Jai Balaji Industries Ltd: A Hidden Mining Story

CMP: Rs.23.80

Introduction: Jai Balaji Group is one of the largest manufacturers of steel in the private sector in Eastern India. It has integrated facilities for producing steel in its manufacturing units spread across the states of West Bengal, Chhattisgarh, Orissa and Jharkhand in India. 

The Group has a chain of value-added products which include DRI, Pig Iron, Ferro Alloys, Alloy and Mild Steel Billets, Reinforcement Steel TMT Bars, Wire Rods, Ductile Iron Pipes and Alloy and Mild Steel Heavy Rounds. Jai Balaji Industries Ltd continues to have three wholly owned subsidiaries namely:

• M/s. Nilachal Iron & Power Limited==> It is a wholly owned subsidiary of the Company since 26.10.2007, having its manufacturing plant located in Kandra near Jamshedpur, Jharkhand. It currently, manufactures sponge iron. Work on increasing its capacity by 60,000 tonnes per annum has been initiated.
  The company has been allotted the Dumri Coal Block for captive mining from the Government of India, about 300 kms from the plant. Mining of coal is expected to start shortly and a Coal Washery ill also be installed to improve efficiency of the raisings. 
• M/s. Jai Balaji Steels (Purulia) Limited
• & M/s. Jai Balaji Energy (Purulia)

The company also has 101.1 MW power plant, Sinter plant to utilize cheaper iron ore fines and have also put up Coke Oven Plant.

Shareholding Pattern: The promoters hold 54.57% of the shares of the company while general public holds 41.07% of the shares of the company. The corporate bodies hold 13.14% of the shares of the company while the FIIs hold 4.3% of the shares of the company. In fact the  FIIs' holdings have increased from 3.71% in October, 2013 quarter to 4.36% in March, 2014 quarter. 

Financials: Net Loss of Jai Balaji Industries came as Rs.123.49 crore in the quarter ended March 2014 as against net loss of Rs.63.46 crore during the previous quarter ended March 2013. Sales declined 14.62% to Rs 434.35 crore in the quarter ended March 2014 as against Rs.508.70 crore during the previous quarter ended March 2013.

For the full year,net loss reported to Rs.318.95 crore in the year ended March 2014 as against net loss of Rs.213.13 crore during the previous year ended March 2013. Sales rose 27.81% to Rs.1946.00 crore in the year ended March 2014 as against Rs.1522.58 crore during the previous year ended March 2013.

Due to the increase in the raw materials cost, such as Iron Ore and Coke/Coal as a percentage of net sales, post FY11 and inability to increase end product prices due to competitive environment, resulted in EBITDA margins of the company taking a hit. This is one of the prime reasons why the company is posting huge losses. 

Now, most of the established companies, like SAIL, Tata Steel, Jindal Steel and Power Ltd etc, have their own captive iron ore and coal mines which puts a lid on the costs. But Jai Balaji Industries Ltd has to procure this at market prices and under such circumstances, the going got tough for it. 
As a matter of fact the it was allotted both Coking and Non Coking in the past and have also formed joint venture companies for implementation. But due to some nagging issues surrounding coal block allotment, the things got unnecessarily delayed. However, off late Dumri Coal Block received Environmental clearance and Forest Go Certificate. Forest clearance stage one has been received and stage two is under process. This is expected to significantly reduce the cost of the production in the days ahead. 

Triggers: 

• Company has 1.1 mtpa steel manufacturing company with diversified product range including pig iron, sponge iron, TMT bars, ferro alloys, alloy bars etc. Replacement cost of assets is over Rs.5000 Cr. It has debts around Rs.2200 Cr. The NAV of the company therefore stands at Rs.2800 Cr. 
• The company is also hopeful of commencing work on its proposed steel plant at Raghunathpur in the Purulia district of West Bengal soon. According to information available on the company's Web site, it plans to set up 5-mt steel plant, 3-mt cement plant along with a 1,215-MW power plant at an estimated investment of Rs.16,000 crore.
• The company holds varying stakes in four coal blocks-Dumri and Rohne in Jharkhand and Andal and Jagannathpur in West Bengal. It posses 700 mt of high graded coal. 
• The DRI Plant of 60000 MT & coal washery in subsidiary company M/s Nilachal Iron & Power Limited started its commercial production during FY13. In FY13, the company’s project for expansion of 350000 MTPA Coke Oven Plant along with Waste Heat Recovery Boiler of 80 TPH was completed and capitalized. The said coke oven plant is presently running satisfactorily. These efforts are helping it to improve the margins. 
• The company completed a CDR-scheme where it got reliefs both in terms of interest rate and debt. It is estimated it will be able to save Rs.25-30 Cr annually through CDR mechanism only. Moreover, steel demand was low in FY14 due to continuing economic crisis, however, spurt in demand is expected in 2014-15. A sharp pullback in demand of steel in the third quarter has pushed up steel consumption in the fourth quarter of FY14. Also, with as the government talking tough on inflation, the raw material price are expected to come down albeit in a very tiny manner and very slowly. This is expected to give an upward push in its bottomline going forward. 
• Jai Balaji Industries Ltd has recently informed the BSE that the Board of Directors of the Company at its meeting held on May 29, 2014, inter alia, have converted the remaining 65,05,000 warrants which were allotted on July 04, 2013 to Hari Management Limited, Promoter Group Company of the Company into 65,05,000 equity shares of Rs.50 each (including premium of Rs.40 per equity share). Earlier the Company on 4th July, 2013, issued and allotted 10,000,000 warrants to promoter group companies namely M/s. Enfield Suppliers Limited (1,900,000 warrants) and M/s. Hari Management Limited (8,100,000 warrants) on a private placement basis at an issue price of Rs.50 each. Also, the number of pledged shares have come down from its peak level of 92%. Company has further plans to release more pledged shares in due course of time.
• A Joint Venture Company ‘M/s.Rohne Coal Company Private Limited’ was formed in 2008-09 with the Registrar of Companies, NCT of Delhi & Haryana, in which the company along with M/s. JSW Steel Limited & M/s. Bhushan Power & Steel Limited are venture partners. The said Joint Venture Company was formed in terms of allocation of Rohne-Coking Coal Block in the State of Jharkhand by Ministry of Coal, Government of India. Both the Joint Venture Companies are in the process of setting up coal mining facilities at respective coal blocks. The Ministry of Environment and Forest (MoEF) has already granted the first stage forest clearance the Rohne coking coal block in Jharkhand.

Conclusion: Persistent slowdown in demand for steel and falling steel prices has squeezed profitability of steel companies in India. This was reflected in the Financials of the company during FY14. However, the global steel demand is expected to grow over by 10% in the next five years. Steel industry is vital for overall economic development of every nation as it is one of the core sectors. India is the largest producer of sponge iron in the world. Despite all the headwinds and lingering difficulties, the steel industry is likely to deliver growth with the current NDA government focusing on infrastructure development. 

At present the Indian Steel industry is on the growth path due to growing domestic demand, unexplored rural market and rapid urbanization. The strong growth in automotive industry and power sectors would drive steel output and consumption, in future. With the improvement in the economic recessions in the west, the potential for increase in demand is high.

Moreover, the total revenue of Jai Balaji Industries Ltd for FY14, came out to be Rs.1990.78 Cr, plus its assets (Coal Blocks + NAV) are available at just Rs.175.60 Cr. The book value of the shares of the company is Rs.72.59 against the CMP of only Rs.23.80. 

Chartically speaking, the stocks seems to be at the end of downtrend and should find support around Rs.22.40--21.70 ranges. The investors are suggested to accumulate the scrip, if this level holds. In any case, in the short term, the scrip is not likely break Rs.19.70 on the downside. The short term target for the scrip is Rs.29-31.