Jhagadia Copper

 


BSE Code: 504920

CMP=21
Recommendation: Strong Buy
Price Targets:
Medium Term: 28+
Med-Long Term: 35+

Introduction



Jhagadia Copper Ltd. (Formerly SWIL Ltd.): SWIL was originally promoted by Mr. Satya Narayan Khaitan as Shalimar Wires & Industries in 1962. Originally the company was engaged in production of consumables and machinery for paper industry, synthetic fibres, copper and copper alloy wires, copper alloy and nickel silver strips. The company started setting up a 50000 tpa copper plant in 1996. The project ran into trouble right from beginning resulting in delays and huge cost over runs. In 2002 the consortium of financial institutional took over the 1185 crore project from its original promoters. The institutions managing the company had planned to sell the controlling stake in the company in 2001, when Sterlite Industries, Indo-Gulf and the UK-based Metdist did the due diligence, but due to adverse market conditions the process could not be completed. From January 01, 2006 the name of the company has been changed to Jhagadia Copper Limited to bring it in line with the present activity of the company.
SWIL has set up project for production of 50,000 tpa copper cathodes conforming to LME Grade 'A' specifications and additional 20,000 tpa copper anodes through Secondary Route using Top Blown Rotary Converter (Kaldo) Technology in technical collaboration with Outokumpu Technology AB, Sweden. The company has entered into 'Project Supervision, Management and Completion Contract with Outokumpu Technology AB. The company has also an agreement with Mount Isa Mines Limited, Australia for technical know-how for electrolytic refining of copper under ISA process. This process ensures the production of LME Grade 'A' copper cathodes.
The company would be the pioneer in India in using secondary smelting technology. This technology allows maximum flexibility amongst all available smelting technologies in sourcing and usage of raw materials. The project can use low sulphur copper concentrates, oxide concentrates, copper slags, reverts, shredded cables, electric motors and other copper bearing raw materials for production of copper cathodes. The project can also handle environmentally hazardous / semi-hazardous wastes as defined under the Basle Convention and will represent the only such smelter easter part of the globe.
SWIL has entered into a Memorandum of Understanding (MoU) with MSTC for supply of raw materials like copper concentrate, copper bearing, scrap, copper ashes and residues etc. for the manufacture of copper anodes and copper cathodes. The company is also importing the raw material directly from various sources.
Empowered Group of Corporate Debt Restructuring Cell approved the restructuring of debts of the company. As per the approval the rates of interest on various loans are realigned resulting in reduction of weighted rate of interest from 11.5% p.a. to 9.5% p.a. The repayment of principal of various loans is deferred upto April 2007 and the interest for the period upto March 2007 shall be converted into Optionally Convertible Cumulative Redeemable Preference Shares.
ICICI Bank Limited and Dena Bank have sanctioned working capital facilities aggregating Rs. 15,020 lakhs. Further, after close of the period ended on 30th September 2005, Industrial Development Bank of India Limited has sanctioned working capital facilities aggregating Rs. 4,000 lakhs. During the period, the company allotted to Financial Institutions/Banks, 6% Optionally Convertible Cumulative Redeemable Preference Shares aggregating Rs. 7046.91 lakhs and Optionally Fully Convertible Debentures of Rs. 780.69 lakhs through private placement.
Latest Equity 124.30 crs.
Latest Reserve 38.59 crs.
Latest Book Value Rs.13.10

Share Holding Pattern
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Description No. of Shares % Holding
NRIs 282466 0.29
Domestic Institutional 48486311 49.86
Holding
Govt. Holding 5519457 5.68
Non Promoter 7315490 7.52
Corporate Holding
Promoters Holding 14900872 15.32
Public & Others 20744505 21.33
Totals 97249101 100
Prospects: In 2005, copper prices had gone up by 70%. However, same trend continues in 2006 as well. In fact, since March 01, 2006, copper prices have gone up by 40% to USD 6635 per ton.
Copper Companies are likely to report bumper profits. As a result, Hindalco Re. 1/- Face Value iss quoting at Rs. 225/- and Sterlite Rs. 5/- Face Value is quoting at Rs. 2800/-. SWIL had gone upto Rs. 29/- when Sensex was 7000 and hence, at Rs. 22/- it has bottomed out. Main reason for such low price level is wrong perception of the market that Plant of Jhagadia Copper is still incomplete and that, production has still not started. Company has not made official announcement of commercial production (it is a normal practice world wide for metal companies to announce commencement of production at much later stage after achieving rated capacity). Actually, Jhagadia has already started production and had produced 10332 MT copper cathodes for period ended Sept. 2005. At present, company is producing around 1300 - 1500 MT per month against installed capacity of 4200 MT p.m. Company had recently executed order for Hindustan Copper worth Rs. 90 crs. Now, BHP Bilton of Australia (world giant in mining and metal) has placed an order for 10,000 MT of copper cathode with Jhagadia.
Copper demand in India is much higher than the supply. Jhagadia is able to sell whatever it is producing. However, it is not able to operate at full capacity due to working capital shortage. Company has already started making profit at EBIDTA level even at such low capacity utilization. Company is aiming to increase its capacity utilization to 60% in next 2-3 months. At that time, ICICI Bank may relase some more funds to ramp up production to 100% capacity. Jhagadia needs hardly 60-70 crs. to double its production capacity to 100,000 MT.
Valuation: Market capitalization of Jhagadia is hardly 250 crs. although, similar project will cost more than Rs. 700 crs. These days when heavy loss making companies like I.G. Petro, Andhra Cement, Moschip are quoting at such high levels, Jhagadia Copper is extremely cheap.
Conclusion=ICICI and other lenders would certainly want to sell the project to recoup their heavy investments. Divestment process should be completed in 10-12 months. As per highly placed sources, ICICI Bank has put Jhagadia valuation at Rs. 75/- per share. Sterlite and Hindalco will be the strongest contenders. Although company may not report NP until full capacity utilization is achieved, its share price can shoot up to much highr levels depending upon when ICICI Bank invites bids for divestment. The Copper Outlook is expected to remain strong for next 15-18 months atleast. In view of same, Jhagadia Copper is available at ridiculously low valuations with potential of multibagger appreciation.So considering all the facts,We assign a value buy on the counter with a target price of 35rs