Increasing coke prices due to the limited capacity available and higher demand for steel in the international market has benefited coke manufacturers like Austral Coke and Projects (ACPL).

Business

The company is into manufacturing of low ash metallurgical (LAM) coke and started selling manufactured coke from FY2005-06. In the same period, the capacity of LAM coke was expanded to 1.50 lakh tonne from 50,000 tonne of LAM coke. ACPL requires coking coal as a main raw material for producing coke. However, the raw material is mainly imported from foreign markets like Australia, China, Mozambique, Zimbabwe, Russia, and Indonesia due to the low quality of coking coal available in India.

Coke, which is used in blast furnace and various other sectors, is in short supply, with no new capacity addition coming up in developed countries, and this is an added advantage for ACPL. This has resulted in high coke prices in the international market. Particularly in China, the coke price has increased from $190 in 2003 per MT to $300 MT in 2008.

To secure raw materials in the future it has acquired six licences covering an area of one lakh hectare for mining in the Republic of Mozambique. The licence was acquired through its subsidiary Astra Mining, Mozambique having a shareholding of 95%. If these coal reserves are found fruitful, they could help the company to extract the required coal in the future and fulfill the requirement for capacity addition. Currently, geophysical studies are ongoing and it would take time to start the mining activities.

ACPL also deals in providing construction/earthmoving machinery to medium/large construction companies and textile trading other than LAM coke. The non-core business gave much impetus to sales growth over the last couple of years. However, most of the profit is generated from its coke business, which is at around 81% of the total net profit before interest and tax.

Objective and financials

From this issue, ACPL intends to invest Rs 30.8 crore in setting up an 8 MW power plant and Rs 40 crore for acquiring mines. It also intends to setup a 1.5 lakh MTPA LAM coke plant in Maharashtra with an investment of Rs 78.1 crore. This addition is over and above the current capacity of 3.75 lakh tonne (total capacity of 5.25 lakh). The company’s inability to generate sufficient revenues due to 200% growth in the capacity addition could increase operational cost and ultimately affect profitability. It must be noted that the company may not be able to increase the capacity utilisation above the level of 65% due to process constraint.

Over the last five years the company has delivered healthy growth. However, there was a sudden jump in the net profit margin from 5.2% to 15.5% in FY2007-08 till February. Margins may not sustain ahead if the price of coke comes down or less profitable business contributions goes up in the topline. Its sales and net profit for the 11 months ended FY2007-08 are Rs 226.67 crore and Rs 35.17 crore respectively.

Valuation & Concerns

The total issue the company has floated also includes a green-shoe option and will act as a stabilisation fund. Excluding the green-shoe option, the annualised post issue diluted earning per share is Rs 13.22.

Considering the price band, the price-to earning multiple of ACPL is 12.48 times and 14.82 times compared to 21.22 times of Gujarat NRE Coke. ACPL’s pricing is relatively better compared to the size of the business of Gujarat NRE Coke.

Apart from having strong growth prospects in the coke business there are company-specific concerns one should note. ACPL is into businesses, which are hampering its overall profitability, like textile trading (PBIT of Rs 0.16 crore) and contributing around 19% to the topline. If similar kinds of margins continue ahead, it could adversely affect the bottomline, where coke is a high margin business.

ACPL has a non-compete agreement for three years with Austral Infrastructure (AIPL), which is one of the promoter groups companies proposing to manufacture similar products and this is one of the major concerns. However, ACPL would assist AIPL in the purchase and sale of transactions and would be paid management fees. After expiry of the agreement they both could compete and that can lead to a conflict of similar interests.

The company intent to raise funds in the final RHP is much lower then written in the Draft RHP, but there is no change in its objectives of the issue and this signals that the company would still implement projects like power plant and expansion activity with the same funds. This is a grey area that one should note.

One should also note that there is a wide gap of around Rs 22 to 44 crore (considering lower and upper price band) between funds raised (pre-IPO placement and the present issue) and total investment in the intended projects. Investors must consider the above factors before investing.