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Uttam Galva: A brief overview... - Views on News from Equitymaster
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  • Apr 4, 2007

    Uttam Galva: A brief overview...

    Uttam Galva Steel was incorporated in 1985 and is one of the largest manufacturers of cold rolled (CR) and galvanized (GP) steel in Western India. The company is into the business of procuring hot rolled steel (HR) and processing it into CR and further into GP and Colour Coated Coils. In galvanized coils it specializes in making ultra thin sheets, which could be as low as 0.13 mm thickness. The excess capacity of CR which is not used for galvanizing is converted to value added grades in Cold Rolled Closed Annealed (CRCA) coils, cut to length sheets and also sold as full hard CR in the overseas markets. The company's manufacturing facilities are located at Khopoli, in the state of Maharashtra, which are close to Nhava Sheva and Mumbai ports. This provides the company with easy access to imports of HR coils and facilitates export of its products. More than 70% of the company's products are currently exported to over 120 countries worldwide. It has a client base in advanced markets such as Australia, France, Germany, Greece, UK and USA. The company had planned to expand its CR capacity to 1,000,000 MTPA by the end of FY07 (75,000 MTPA in FY06) and its GP capacity to 7,50,000 MTPA by June 2007 (4,50,000 MTPA in FY06).

    Product Mix: Galvanized products account for almost 70% of the total saleable production of the company. Over the years, the company has changed its product mix and has focused more on galvanized products. Galvanised steel, a value added product that enjoys higher margins and is used by automobile industries has been gaining increasing importance in recent times. The contribution of galvanised products has increased from almost 50% in FY03 to 70% in FY06. Currently, the company transfers almost 77% of CR production to GP/GC. The company's increasing focus on value added products is a move to insulate extensive volatility in steel industry globally.

    Revenue Mix: Over the past few years, the company's exports have accounted for more than 50% of its turnover. However, in recent past domestic sales have picked up, this may be attributed to the fact that domestic demand has picked recently on account of buoyancy in the end user industries like automobiles. The gross sales of the company grew at a CAGR of 49% during FY03 to FY06, while domestic sales recorded impressive 61% CAGR during the same period. The exports grew at a slower rate compared to domestic sales at CAGR of 41% during FY03 to FY06. The export turnover in FY06 was lower by 27% YoY in FY06 on account of steep fall in HR coil prices in international markets and consequently led to lower CR and GP/GC prices. With the support of higher domestic realisations during this period, the company has taken a conscious decision to focus on the domestic market going forward.

    Financial Performance: On account of growth in the steel industry, the company's net sales grew at CAGR of almost 32% in the last 3 years. Though, the operating profits grew at CAGR of 24% during FY03 to FY06, operating margins have been volatile on account of rising expenses. Iron ore, which is the main raw material used by the steel industry, has seen its prices firming up. The company is not an integrated player and moreover, of the total raw material required by the company, 50% to 60% is procured indigenously and the remaining is imported. Not only the imported raw materials increases the cost pressure but also increases the exposure of the company to international raw material price volatility.

    Particulars FY03 FY04 FY05 FY06
    Net Sales 7,831 11,625 20,941 17,882
    Expenditure 6,851 10,339 19,000 16,007
    Operating Profit 980 1,287 1,941 1,875
    Operating profit margin (%) 12.5% 11.1% 9.3% 10.5%
    Other Income 8 40 54 96
    Depreciation 228 335 322 380
    Interest 460 738 645 774
    Profit before tax 301 254 1,028 817
    Extraordinary Items (148) - - -
    Tax 7 16 81 73
    Net Profit 146 239 947 743
    Net profit margins (%) 1.9% 2.1% 4.5% 4.2%

    In the past, the company's profitability was adversely affected due to higher finance cost and higher depreciation. However, with the upturn in the steel cycle and improved performance, the same has considerably improved. In FY06, the company managed to reduce its costs on account of its continuous efforts to upgrade equipments, expansion and moderinastion of plants to enhance yield and efficiency.

    What to expect?
    The company has raised additional debt of approximately Rs 4 bn to fund its ambitious capex plans to maintain its market share and diversify its product base. With this, its interest cost will increase exerting further pressure on the net margins of the company. We believe that value added product mix and continuous efforts to control costs would lend stability to the company's business over the longer term. However, caution needs to be exercised on account of extreme price volatility in international and domestic markets and cyclical nature of the industry.



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