Published on 30/05/2019 10:27:58 AM | Source: Yes Securities Ltd

Update on Sarda Energy & Minerals Ltd by Yes Securities

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Lower pellet sales impact profitability

Sarda Energy reported weak set of numbers led by lower pellet production and decline in steel prices. Pellet production declined sharply due to delay in environment clearance for its expanded capacity. Profitability was further impacted as product prices declined in the first half of the quarter. Weakness in ferro alloy market further pulled down overall performance. Q4 revenue declined 10.5% yoy largely led due to 25.9% yoy decline in ferro alloy revenues. Pellet production during the quarter declined 27.1% yoy and 63.2% qoq as the company had exhausted its environmental clearance limit for FY19 and clearance for expanded capacities was delayed. Operating profit fell 39.3% yoy to Rs.575mn due to lower contribution from pellet, lower steel spreads and weak ferro alloy division performance. Ferro alloy production during the quarter was also impacted due to product mix change. Ferro alloy and power production in its subsidiary was also lower during the quarter.

Steel prices started recovering from second half of Q4 and have been steady in Q1 FY20. Current steel prices were higher by Rs.700-1,000/ton over average Q4 prices. Pellet prices have rallied from Rs.6,200/ton in Q4 to Rs.7,000-7,200/ton due to iron ore supply constraints in global market. Environmental clearance for the pellet plant is expected in H1 FY20. The process has been delayed due ot elections. The company has incurred majority of the capex on its 96MW hydro power plant and expects the plant to be fully operational by FY20 end. The company is consolidating its hydro power assets and has increased stake in its 24MW hydro plant from 60% to 100%. SEML would report strong earnings growth over the next two years led by steady steel margins, volume growth in steel and commissioning of hydro power plant.


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