Religare puts buy on Sarda Energy & Minerals; target Rs 404

MUMBAI: Religare Securities has reiterated 'buy' rating on Sarda Energy with a revised target price of Rs 404. The company's 2007-08 numbers are ahead of the brokerage expectations with a net profit growth of 183 per cent to Rs 120 crore. The growth was supported by higher production volumes across segments in a strong pricing environment. The company has increased the production of sponge iron, steel and ferro alloys by 11 per cent, 37 per cent and 9 per cent respectively during the fiscal. Realisations of steel and ferro alloy have increased by 14 per cent and 78 per cent respectively.

For Jan-Mar 2007-08, Religare finds that the numbers are not comparable year-on-year as group company, Chhattisgarh Electricity, was merged with Sarda Energy in 2006-07. Sequentially, sales have increased 32 per cent during the quarter on the back of a sharp increase in ferro alloy and billet realisations. The operating margin, however, shed 600 basis points quarter on quarter to 27 per cent due to the purchase of iron ore from the spot market. This was necessitated after a labour strike led to the closure of company's iron ore mine. The company has resolved the dispute and the mine is now operational. Religare expects the mine to feed 20 per cent of 2008-09 production requirements.

The stock is currently trading at a P/E of 5.6x and 3.9x on FY09E and FY10E respectively and at an EV/EBITDA of 4.6x and 3x for these two years. Religare has reduced their earnings estimates to build in higher iron ore prices and increased open market purchases. Further, the brokerage has revised their target multiples for the stock considering the increased investor risk aversion.