Sarda Energy & Minerals Ltd., formed through the merger of Raipur Alloys & Steel Ltd. And Chhattisgarh Electricity Company Ltd. Is a fully ntergrated steel manufacturer. The company has a captive Iron Ore, Manganese Mines and Coal Sources. The company also has a captive power plant which provides it a clear competitive advantage enabling the company to produce at most competitive costs. The company is a manufacturer of Sponge Iron, Ferro Alloys and Rolled products. We expect to benefit from this edge in 2008-09 and beyond. The company’s has a 250-hectare plant located in Raipur  with a dedicated 8-km water pipeline from the Kharoon river to the plant for uninterrupted water supply.

Self Sufficiency in Critical Inputs:

The company is 100% self sufficient in its energy needs, which is the  most critical input in ferro alloys and steelmaking. The company has a 48MW power plant sufficient to meet ts own power requirements. The company’s operational Iron Ore mine has reserves of nearly 20 million MT.  In addition, the Company has got an in-principle approval from the Government of India for five more mines possessing sufficient reserves to meet its requirement for the next 25 years. The Company secured coal reserves of more than 100 million MT. The first mine with reserves of 67 million MT has been commissioned. As regard Manganese Ore, the company acquired mining rights from private parties in Goa. In addition, reconnaissance permits/ in-principle approvals were  granted  in favour of the Company for three mines in Madhya Pradesh.

Low Cost Producer:

The company is a low cost producer on account of its vertical integration, economies of scale and reduced dependence on the external market for  supply of critical inputs. The Company had foreseen the need to secure raw material resources more than a decade ago and had taken adequate steps in  that direction.  The company today is completely integrated from iron ore to finished steel for end users. The availability of captive resources within a radius of  250  km from its manufacturing facility significantly saves logistic costs.

Conclusion:

Sarda Energy may be better placed than many other steel manufacturers to compete in a difficult environment on account of its raw material linkages. Even though steel prices are on a decline, we believe the drop in the stock price of Sarda Energy from a High of Rs 695 to the current price of Rs 60 is largely overdone. Investors may choose to buy the stock for a 50-100% gain over the next few months. However, a close watch needs to maintained on Steel Cycle and any indications of the prices stabilizing/ inching upwards after the fall witnessed recently may lead to upward rerating of the stock. The short term downside from the current levels looks negligible.

Company Profile:

Bank of India was founded on 7th September 1906 by a group of eminent businessmen from Mumbai. The Bank was under private ownership and control till July 1969 when it was nationalized along with 13 other banks. Since then, the Bank has made enormous contribution to India’s efforts towards agricultural and rural development, industrial diversification and modernization and export development. Keeping pace with financial sector reforms in India, the bank has apart from providing full banking services has ventured into Merchant Banking, Mutual Funds, Housing Finance, Custodial & Depository through its subsidiaries. The Bank has 2884 branches in India spread over all states/ union territories including 155 specialized branches. These branches are controlled through 48 Zonal Offices. There are 27 branches/ offices (including three representative offices) abroad. The Bank went public and got its shares listed in 1997.

Financial Position:

For the FY’08, the Bank showed pretty impressive growth. Bank of India’s net revenue increased by 27% to Rs 6346.3 crore. Its net profit showed an excellent growth by 79% to Rs 2009.5 crore. The total deposits increased by 25%, which included an increase in the current deposits by 33%, an increase in the saving deposits by 14% and an increase in term deposits by 28%. There was an increase in advances also by 33.3% to Rs 113476 crore. The Net Interest Income (NII) increased by 23% to Rs 4229.3 crore. The Non Interest Income also showed an increase of 35% to Rs 2117 crore. The Net NPAs (Non Performing Assets) are down by 6%.

For the first quarter of the FY’09 (ending 30th June, 2008), Bank of India continued on the growth path inspite of rising interest rates. It reported an increase in net revenue by 31.53% at Rs 1747.2 crore and the net profit registered a growth by an impressive 78.3% to Rs 562 crore compared with Q1FY08. We expect this momentum to continue in the next few years. There has been growth in advances (the corporate advances grew by 55.5% yoy) and deposits by 39% and 30% respectively, leading to an increase in the Net Interest Income (NII) by 24.7% to Rs 1180.8 crore. The core fee income increased by 59% yoy to Rs 343 crore and the other income also registered a growth of 49%. Treasury Income grew by a mere 4.6% to Rs 680 crore but this was understandable. The Bank has moved more than 80% of its Investment portfolio to Held To Maturity and this has insulated it from the vagaries of the bond market. Its domestic Net Interest Margin (NIM) showed a decline of 22 basis pts while the foreign NIM showed an improvement of 38 basis pts, leading to a total decline of 7 basis pts. Net NPAs are down by 65 bps yoy to 0.52% (stable sequentially). The international business accounts for around 20.10% of Bank’s total business.

Investment Positives:

Excellent quarterly results:

The bank reported one of the best results among the public sector banks. It witnessed a growth in the net profit, advances, deposits, NII and fee income. The bank’s overall expenses have not shown an increase, indicating the operating efficiency achieved by the bank. The total operating expenses grew by a mere 3.7% to Rs 674.7 crore in the current quarter, which included an increase in the employee expenses by 11.2% and a decline in the other expenses by 9.4%.

Front-Runner in introduction of innovative technology:

It introduces various innovative services and systems. The Bank has been the first among the nationalized banks to establish a fully computerized branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989. The Bank is also a Founder Member of SWIFT in India. It was the first Indian Bank to open a branch outside the country, at London, in 1946, and also the first to open a branch in Europe, Paris in 1974.

Attractive Valuations:

The Bank is very attractive in terms of its peers from all parameters and is showing good growth in a rather volatile environment.

Concerns:

Rise in interest rate:

One of the major concerns for the bank is the risk associated with the increase in the interest rate. The recent hike of the Repo rate and the CRR (Cash Reserve Ratio) would affect the cost of funds and this may get reflected in Q2 numbers.

Decline in CASA:

The CASA (current account saving account) for the bank for Q1FY09 declined 350 bps yoy to 34%. The decline in CASA is a major concern.

Valuation:

The banking sector has seen a sharp correction in prices because of rising interest rates. We expect the inflation to soften in the future. Its good to be overweight on the banking sector.

Bank of India has shown a good financial performance for the first quarter of FY’09. Its ROE is one of the best among PSU banks. It is expected to have an annualized EPS of around Rs 42.8 per share for FY09. At CMP of Rs 289.45, it trades at a P/E of around 6.7. The PEG ratio (PE/growth in NP) comes to 0.085. We recommend the stock as an excellent investment with a target price of Rs 375.

Disclaimer: Bank of India is a part of some of the proprietary and client portfolios of P.N.Vijay Financial Services P Ltd.

VBC Ferro Alloys Ltd. (VBCFAL) was incorporated in 1981 and set up a plant for production of 10,000 TPA of Ferro Silicon at Rudraram Village, Medak District, Andhra Pradesh in the year 1984. The plant went into commercial production in April 1985. VBCFAL is currently operating a Ferro Alloy Plant comprising of 2 nos. sub-merged arc furnaces of 16.5 MVA capacities each having a installed capacity to produce 10,000 MTPA of Ferro Silicon, 31,500 MTPA of Ferro Chrome and 27,000 MTPA of Silicon Manganese /Ferro Manganese.

The factory premise is situated on land measuring 80 acres (approx.) at Rudraram. The factory premises has all the facilities like raw material handling system, pollution control system, Pump House, Laboratories, fully automated control system for furnaces & weighing-batching, EOT Cranes, and In-house Power Sub-station with 25 MVA Power Transformer etc. It is situated close to 132 KVA  power line of AP Transco; the raw materials required are available within radius of 200/250 KM.

The Company is currently selling its products directly through its own sales depot located at Kolkata, New Delhi and Chennai and through its agents. The Company sells its products through direct tendering process where it has been enlisted as registered vendors. The Company is presently exporting to countries like China, Japan, Korea, Singapore, Canada, Itly, Taiwan, Turkey, Abu Dhabi, Germany, Mexico, Greece etc.

Some of the major Indian clients of VBCFAL include Panchamahal Steel Limited, Baroda, Sunflag Iron & Steel Limited, Nagpur, Mahindra & Mahindra Limited, Mumbai, Shah Alloys Limited, Ahmedabad, Jindal Steel & Power Limited, Raigarh, Jayaswals Nico Limited, Nagpur, Bharat Heavy Electrical Ltd., Hyderabad, Mishra Dhatu Nigam Ltd., Hyderabad, Visakhapatnam Steel Plant, Visakhapatnam, Indo German International Pvt. Ltd., New Delhi and Nilion Exports Limited, Mumbai.

INVESTMENT IN POWER PROJECTS

VBC Ferro has invested substantial amounts in Power Projects of the group.

Konaseema Gas Power Ltd. – VBC Ferro has invested Rs 135 crores towards Equity Capital of Konaseema Gas Power Ltd. and holds approximately 30% of the Equity of Konaseema. Konaseema has set up a 445 MW Gas Based power project. The total project cost of around Rs.1400 crores has been funded through Equity of Rs 440 crores and the balance as debt. The project has been commissioned, however it is not operational due to non availability of Natural Gas. The plant is expected to be operational by Mar 2009 with new gas availability from ONGC & Reliance.

Orissa Power Consortium Ltd. – The company has invested Rs 6.17 crores towards Equity of Orissa Power Consortium Ltd., which is setting up a 20MW Dam based Hydro Power project in Orissa.

CONCLUSION

Investment in the shares of VBC Ferro is recommended for investors with High Risk appetite in view of various risks and uncertainties attached, however the stock holds potential for high returns.

First the Risks

The fortunes of company’s core business of Ferro Alloys is dependent to a great extent on global prices of raw material and finished products and in the event of any adverse movement in the price of either, the financials of the company may get affected.

The company has made substantial investments in Konaseema Gas Power Ltd.. The power project which has not been operational till date due to non availability of Natural Gas is expected to be operational by March 2009 with new gas availability from ONGC and Reliance in the KG Basin. However in the event of delays in availability of Natural Gas, the financials of Konaseema may be adversely impacted which will impact valuations of VBC Ferro.

The other major risk is the contingent liabilities in the form of various corporate guarantees given by VBC Ferro Alloys for various group companies.

Coming to the positive side

VBC Ferro Alloys is involved in the manufacture of Ferro Alloys. The company has its plant located at Medak Distt. Of Andhra Pradesh on land area of around 80 acres.

The company has made investments of Rs 135 crores in the Equity Capital of Konaseema Gas Power Ltd. and holds approximately 30% of the Equity of Konaseema. Konaseema has set up a 445 MW Gas Based power project. The total project cost of around Rs 1400 crores has been funded through Equity of Rs 440 crores and the balance as debt.

The power project which has not been operational till date to non availability of Natural Gas is expected to be operational by March 2009 with new gas availability from ONGC and Reliance in the KG Basin. The start of commercial operations of Konaseema Gas Power project would be a big positive for shareholders of VBC Ferro since further value unlocking can happen when Konaseema goes public or inducts a financial investor.

The management’s optimism is evident from the fact that Konaseema has embarked upon further expansion of its capacity to 1265 MW by setting up additional capacity of 820 MW in Stage-II. The financial closure of Stage-II is at an advanced stage.

VBC Ferro has a small Equity of Rs 4.20 crores and high Book Value of Rs 322. The company has a market cap of around Rs 97 crores and Unsecured loans of Rs 27 crores, the enterprise value of the company is less than the investments of Rs 144 crores that it has made in Associate companies namely Konaseema (Rs 135 crores) and Orissa Power Consortium Ltd. (Rs 6.17 crores).

The benefits to the shareholders of VBC Ferro will be immense after the operation of Konaseema plant given a very small Equity Capital of Rs 4.20 crores.

Investors with an appetite for HIGH RISK can choose to accumulate the stock at the current levels and on declines.

VBC has invested Rs 135 crores for  30% stake in Konaseema Gas Power project which has put up a 445 MW Natural Gas based power project at a total investment of over  Rs 1400 crores. Start of commercial production of Konaseema project will lead to substantial benefits to the shareholders of VBC Ferro given its small Equity Capital of Rs 4.2 crores & may lead to an upward rerating of VBC Ferro stock.

VBC Ferro Alloys Ltd. (VBCFAL) was incorporated in 1981 and set up a plant for production of 10,000 TPA of Ferro Silicon at Rudraram Village, Medak District, Andhra Pradesh in the year 1984. The plant went into commercial production in April 1985. VBCFAL is currently operating a Ferro Alloy Plant comprising of 2 nos. sub-merged arc furnaces of 16.5 MVA capacities each having a installed capacity to produce 10,000 MTPA of Ferro Silicon, 31,500 MTPA of Ferro Chrome and 27,000 MTPA of Silicon Manganese /Ferro Manganese.

The factory premise is situated on land measuring 80 acres (approx.) at Rudraram. The factory premises has all the facilities like raw material handling system, pollution control system, Pump House, Laboratories, fully automated control system for furnaces & weighing-batching, EOT Cranes, and In-house Power Sub-station with 25 MVA Power Transformer etc. It is situated close to 132 KVA  power line of AP Transco; the raw materials required are available within radius of 200/250 KM.

The Company is currently selling its products directly through its own sales depot located at Kolkata, New Delhi and Chennai and through its agents. The Company sells its products through direct tendering process where it has been enlisted as registered vendors. The Company is presently exporting to countries like China, Japan, Korea, Singapore, Canada, Itly, Taiwan, Turkey, Abu Dhabi, Germany, Mexico, Greece etc.

Some of the major Indian clients of VBCFAL include Panchamahal Steel Limited, Baroda, Sunflag Iron & Steel Limited, Nagpur, Mahindra & Mahindra Limited, Mumbai, Shah Alloys Limited, Ahmedabad, Jindal Steel & Power Limited, Raigarh, Jayaswals Nico Limited, Nagpur, Bharat Heavy Electrical Ltd., Hyderabad, Mishra Dhatu Nigam Ltd., Hyderabad, Visakhapatnam Steel Plant, Visakhapatnam, Indo German International Pvt. Ltd., New Delhi and Nilion Exports Limited, Mumbai.

INVESTMENT IN POWER PROJECTS

VBC Ferro has invested substantial amounts in Power Projects of the group.

Konaseema Gas Power Ltd. – VBC Ferro has invested Rs 135 crores towards Equity Capital of Konaseema Gas Power Ltd. and holds approximately 30% of the Equity of Konaseema. Konaseema has set up a 445 MW Gas Based power project. The total project cost of around Rs.1400 crores has been funded through Equity of Rs 440 crores and the balance as debt. The project has been commissioned, however it is not operational due to non availability of Natural Gas. The plant is expected to be operational by Mar 2009 with new gas availability from ONGC & Reliance.

Orissa Power Consortium Ltd. – The company has invested Rs 6.17 crores towards Equity of Orissa Power Consortium Ltd., which is setting up a 20MW Dam based Hydro Power project in Orissa.

Demand to remain strong over the next five years:

Crude oil prices have risen multi-fold in the last five years on account of a strained demand-supply situation. The worsening balance and rising prices have warranted increased exploration and production (E&P) investments worldwide, which in turn has led to a surge in demand for pipes. According to Simdex, 266,717km of global pipe line demand is expected to arise from 534 projects in the next five years. 47% of this demand is expected to come from Asia and Middle East, followed by 32% from North America and Latin America. Assuming 300 tons of pipes per km at the rate of $ 1,050/ton, we estimate total demand at $ 84 billion.

JSL present across all product lines:

JSL is the most diversified player in the Indian pipe segment, catering to oil & gas transportation and exploration, water transportation, and sewerage systems. In addition, the company has received accreditations from various oil and gas majors in the US, Middle East, and South East Asia. JSL is increasing its capacity to 2.05mtpa from 1.25mtpa by CY08. The expansion would be across all products i.e. SAW, seamless and DI pipes. We expect higher capacity utilization of its existing facilities and new capacity additions to lead to strong growth for pipe segments in CY09 and CY10.

Strong order book, diversified portfolio to boost topline:

Jindal Saw Ltd (JSL) has a strong order book of $ 1,090 million to be executed by Feb 2009. The order book break-up is; SAW pipes -$ 860 million, seamless pipes -$ 65 million and DI pipes -$ 165 million. With new capacities expected to be operational at the start of CY09, we expect topline to rise 39.0% yoy. With the low margin US business hived off and focus more on higher margin products, we expect operating margins to expand by 420bps to 16.4% in CY09. At CMP, the stock trades at 10.8x and 6.9x CY08E and CY09E earnings of Rs 53.7 and Rs 84.7 respectively. We recommend a BUY; target of Rs 678.