Facor Alloys - Good stock to invest in

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Scripscan: Facor Alloys Ltd
Duration:9-12 months

Stock introduction:
Belongs to Saraf Group, Facor was created in 2005 upon de-merger from Ferro Alloys.Company is engaged in the production of Ferro Chrome with installed capacity of 73,000 TPA which is one of the main R/M in Stainless Steel Production. World demand for same is around 6.50 mn tons, major portion being made by South Africa. Ferro Chrome prices are determined on quarterly basis by South African Chrome Producers. World demand for Stainless Steel is expected to grow at 4% which means demand for Ferro Chrome will also remain robust. Before markets crashed, share price had gone upto Rs. 21.75 and since then, has reacted 60% which makes it an excellent buy at CMP.In 2005, scrip was listed at Rs. 25-27. However, share price came down heavily due to following:1) Performance of the company that time was not very good.2)At that time, promoters were holding more than 90% Equity. And, under CDR scheme, promoters had been allotted these shares at par (Re. 1/-). Hence, promoters started selling heavily to realize big gains which increased the floating stock.

Financial Performance:
For 07-08,company has put up fabulous show.Although turnover has gone up by 40%, PAT has zoomed by 444% to 70.77 crs.EPS stands at Rs. 3.62 as against 0.67 in previous year. Main reason for such improvement is higher production, increase in conversion charges from TISCO and higher realisation in own sales. Total production stood at around 67,000 tons.An unknown Treasure:Despite such splendid show, its share price is ruling very low and it has not caught fancy of big investors,brokers, analysts etc. as they have presumed that Facor’s splendid show will not be possible in future.They presume that its profit margins are very high as company must be producing Facor Chrome from old contract of Chrome Ore at lower prices and in future, company will have to pay much much higher price for Chrome Ore which will bring down its profitability.however, this is not correct as no one knows the real facts/business model of facoralloy.

Facor group has 2 plants for production of ferro chrome of which,one is now under facor alloy and other is under ferro alloy. when govt. had allotted chrome ore mines (before de-merger), there was a condition in the mining agreement that these mines will be used by both plants of ferro chrome.when,one factory of ferro chrome went to facor alloy, technically 50% of chrome ore mines also should have been transferred to facor alloy. however, such a move involved huge technical/legal issues which would have taken years to sort out. hence, an understanding was reached between ferro alloy and facor alloy that facor will get chrome ore at a significant discounted price and not at market price. thus, facor alloy gets approx. 30% discount vis a vis prevailing chrome ore prices. due to rise in chrome ore prices, ferro chrome prices have risen sharply. thus, facor alloy is sort of owning (indirectly) chrome ore mines without actually owning the same and hence, it will continue to report kind of bumper profits which mining companies achieve.

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