Ferrochrome Capacity Expansion And Chrome Ore Integration Will Support Stronger Long Term Prospects

Catalysts

About Indian Metals and Ferro Alloys

Indian Metals and Ferro Alloys is a fully integrated ferrochrome producer with captive chrome ore mining, smelting and power operations.

What are the underlying business or industry changes driving this perspective?

• Closing of the Kalinganagar ferrochrome plant acquisition and ramp up to 70,000 to 80,000 tonnes in FY 27, with scope to reach 150,000 tonnes, should lift overall volumes toward 400,000 tonnes and support a structurally higher revenue base.
• Shift of global ferrochrome supply from low cost South African smelters to higher cost Chinese producers, combined with elevated chrome ore prices for nonintegrated players, reinforces IMFA's cost advantage and should support healthier spreads and net margins over the cycle.
• Rapid growth in Indian stainless steel production and infrastructure led metal demand, alongside IMFA's plan to move toward a 60 percent export and 40 percent domestic sales mix, increases pricing flexibility and is likely to smoothen realizations and earnings.
• Scale up of captive chrome ore raising from about 7 lakh tonnes toward the 12 lakh tonne environmental clearance, including transition of Sukinda to underground mining, secures raw material for over 0.5 million tonnes of ferrochrome output and should keep cash costs and EBITDA per tonne structurally competitive.
• Pivot toward 110 megawatts of hybrid renewable power and continued discipline on leverage for nearly INR 900 crores of planned CapEx helps mitigate energy and financing cost volatility, supporting more stable operating margins and cash flows.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Indian Metals and Ferro Alloys's revenue will grow by 35.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.9% today to 14.4% in 3 years time.
• Analysts expect earnings to reach ₹9.2 billion (and earnings per share of ₹143.32) by about December 2028, up from ₹3.3 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 14.3x on those 2028 earnings, down from 22.6x today. This future PE is lower than the current PE for the IN Metals and Mining industry at 21.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.78%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Global ferrochrome prices remain volatile and could decline again if Chinese smelter capacity continues to expand faster than stainless steel demand, compressing realizations and putting pressure on revenue and EBITDA margins over the cycle.
• Large, multi year expansion plans in mines, greenfield smelting and the Kalinganagar acquisition depend on timely execution and stable costs. Any delays, cost overruns or operational ramp up issues in new furnaces and underground mines could drag utilization, increase depreciation and finance costs, and weigh on earnings growth.
• The shift of Sukinda from open cast to underground mining and the targeted ramp up of chrome ore raising to 1.2 million tonnes entail technical, regulatory and safety risks. If grades, recoveries or approvals disappoint, IMFA may face higher mining costs and potential ore constraints, eroding its cost advantage and net margins.
• Power and environmental compliance are becoming structurally more demanding. Higher renewable purchase obligations, coal related regulation, and any setback in the 110 megawatt renewable transition could elevate energy and compliance costs, limiting the benefit of higher ferrochrome prices on EBITDA per tonne.
• Management is counting on a higher domestic stainless steel share and strong infrastructure led metal demand. If India’s growth or stainless steel capex cycles slow, or if imports substitute domestic offtake, the expected volume and pricing uplift may not materialize, capping revenue growth and earnings scalability.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹1620.0 for Indian Metals and Ferro Alloys based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ₹63.9 billion, earnings will come to ₹9.2 billion, and it would be trading on a PE ratio of 14.3x, assuming you use a discount rate of 14.8%.
  
• Given the current share price of ₹1382.4, the analyst price target of ₹1620.0 is 14.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.