The Hindu Business Line : Gujarat NRE Coke: Buy

The stock of Gujarat NRE coke can be added to one's portfolio. At its current price, the stock trades at a multiple of about five times its expected per share earnings for the year-ending September 2006. Robust demand for coke, stable outlook for prices, gains from capacity expansion and backward integration make the stock attractive in the near term. Growth is, however, likely to be more moderate on account of stable prices and fresh capacities.

Gujarat NRE is India's largest non-captive coke producer with an annual capacity of 0.5 million tonnes. The company plans to set up a coke oven project at Dharwar (Karnataka) and also expand its existing facilities in Gujarat at Kandla and Jamnagar. These projects, likely to be completed by December 2006, will take the total annual capacity to 1.4 million tonnes. The new capacities are likely to result in higher volumes. Higher depreciation and interest costs are, however, likely to exert some pressure on the earnings in the near term.

The company completed the acquisition of a second coking coal mine in Australia in July. The first coal mine, acquired in December 2004, has commenced production. This move towards backward integration is likely to benefit the company in terms of assured raw material supply — the acquisitions have added about 400 million tonnes to its coking coal reserves — and better control over input costs.

The demand for metallurgical coke is likely to remain strong in the medium term.

The steel sector, which is the largest user of coke, is on expansion mode. The total steel capacity expected to cross 70 million tonnes by 2012 lends optimism to the company's business prospects. On the supply side, the shortage of coke is likely to continue over the near term until fresh capacities are commissioned.

According to the Coal Ministry, more than half of this year's total deficit of coal would be of coking coal. The demand-supply gap is, therefore, likely to offer stability to the coke prices in the medium term.

The global scenario also offers positive outlook for the demand of coke. Rationing of coke exports by China in 2004 resulted in demand outstripping supply and the prices of coke going through the roof. These prices which touched a historic high of about $ 485/tonne in May 2004,were unsustainable and fell sharply in the following months. Over the past few months, they have recovered from their lows and are expected to stabilise at $240-280 a tonne in the medium term.

China's consumption is also likely to remain strong on the back of robust domestic demand. This offers an attractive opportunity for India, in general, and Gujarat NRE, in particular, to serve the global market. The company exports 10-15 per cent of its production to markets in Brazil, Europe and Japan. It has an export order book worth Rs 150 crore, equivalent to about 50 per cent of its FY-04 sales.

The company plans to venture into steel-making by setting up a rolling mill and a co-generation power plant by FY 07-08. The risk element stems from the cyclical nature of business. An appreciating rupee and a cooling off of prices remain the principal risks to the company's business.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page