of Directors of Amreli Steel Limited (ASTL) recently approved an investment to install facility for production of ADC12 Aluminum Alloy Ingots, which is widely used alloy to produce Pressure Die Casting (PDC) components used in Engineering, Electric Lighting and Automotive Industry. As per expert’s discussion with management, total CAPEX of the project is estimated at Rs750mn with the project to be financed with a Debt to Equity ratio of 80:20. Initial product capacity will be 18k MT, which is expected to come online in FY24.
As per our estimates, incremental impact on the earnings of ASTL is likely to be Rs1.6/share (15%-20% of FY24 Earnings) from this Aluminum segment.
For our estimates, we have assumed Aluminum scrap LME (raw material) price of US$1,430/MT with a primary margin of US$770/MT.
ASTL is looking for both options either to go for exports or tap local market but we have assumed 100% exports in our projections due to higher export potential. In order to arrive at the selling price we incorporate a 1% discount on LME Aluminum price which is considered as a global benchmark for pricing of the commodity and comes close to US$2200/ton.
The manufacturing process of Aluminum is not very energy intensive vs. long steel rebar which consume more energy. Conversion cost (cost of conversion from scrap to end product) is estimated at US$250/MT.
Globally, similar manufacturing facilities have a conversion losses of 3-10%. Conservatively, we have incorporated a conversion loss of 10%. While the waste scrap could also be sold for which we have assumed a 90% discount on the Aluminum scrap price.
We have assumed plant capacity utilization of ~70-75% for the first two years which is likely to improve gradually.
Given high container and sea freight cost, we have assumed gross margins of ~12% which could improve going ahead once global supply situation improve.
Company is likely to use straight line depreciation method for the project with life of 20-year. We have also incorporated the working capital requirement with net cash cycle of three months.
ASTL would be insulated from any major duties as the company is likely to enjoy duty exemption on raw materials consumed for exports, we believe.
The full and final tax would be only 1% for exports which could results in lower effective tax rate going forward for the company.
The development will help ASTL to diversify its portfolio and improve bottom-line. The management of ASTL is also eying to even enhance this Aluminum capacity in future.
To recall, Mughal Iron & Steel (MUGHAL) another listed steel company is already involved in the manufacturing of copper with a capacity of 8k MT and planning to enhance its copper capacity by 10k MT. MUGHAL has also planned add Aluminum manufacturing facility with a capacity of 38k MT in FY23.
ASTL is trading at FY23 PE of 4x which is inline with market FY23 PE. We do not expect any dividend payment in FY23.
Courtesy- Topline Securities