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Radhika Kamath

Exports will be the revenue driver.

THE price of the Uttam Galva Steels stock has fallen by over 30 per cent in the last two months. Shareholders can remain invested in the company, as there is room for attractive returns over the medium term. At the current price of about Rs 50, the stock trades at a multiple of about four times its per share earnings for FY-05.

Our recommendation is based on the robust demand for the company's products, earnings growth potential and broadening product mix. Steel prices, even if they decline, are likely to remain at higher levels on average. Strong volume growth and the capacity addition expected from this fiscal could offset the impact of a cooling off in steel prices on the company's earnings. The price hike of Rs 1,500 per tonne (about 6.5 per cent) with effect from April 1, is likely to be reflected in higher earnings for the current quarter.

Uttam Galva, a mid-cap steel player, makes and sells cold rolled and galvanised products, which are widely used in automobiles, white goods, engineering and construction industries.

The company's performance over the years has been impressive, especially in the light of the tough business environment with competition from industry majors. The revenues have recorded an annual average increase of about 35 per cent in the last five years.

Exports more than doubled between FY-04 and FY-05, touching Rs 1,315 crore, accounting for 60 per cent of its revenues. This was mainly because of the price effect and the shift by the company to more value-added grades and sizes. The average capacity utilisation was a high 80 per cent, indicating the growing demand for the company's products.

With the successful commissioning of its cold rolling mill, Uttam Galva's capacity rose 50 per cent to 0.75 million tonne per annum with effect from March 2005. This can be expected to contribute to revenues this fiscal. The capacity expansion would enable it meet the increasing demand, particularly in the export market. The addition of colour-coated products would enrich its portfolio, resulting in higher realisations.

Financial arrangements with Stemcor of Singapore, involving advance payments against future exports, would strengthen its overseas marketing efforts and freeze cash for other uses, enabling the company to reduce its interest cost.

However, there are certain risks associated with the stock. Though we expect demand to outpace supply, capacity additions by other steel players may result in price wars, putting pressure on margins.

Also, big players such as Tata Steel and SAIL would be better-placed in such a situation as they have control over the entire value chain. The outlook for the automobile sector looks positive, although demand growth may not be as robust as in the previous year. In the light of the above factors, remaining invested appears a viable strategy.

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