Indian Equities: Hira Ferro Alloys
Hira Ferro Alloys is in the business of manufacturing ferro alloys – mainly silico manganese. They are used as intermediates in manufacturing steel, acting as deoxidant and alloying agents.
The company recently acquired an 8.5mw biomass power plant as a going concern. Apart from servicing their ferro alloys business, they intend to scale up sales of power in the short-term market through merchant sales.
Management intends to focus on the power segment in the future since they believe it will provide a more predictable and sustainable earnings model.
The company reported erratic revenues over the last five years where last year’s revenues appear to be around the mid-point of about 150cr. It has, however, been consistently profitable – reporting 35cr of operating profits in the last financial year. It employed a moderate debt load to finance its operations.
The fortunes of the ferro-alloy business are tied to those of the steel industry. Consequently, it is exposed to the steel industry’s persistent cyclicality, which exposes it to periods of diminished demand.
The recent 17-18% p.a. nominal growth in ferro alloy demand has been met with about 35% growth in supply capacity resulting in depressed selling prices within the industry. This will result in only a staggered pick up in production in the medium-term future.
The business is likely to be exposed to such bouts of overcapacity in the future as well. Further, the business is global and marked by severe competition and hence, prices are determined internationally based on the global demand/supply equation, which is volatile.
The business is heavily dependent on power, which comprises 35-40% of production cost. The shortage of power and high costs (3-5 times higher than competing countries) has an adverse impact on profitability.
Moreover, the business is exposed to frequent shortages of its primary raw materials, and consequent high costs – manganese ore, chrome ore, power coke, other fluxes, etc. Due to shortages, the company is reliant on imports, which brings consequent risks of a weakening INR.