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January 10, 2018 ACCUMULATE

India | Specialty Steel (Alloy Steel) | Initiating Coverage on every dip

Vardhman Special Steels Ltd (VSSL)

for private circulation only
This detailed report is follow up of concise report sent on November 16,2017, stock price was Rs. 164.15 on that day.
The Company is positioned as an important or only supplier for niche small diameter steel bar space catering to the
passenger vehicles and two-wheelers. About 60% of its steel goes to low-volume, critical quality and special steels
applications – a rather uncluttered space.
Stock Statistics

I ncorporated in 2010 after demerger from Vardhman Textiles Ltd, Vardhman

Special Steels Ltd. (VSSL) is leading manufacturer of Billet, Steel bars and
rods and bright bars of various categories of Special and Alloy Steels. The
high-grade hot rolled bars manufactured by the Company are used in Engineering,
Automotive, Tractor, Bearing and Allied Industries. The Company also supplies
Bloomberg Code
BSE Code
NSE Code
steel for bearing applications. About 4% of the total production of the Company is
exported. VSSL is managed by professionals and is promoted by Vardhman CMP (INR) Jan 09, 2018 170.8
Group, counted as one of the best and shareholder friendly management among Face Value (INR) 10
North Indian Business Groups. Its Managing Director, Mr. Sachit Jain holds Adjusted PE (x) FY17 28.69
degree in B. Tech (Electrical) from IIT, New Delhi and MBA (Gold medalist) Adjusted P/BV (x) 2.77
from IIM,Ahmedabad. He has also studied Financial Management from Stanford, BSE Sensex Jan 09, 2018 34443.19
USA. He has a rich experience of over 26 years in the Textile and Steel Industry.
Other members on board are from IITs and IIMs which makes composition of Market Cap (Crore INR) 548.78
board dynamic and gives confidence about better strategies and their Market Cap / Sales (x) 0.7
implementation. 52Wk High / Low (INR) 194.95 / 61.79
Avg.Volume Jan 2018 111982
Major Customers of VSSL
Source: Research Team
Automotive /
Cars 2-Wheelers HCV / LCV Auto Components Tractor Off Highway
Toyota Yamaha Tata Oerlikon Graziano John Deere Caterpillar Shareholding Pattern (SEP 2017)
Hyundai Hero Motocorp Daimler Meritor Tafe
Magna Shareholders' Category %
Maruti Suzuki TVS Ashok Leyland Mahindra Dana Promoters 72.80%
GKN Driveline
Renault Nissan Bajaj Auto Swaraj Mazda American Axle Sonalika Institutions 0.38%
Bodies Corporate 3.05%
Ford Honda Volvo Bosch New Holland JCB
Public / Others 23.77%
Market Share - The Company’s Installed Capacity share in alloy and special Source: BSE

steel total market of 8.1 million MT is near 2%. (Please check Industry segment
for more details) VSSL SALES BREAK-UP
g & Off Bearing
Highway 4%
Infrastructure - The Company has facilities only in Ludhiana Punjab, through 14%
which it carries out its manufacturing operations which consists of Melting Shop, Vehicles
Rolling Mill and Bright Bar Shop. Its factory is spread in 19.74 acres. The 34%
Company has melting capacity of special alloy steel upto 1,60,000 TPA after an
expansion with budgeted capital cost of Rs.36.90 Cr. It plans to increase the al Vehicles
capacity to 1,80,000 TPA by FY 20. It has Rolling Mill capacity of 1,50,000 TPA 16%
with new state of art technology from Morgadshammer, Sweden. It also installed
Magnaflux leakage testing system (Dr.Foerster Germany), and Ultrasonic Testing
from (Olympus, Canada). It has increased capacity of Bright Bar Shop to 25,000 Wheelers
MT (Metric Tonnes) per month through expansion in 2015. 32%

ElectricArc Furnace technology - The Company has state of the art ElectricArc Landbank owned by the Company
steel making facility (that generates less pollution than traditional blast furnace Year of Acquisition Area Location
1973 52048.6 square yards Ludhiana
and is becoming preferred mode of steel making in China) along with latest
1989 6.11 acres Ludhiana
processing and steel rolling facility supported by all modern hardware and 2004 7702 square yards Ludhiana
software to produce steel for automotive forging applications. It has in-house 1994 1.29 acres Ludhiana
Research and Development lab and all testing facilities and team of 54 experts to 2011 24873.08 Haryana
cater to demand of technically superior special steel for end users like Toyota, 2011 3540.24 Haryana
Suzuki, Nissan, Ford, Hero Moto Corp, Yamaha, Bosch and Caterpillar US. Source: VSSL RHP

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Vardhman Special Steels Ltd. January 10, 2018

Warehouses - It also owns one warehouse in Gurugram, Haryana. It has leased warehouses across
India. It has one bonded warehouse managed by Third Party Logistics Providers in Bangkok,
Thailand. Pan India presence helps the Company Just in Time Delivery to customers and avoid
dependence on trading houses and traders.

Raw material - The principal raw material used for manufacturing of steel billets is Shredded
Scrap, Sponge Iron, Directly Reduced Iron (DRI) Pig Iron, MSTB etc. Apart from these raw
materials, various types of ferrous alloys are mixed with the liquid metal at LRF stage. All these
are procured from domestic and overseas market. Earlier the Company was mainly dependent on
imports for raw material procurement but has started procuring it indigenously now.


Automotive sector OF RS. 8.89 PER SHARE IN FY 18 & RS. 9.96 PER SHARE IN FY 19 We are initiating
turnaround will help coverage on VSSL with an earnings per share estimate of Rs. 8.89 per share for FY 18 and Rs. 9.96
the Company to per share for FY 19 backed by favourable conditions for auto sector where it enjoys strong position
maintain healthy as an important supplier because of expertise in niche segment of specialty / critical steel due to
financials going availability of better infrastructure and a professional management. It enjoys competitive edge in
forward comparison with peers because of the electronic arc furnace (EAF) technology . The Company is
gradually expanding capacities to meet Improving Volumes of VSSL
higher demand (Rolling Mill capacity has 5 Yrs
The Company may improved to 1,80,000 TPA in FY 17 from Particulars FY 12 FY 17 CAGR
add more customers 70,000 TPA in FY 12 and its steel
Steel Production (Billets) - M TPA 99893 135884 6%
going forward production has jumped to 1,35,199 MT in
Steel Production (Rolled) - M TPA 67298 135199 15%
because of its state of FY 17 from 67298 in FY 12. It has
the art technology improved production efficiencies Rolling Mill Capacity - TPA 70000 180000 21%
and strong (Average no of heats per day increased to Sales Volumes - M T 93169 131636 7%
infrastructure 15 in FY 17 from 10 in FY 12 and Heat Source: Company
Sequencing improved to 68% in FY 17 from 11% in FY 12). It has widened its product range from
25-70 mm in FY 12 to 16-125 mm in FY 17 to address requirement of turned around auto sector.
The Company had reported 200+ clients as on 31st March 2017. Its customer base expanded from
12 domestic OEMs in FY 12 to 18 OEMs in FY 17 and has 7 global customers in FY 17 against
only 2 in FY12. It has added two more global customers in first half of FY18. 21 customers are
giving more than 60% of their business in FY 17 from count of 14 customers giving their more
than 60% of business in FY 12.VSSL is looking to raise upto Rs175 Crore to carry out its capex (Rs
120 Crore for next five years, out of which it spent Rs,40 Crore last year -bought land (worth Rs.
36 Crore ) and expansion plans (Rs. 18 Crore) and to repay loan to reduce debt. It is looking to take
capacity for melting and rolled finished products to take to 2.4 lakh tonne each.

We feel VSSL is the best placed because of strong brand value of “Vardhman” brand, efficient
management and good infrastructure & R&D facilities to grow with growing automotive sector.
Supply to Defence and Railways are other new avenues where the Company is looking to make a
space. We are expecting substantially improved financial performance and stock returns in next
two years.

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Steel Production Capacity in
The present India is third largest producer of steel and is likely to
Government is India (In MTPA)
become second largest producer after China with
focusing on revival of expanding capacities. India's competitive advantage
the job creating steel in steel production is driven, to a large extent, from the 300
sector which went indigenous availability of high grade iron ore and 250
through a troubled non-coking coal – the two critical inputs of steel 200
phase because of production. In addition, it also has a vast and rapidly
economic slowdown, growing market for steel, strong MSME sector and a 150 122

burden of very relatively young work force with competitive labour 100
ambitious expansion costs. There is significant potential for growth given 50 22
plans carried out on the low per capita steel consumption of 61 Kg in India 0
borrowed funds and (incl. rural consumption at 10 kg), as compared to 1992 2016 2031 Target
dumping of surplus world average of 208 Kg. Several initiatives mainly,
and very cheap steel
affordable housing, expansion of railway networks, development of domestic shipbuilding
from China
industry, opening up of defence sector for private participation and the anticipated growth in the
automobile sector, are expected to create significant demand for steel in the country. Growth in
Closure of steel consumption in a country is typically linked to the economic growth and steel intensity. It is
steelmaking units in expected that at the current rate of GDP growth, the steel demand will grow threefold in next 15
China will help years to reach a demand of 212 - 247 MT by 2030-31.
Indian steel sector
going forward
Demand of steel products - Domestic steel demand Sector-wise Steel Demand in India (in MT)
can be broadly categorized into demand for flat steel 15 Yr
Sector FY 16 FY31 E CAGR
products and the demand for long products. The Infrastructure 9.5 90 16%
demand for flat products is supported by the Construction
Improving economic 23.5 45 4%
e n g i n e e r i n g , a u t o m o b i l e s a n d t h e p i p e - Engg. & Fab 35 43 1%
scenario and the
manufacturing sector. The demand for long products Automotive 2.5 10 10%
is supported by infrastructure and the construction Railways 2 5 6%
spending has brought
sector. According to Research estimates, demand for Packaging 2 6 8%
hopes of revival of Energy
flat products during the next 4-5 years is likely to Others (Incl Defence, Ship
3 11 9%
steel demand in grow at a CAGR of about 6.0%, while the demand for Building, Oil &Gas 4 20 11%
India. long products during the same period is likely to grow Total Finished Steel Consumption 81.5 230 7%
at a CAGR of about 6.2%.The increased localization Per Capita Consumption in Kg 61 158 7%
The safeguard duties of components by manufacturers such as Honda, Source: National Steel Policy, 2017 document
imposed by the Ford, Suzuki, Hyundai and Nissan has helped steel industry to improve its operating cost and also
Government is also provide a suitable substitution for imported steel. With several budgetary allocations boosting
helping steel industry infrastructure, the demand of steel and steel products is expected to rise. According to the World
to face competition Steel Association, India will contribute 5.1 million tonnes out of the forecasted growth of around
from cheap imports 20 million tonnes in global steel demand during the CY 2017. In the short and medium term, the
steel industry is set to grow at a 6-6.5% CAGR, according to CRISIL.

Demand of alloy steel - The demand of alloy steel

depends upon the size and growth of the auto- ALLOY STEEL SEGMENT
component and automotive sector. The Indian auto WISE CONSUMPTION
Turnaround of industry is the third largest automobile sector in the (Source: Steel Word , Nov 2016)

automobile sector world. The industry accounts for 7.1% of the country's Other
will generate higher Gross Domestic Product (GDP). Currently, there are Engg.

demand for alloy about 25 alloy steel players in India with a capacity of Defense
steel 9 million tonnes to meet the increased requirements of 5%

this specialized segment. However, it is facing a Bright Bars

Seamless 5%
severe threat of cheaper imports from China in the Steel Tubes Automotiv
short term due its low cost of manufacturing and & Pipes
idling of excess capacities. More than 60% Spring
consumption of alloy steel is by automotive industry. Manufactu
Alloy and carbon steel for automotive forging

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application has production capacity of 4.0 million tons approximately with demand as high as 4.5
million tons, which is expected to go upto 7 million tons by 2020. Steel producers have also lined
up new production facilities upto 3 million tons per annum to bridge this demand v/s production
gap by 2020.

The bars and rods are mostly used by automotive companies which is approximately 2.46 million
MT followed by auto component using 1.26 million MT. Other prominent markets for bars are
Railways, Defence and Earth Moving Equipment manufacturers such as JCB and Caterpillar. The
Railways with increased demand of leaf spring steel and coil springs followed by other
components like Shafts etc. for new improved coaches and engines have boosted the steel industry
production as well, followed by similar increased demand from Defence sector.
The Company enjoys
Market Share - Big volume manufacturers are Glance at market share
niche position despite
situated in Western and in Eastern part of India. VSSL VSSL 2.00%
stiff competition
enjoys 2% market share in installed capacity of 8.1 JSW 14.80%
million MT of alloy and special steel. The Company's Usha Martin 12.00%
territorywise market share in 2016 was -
Sunflag 6.00%
Mukand 3.70%
§ Northern India - 8% (Volume approx 8000 MT / Source: VSSL RHP
§ Western India - 1.5% (Volume approx 1800 MT / Month)
§ South India - 2.6% (Volume 1200 MT/ Month) (Source of Info: VSSL RHP)

Major Competitors like Sunflag, Mukand and ISMT supply majorly in Western and South India
and have strong presence in bearing steel as well, especially ISMT. Kalyani has its own Niche and
strong presence in Defence sector. Usha Martin, Bhushan Power and Steel and other companies
such as Gerdau have spread their markets all over India mainly for industrial, tractor and
commercial vehicle segments where either medium to large diameters or less critical steel is used
because of cost effectiveness and less criticality of components required as compare to passenger
vehicles. Indian alloy steel manufacturers and primarily Japanese steel makers are entering into
alliances such as Sunflag has formed alliance with Diado, Usha Martin with Aichi and Mahindra
Steel with Sanyo. Recently in March, there was an announcement of a Joint Venture between
Mukand and Sumitomo. Despite non-existence of alliance with an international player, VSSL is
well placed against its competitors because of single source for critical application steels in most
of the cases. VSSL is looking for alliance with international player to garner better market share
and access latest technical know-how in near future.


aims at making New Steel Policy - The National Steel Policy 2017 released by the Government, also aims to
domestic steel increase steel production. The New Steel Policy, 2017 aspires to achieve 300MT of steel-making
makers more capacity by 2030-31. This would translate into additional investment of Rs. 10 lakh Crore by
competitive through 2030-31. It will also generate significant employment in the range of 36 Lakhs by 2030-31 from
the current level of 25 Lakhs depending on degree of automation resulting from adoption of
higher spending on
different technologies. The Policy seeks to increase per capita steel consumption to the level of
R&D, safeguarding
160 Kgs by 2030-31 from existing level of around 61 Kg. The Policy is also looking to make India
them through
net exporter of steel by 2025-26. For the infrastructure push, expenditure for transport sector has
imposition of import
been raised to INR 0.64 trillion, taking it up to a total of INR 2.4 trillion in Union Budget for 2017-
duties on finished 18. Around INR 1.31 trillion of capital expenditure is assigned towards Railways. This will clearly
products and low have a large effect on the demand for steel and the metals. (Source: Usha MartinAnnual Report).
duties on import of
raw materials Make In India – The Central Government wants steel to contribute heavily to the government's
target of raising the share of manufacturing in the economy to 25% by 2022 from 17% now. The
Government has come out with a ruling that domestic steel will be given preference in
Procurement of Government projects as part of the Make in India programme. Current level of capacity utilisation
Indian steel for Govt of domestic steel producers is below 80%. If demand picks up on account of increased government
projects under “Make spending on infrastructure and government mandates the use of domestic steel in such projects, the
in India” initiative domestic steel producers are fully capable of raising the production level. Most steel companies

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had losses as prices fell after cheap imports (1/3rd from China) doubled to 13 million tonnes in
2015/16 from the levels of 2013/14. Most Indian steel companies are so saddled with debt. The
steel industry contributes 29 per cent of overall banking sector bad debt of around $135 billion,
according to government data. This initiative of the Government may attract global steelmakers
such asArcelor Mittal and POSCO to invest in the country or these debt ridden companies.

Turnaround of Auto Sector - The automotive

manufacturing industry comprises the production of Auto Sales in India
commercial vehicles, passenger cars and three & (in millions )
Automotive sector two-wheelers. The automobile industry is Source: SIAM
turnaround offers witnessing turnaround and revival in demand 25
backed by increasing disposable income, improving 22
good growth 20 20
prospects for alloy life-style, increasing number of nuclear families and 20 18 18
steel manufacturers easy availability of the finance. A normal monsoon
has revived rural demand in auto sector which had 15
Low interest rates, taken a hit in the past. The Government is looking at
Easy availability of phasing out pollutant old commercial vehicles 10

finance, (trucks & busses) and replacing them with modern,

fuel-efficient and less-polluting ones by offering tax 5
Normal Monsoon,
and other benefits. There are 28 mn vehicles that are
Improving 0
atleast a decade old. Revival of the logistics sector
purchasing power, FY 12 FY 13 FY 14 FY 15 FY 16 FY 17
after GST implementation & Job creation drive are
phasing out of old other growth drivers for the auto demand.
vehicles, turnaround
of the logistics sector SEGMENT WISE SHARE IN
Two wheeler production is expected to rise from AUTO PRODUCTION IN FY 17
will keep auto 18.8 mn in FY16 to 34 mn by FY20E. The Central
demand benign Government's Auto Mission Plan II forecasts the Commercial
Vehicles Passenger
passenger vehicle market to be more than triple to 3% Vehicles
9.4 mn units by 2026 from 2.8 mn now, if the Three 15%
economy grows at an average rate of 5.8% every Wheelers
year during this period. The Indian automotive
aftermarket is estimated to grow at around 10-15%
p.a. to reach US$ 16.5 billion by 2021 from around
US$7 billion in 2016. India's share in the global Two
passenger vehicle market to touch 8% by 2020 from Wheelers
2.40% in 2015.

New Growth Avenues for VSSL -The Company is looking at supplying steel to passenger car
manufacturers like Suzuki and Toyota by replacing / substituting their import requirement of steel
bars. It is looking to supply steel to Railways for Railways spring applications after RDSO
Railways and (Research Designs and Standard Organisation, sole R&D organisation of Indian Railways)
Defence offers two approval. It is looking to export steel bars to countries such as Iran, Germany and Italy. It has
high growth avenues planned to develop hexagonal sizes in house for various industrial applications. It is looking to
for the Company in take approval of Japanese companies like NSK, NTN, Isuzu, Mazda, Toyota and Mitsubishi in
the future coming years. It is also looking to develop bearing steel market for companies like SKF and
Schaeffler. It has planned to develop Quench and tempered steel bars for various Tractor
component applications in countries such as Turkey.

Export Front - The Company has presence in six nations and shares a healthy relationship with a
It managed to add 2 Thailand-based company for exports. It is looking at expanding customer base in Italy, USA and
Global OEMs in First Germany. The Company is looking at increasing export revenue share from 4% in FY 17 to 10% in
half of FY 18 FY 18. It has received product approvals from two leading, quality conscious, globally-respected
European automobile OEMs in FY 18.
Alliance / JV with an
international player Looking for an international alliance - VSSL management is looking for an international
may create value for partner - Japanese or European which can take minority stake in the Company. International
shareholders going alliance will open new markets for VSSL such as Bearing steel, Tool steel and ultra clean steel for
forward defence applications and other high value engineering applications. It will also get access to latest

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technical know how and new customer base.

Mitigation of client concentration risk - The

Company has managed to increase business with its
The company is key clients individually and reduce their proportion in
looking to expand overall revenue mix. More than 85% its clients have 50% 43%
customer base to been with the Company for more than five years. It is 40%
avoid dependence of looking forward to consolidate its niche segment 20%

top 5 clients supplies and is following up with the Companies such 10%
as Volvo, Isuzu, Ford, NTN and Toyota for approvals. 0%
FY 14 FY 15 FY 16
The Company is likely to get more approvals because
of its electric arc furnace technology going forward as the world is shifting towards non-polluting
or environment friendly technologies for manufacturing.

Competitive Edge over Competitors - VSSL, despite non-existence of alliance with an

international player, is well placed against its competitors because of being single source for
critical application steels and its state of the art electric arc furnace and strong R&D infrastructure
to develop products as per specific requirements of the customers. VSSL is looking for alliance
with international player to garner better market share and access latest technical know-how in
near future.

Three Point Agenda for FY 18 - The Company is looking at increasing melting capacity to
1,80,000 TPA from 1,60,000 currently by next year through line-balancing and small de-
bottlenecking initiatives, better utilisation of its capacity and strengthen operational efficiencies to
bring down costs. The Company is looking to implement TPM (Total productive maintenance) to
improve production line, quality and service and reduce costs.

Government incentive - The Punjab Government has announced availability of variable power at
!5.00 per unit (KVAH) for a period of five years to al lindustrial users. If it is implemented, it will
be a big positive for VSSL being a power intensive industrial unit. As things stand, this should get
implemented by second half of this year. The management is expecting contribution of near Rs. 12
Crore annually in EBITDAwhenever this power tariff incentive comes into effect.

Punjab Government in its Industrial Policy has announced fiscal incentives to carry out expansion
Punjab Government’s and modernisation by existing and new industrial units. The incentives under Industrial Policy,
Industrial policy to 2017 include Investment subsidy by way of reimbursement of net SGST on intra-state sales in
attract investment in addition to exemptions given in the earlier years’policies (100% exemption on electricity duty and
the state might help stamp Duty and exemption of 50% of the Property Tax payable to the Municipal Corporation).
the Company to The Company is paying Rs 5.29 lakh p.a. as Property tax. The Company is expecting incentives for
improve financial the capacity expansion it carried out recently and future expansions. The benefits will be available
to the Company for 8 years from the date of approval and also the aggregate of the benefits will be
maximum of total investment made by the company under the expansion projects duly approved
under the scheme.

The Company was
Capital intensive industrial unit - The company operates in a capital intensive industry and its
not able to pass on operations involve a high level of fixed cost. If its sales decline, profit may decline sharply. Fixed
affect of higher costs cost component cannot be removed or reduced. This may result in an adverse effect on its financial
in first half of FY 18 condition, cash-flows and business operations if the Company fails to pass on the same to the

Blast furnace route is Lack of Cost Advantage - The Company is located in North India where freight is expensive. The
cheaper than electric process followed by the company, Electric Arc Furnace, is costlier than Blast Furnace Route in

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arc furnace route primary steel making. Commercial vehicle and tractor makers are shifting Blast Furnace Route
steel because of low cost. Thus the Company may be on competitive loss in case of the customers
looking for economical options instead of superior quality.

Export obligations - The Company imports some of its equipment under licenses pursuant to the
Government of India's Export 24 Promotion Capital Goods (EPCG) scheme. It is required to meet
set export obligations within six years from the date of license to avail custom duty exemption. Its
profitability may take a hit if it fails to meet such obligations.

Client Concentration Risk - It derives a significant portion of its revenues from top 5 (five)
The company gets customers of the Company. The Company operates on a rate contract basis and doesn't form long
major revenue share term arrangement at fixed cost with its customers. It depends on them for procurement of regular
from top 5 cleints orders. The loss of any significant customer or any rejection / cancellation of substantial order
from these customers can adversely affect its revenues and profitability.

It does not have Lack of JV or technical alliance with international player - It does not have a Technical JV or
technical alliance / technical alliance with international players like most of the player in auto and auto component
JV with international industry. This advantage gives competitors an edge over VSSL.The Company lacks on approval to
player like supply steel in public sectors such as Railways and Defence.
Competition from China –Downward pricing pressure from its customers, due to growing cheap
Chinese imports had imports from China and rising cost of production in the country, may adversely affect its
damaged Indian steel profitability and results of operations. The Company's decision on price hike / reductions depend
industry but now on the negotiations with the customers so any delay in price hike to mitigate increased production
scenario is changing cost may put pressure on its profitability and profit margins.
with closure of old
steelmaking units on
concerns. India is Reasonable Valuations compared with Peers - The stock of VSSL is trading at reasonable PE of
unlikely to remain a 28.69x to the adjusted earnings for FY 17 against Industry PE of 27.79x (Source: Moneycontrol)
dumping ground for and P/BV of 2.77x. The Company enjoys better profit margins and RONW among peers and has
Chinese steel in the been able to bring down its debt despite carrying expansion plans.
Particulars (Standalone FY 17 Fig in Rs Cr) VSSL Mukand Ltd Sunflag Iron
Net Income 751.75 2,677.02 1,507.50
The stock of the
Company is available Operating Profit 65.48 357.34 153.16
at reasonable Net Profit (Excluding Exceptional Gains) 19.13 -41.81 65.17
valuations Operating Profit Margins (%) 8.71% 13.35% 10.16%
Net Profit Margins (%) 2.54% -2% 4%
Latest Equity 32.13 147.05 180.22
Book Value (Rs /share) 61.65 28.89 39.30
Diluted EPS (Rs /share) 5.95 -2.84 3.62
CMP (09 Jan 2018) 170.80 92.7 82.85
FV (Rs / share) 10 10 10
M-Cap (Rs Cr) 548.78 1363.15 1493.12
M-Cap / Sales (x) 0.73 0.51 0.99
Adjusted PE (x) 28.69 -32.60 22.91
P/BV (x) 2.77 3.21 2.11
Long Term Debt / Equity Ratio (x) 0.58 3.88 0.06
RONW 9.66% -9.84% 9.20%
Source: M oneycontrol

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The Company has Financial Performance Review - Favourable

Financial Performance at a glance
managed to improve scenario for Automotive industry led by normal (Fig in Rs Cr)
its financials and this Monsoon, softening interest rates, easy availability of 1200.00 Source: Moneycontrol, NDA Research Team

improvement is likely finance and improving affordability has helped the 968.25
to continue with Company to register four year compounded growth of 864.51
733.05 751.75
expanded capacity to 11% and 41% in net sales and net profit respectively. 800.00

meet higher demand The Company clocked profit in FY 16 after two years 600.00 493.74
from the auto sector. of losses in FY 14 & FY 15. Its operating and profit 400.00
margins witnessed significant improvement in FY 17
and stood at the highest since FY 13. The management 4.84 -15.11 19.13 28.56 31.99
of the Company is hopeful of registering 18-20% 0.00
2013 2014 2015 2017 2018 E 2019 E
growth going forward. -200.00

Sales NP

First half of FY 18 is dismal because of higher raw

The Company’s material prices coupled with higher increase in Networth (Fig in Rs Cr)
renegotiation with electrode prices globally. The Company was not able Source: Moneycontrol, NDA Research Team
the customers in to pass on affect of the higher raw material prices in
second half of FY 18 first half but is likely to renegotiate with OEMs to pass 400.00
may help it to on hiked raw material prices in second half of FY 18. 350.00 308.02
improve margins in Lower power tariff of Rs .5 / unit will result in reduced 300.00
second half fuel cost and help the Company to improve its 250.00
profitability in second half of FY 18. The 200.00
195.18 185.76
management’s hunger for growth is clearly evident
from its approach of ploughing back earnings into the
business instead of distributing it to the shareholders
at present. Its strategy to bring down debt through 50.00

equity dilution will further reduce interest expenses 0.00

2013 2014 2015 2017 2018 E 2019 E
and strengthen bottom-line of the Company.

VSSL FINANCIALS AT A GLANCE (S tandalone Fig. in Rs. Cr)

PARTICULARS H1 FY 18 2019 E 2018 E 2017 2016 2015 2014 2013

REVENUE 430.94 968.25 864.51 751.75 727.80 733.05 407.90 493.74
EBITDA 28.66 84.62 75.55 65.48 45.77 18.98 4.44 23.24
NET PROFIT 8.28 31.99 28.56 19.13 5.21 -15.11 -9.41 4.84
EBITDA MARGIN 6.65% 8.74% 8.74% 8.71% 6.29% 2.59% 1.09% 4.71%
NP MARGIN 1.92% 3.30% 3.30% 2.54% 0.72% -2.06% -2.31% 0.98%
EQUITY 32.13 32.13 32.13 18.56 18.56 18.56 18.56 18.56
RESERVES & SURPLUS 241.08 307.88 275.89 179.53 156.39 151.17 167.20 176.62
NETWORTH 273.21 340.01 308.02 198.09 174.95 169.73 185.76 195.18
TOTAL DEBT 254.81 231 260.00 254.17 296.37 343.52 294.78 307.05
DILUTED EPS after Right Issue 2.58 9.96 8.89 5.95 1.62 -4.70 -2.93 1.51
DILUTED BOOK VALUE 85.03 105.82 95.87 61.65 54.45 52.83 57.81 60.74
ADJUSTED PE (x) - 17.16 19.21 28.69 105.33 -36.32 -58.32 113.38
PRICE /BOOK VALUE (PBV) - 1.61 1.78 2.77 3.14 3.23 2.95 2.81
DEBT / EQUITY 0.93 0.68 0.84 1.28 1.69 2.02 1.59 1.57
RONW - 9.41% 9.27% 9.66% 2.98% -8.90% -5.07% 2.48%
Source: M oneycontrol & NDA Research.* Right Issue (Price - Rs.50/share, Ratio - 2:3 -2 shares for 3 shares held)

Good land bank with the Company - The Company owns good landbank in Ludhiana,
commercial hub of Punjab (details of the land bank are given on the front page of the Report on right side of
Electric Arc Furnace Technology). The current market value of the land-bank should be much higher
than the book value because of strong appreciation of real estate prices in post 1990. It offers
opportunity of huge exceptional gains in case of monetisation.

NDA Securities Ltd Page 8

Vardhman Special Steels Ltd. January 10, 2018

Valuations - VSSL stock is trading at adjusted (post Right Issue) PE of 28.69x and P/BV of 2.77x
to FY 17 earnings which is acceptable considering its growth potential. With the object to reduce
borrowing, the Company made right issue during May 2017 at Rs 50 per share in the ratio of 2:3.
Hence its paid up equity capital stands at Rs 32.13 Cr currently from Rs.18.56 Cr in FY 17. The
market can afford higher valuations for higher growth potential companies. Market Cap / Sales
ratio is in comfort zone of 0.7x. The Company is focused on carrying expansion plans and keeping
debt under control through equity dilution. It’s expanding reserves, falling working capital
borrowing and improving profitability may encourage board of the Company to announce
dividend in the future.

Conclusion - We feel that the Company’s presence in niche segment of specialty steel, backed by
good demand from turnedaround automotive sector, may help it to register good growth in future.
We expect it to be a MULTIBAGGER going forward and are initiating ACCUMULATE stance
on every DIP.

Source of Info:
§ Company’s website
§ Company’s Annual reports / Press Releases / Offer Documents
§ BSE / NSE website
§ Governmental Policy Documents (Central as well as Punjab Government)
§ News websites and Internet

Equity Research Division

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