MAHINDRA UGINE STEEL CO. LTD. (MUSCO)

MAHINDRA UGINE STEEL CO. LTD. BSE SCRIP CODE 504823

INVESTORS WITH A LONGER TERM HORIZON CAN CONSIDER INVESTING IN SHARES OF MAHINDRA UGINE STEEL CO. LTD. AT THE PRESENT PRICE OF ABOUT 100.00 LEVELS.

Mahindra Ugine Steel Co. Ltd. (MUSCO) was incorporated on 19th December 1962. The Company commenced its operations in 1964 with a licenced capacity of 24,000 tons per annum (tpa) capacity. In 1981, MUSCO raised it's capacity to 75,000 tpa. Further in 1990, the Perin process which was being used was replaced by the Ladle Metallurgy Technology. The current capacity of the plant is 110,000 tpa.

Mahindra Ugine Steel Co. Ltd. (MUSCO) belonging to the Mahindra Group is the pioneer & well known manufacturers of alloy steel in the country. MUSCO is the most trusted brand when alloy steel is referred to. The company also has two stampings division to manufacture pressed sheet metal components and assemblies, one at at Kanhe, Tal. Maval, Dist. Pune & the other at M.I.D.C Ambad, Nashik, both in Maharashtra. Mr. Keshub Mahindra is the Chairman & Mr.Anand Mahindra is the Vice-Chairman of MUSCO.

The steel plant is located at picturesque town of Khopoli on Mumbai-Pune highway about 100 Kms from Mumbai. The production facility of MUSCO is spread over an area of 66.89 hectares (165.29 acres) comprising plant on 24.95 hectares (61.65 acres) and residential set-up on 41.94 hectares (103.64 acres).

MUSCO has its well-defined Quality Policy and Quality Objectives and follows it strictly. The steel division, was first among all steel manufacturing in the country to get ISO certification & was succesfully re certified for ISO 9001-2000 Certification in the year 2002 from RWTUV. In August 2005, it has also been certified for ISO/TS 16949:2002. Both the stampings division have also been certified for TS16949 certification since June 2005.

The steel division has implemented in May 2001,ERP system of SAP version 4.6c for 7 modules & has reaped immense benefits. The I.T. infrastructure is very strongly built on LAN connecting 250 workstations & 80 network printers for user online access of SAP servers, internal & external mail, file server for shared information. A very secure VPN enables connectivity to external world for our consulting partners, secretarial office & branch offices to access SAP & mails.

MUSCO's Steel Division located at Khopoli is a pioneer and a premier Alloy Steel producer and also a single source supplier to a large number of multinationals and other important customers in India. There are two Stamping Divisions one located at Kanhe near Pune & other at M.I.D.C Ambad, Nashik.

Stamping Business :

As a result of the remarkable growth in the Automotive industry, the stamping division at Kanhe has increased its throughout significantly & is expected to further significantly & is expected to further improve upon the capacity utilization. Like many other businesses, the stamping industry too has been a victim of over investment in small sub-optimal units which have traditionally been incapable of producing a quality product. The Kanhe stamping division has been able to move up the value chain & with group support, developed the capabilities to produce sub assemblies for Mahindra & Mahindra (M&M), Tata Motors & Ashok Leyland.

The recent joint venture announced between M & M & Renault is expected to create greater opportunities for the stamping business. Further, business opportunities are also arising on account of M & M foray into a joint venture with International Trucks for the manufacture of Light & Heavy Commercial vehicles. These business activities together with the consolidation of stamping business consequent to merger of Pranay Sheetmetal Stampings Limited (Pranay) into the company is expected to add value to the business.

CLIENTS/CUSTOMERS

The company has an impressive list of clients like Bharat Heavy Electricals Limited, Crompton Greaves, Siemens, National Power Corporation Limited, MARC, Timken, SKF Bearings, FAG Bearings, Tata Iron & Steel Company, NEI, NHB Bearings, Asian Bearings, Mipco Seamless, Texpin, RMP, Rolax, Fairfield Inc. Cummins, Ferromatic Milacron, Ingersoll Rand AND SO MANY OTHERS.

The company also supplies to Govt. Sector like Indian Railways, DLW, Ordnance Factory, Gun Carriage Factory and some overseas Corporates also.

Financials

The company has a share capital of 32.48 Crores made up of 3.24 crore shares of Rs.10.00 each with reserves of 137 crores, commanding a book value of over 53 per share. Promoters group hold 55% shares, Mutual funds, financial institutions, FII etc. hold 22.82% shares and Bodies Corporate hold 4.51% taking the total such holdings to 82.33%. The remaining about 17% is held by the public. Therefore, floating stock and consequently trading volumes are low.

The company has been performing exceedingly well in the past few years. It is also paying dividends. It reported a net profit of about 44.91 crores in FY 06-07 with eps of 13.83. It came out with excellent June 07 qtr. profits of 6.07 Crores and Sept. Qtr. 07 profits of 7.51 Crores. The profits have no doubt taken a dip, but are expected to improve in future with the increased leverage in stamping business consequent upon the tie up with RENAULT. Good days are ahead also on account of M & M foray into a joint venture with International Trucks for the manufacture of Light & Heavy Commercial vehicles. These business activities together with the consolidation of stamping business consequent to merger of Pranay Sheetmetal Stampings Limited (Pranay) into the company is expected to add value to the business.

We have a conservative expectation of FY 08 profit figures 35 Crores, with eps of just about 11. With the above plans taking final shape in the years to come, we expect an earning projection as under :

Our earning projections

FY 07-08 Net Profit : 35 Crores EPS 10.80
FY 08-09 Net Profit : 48 Crores EPS 15.00
FY 09-10 Net Profit : 65 Crores EPS 20.00

Even if we take a conservative P.E. ratio of 12 going by forward earnings, the share should command a valuation of at least 120 going by the forward earnings. Our share price projections are 140 by April 2008, 220 by April 2009 and 280 by 2010.

The share touched a year’s high of 144 and low of 70. Now it is trading at around 100 levels. In our opinion, the shares can be purchased by conservative investors, as this company belongs to a reputed group and has considerable potential to go up.

People should use their judgement and invest, because investing in secondary market is risky. Investors who are not ready to rake risks, should follow mutual fund route or go in for safe avenues like Bank deposits etc.

We advise for a minimum tenure of 2 years and there may be ups and downs in the share price in he short to medium term. Our analysis is purely based on fundamental studies of the company.

People with a longer time horizon can consider investment in Mahindra Ugine Steel shares.