ISMT

Reco Price Rs. 89.80

CMP: Rs.29.45

A threefold increase in capacity, expected to go on stream in March 2008 will

drive volume growth for ISMT besides increasing Operating Margins further, which
currently stand at a healthy 22%. The company is well positioned to take advantage
of the buoyancy being witnessed in the Oil and Gas, Power, Construction,
Automotive and Engg Sectors.

A threefold increase in capacity, expected to go on stream in March 2008 will

drive volume growth for ISMT besides increasing Operating Margins further, which
currently stand at a healthy 22%. The company is well positioned to take advantage
of the buoyancy being witnessed in the Oil and Gas, Power, Construction,
Automotive and Engineering Sectors.

ISMT Ltd. has emerged as the largest Integrated manufacturer of specialized steel
and seamless tubes in the country following the merger of The India Seamless Metal
Tubes Ltd. with Indian Seamless Steel and Alloys Ltd. in 2005.

Background
The Indian Seamless Metal Tubes Limited was promoted in 1977 to produce
specialized seamless tubes in India. Beginning with an installed capacity of
15,000 metric tons per annum, ISMT commenced production in 1980 with the
installation and commissioning of an Assel mill in technical collaboration with
Mannesman Demag Meer of Germany. Subsequently, in 1990 the production capacity was
raised to 50,000 metric tons per annum with the addition of a second Assel Mill.
In 1995 The Indian Seamless Metal Tubes Limited promoted another company, Indian
Seamless Steels and Alloys Ltd. (ISSAL), to produce alloy steel, the raw material
used in the manufacture of seamless tubes, giving ISMT better control over product
quality as well as deliveries.

In April 2000 The Indian Seamless Metal Tubes Limited acquired Kalyani Seamless
Tubes Ltd., the other major Indian manufacturer of seamless tubes. In 2005 The
Indian Seamless Metal Tubes Ltd and Indian Seamless Steels and Alloys Ltd merged
to form ISMT Limited. This Company is the largest integrated manufacturer of
specialized seamless tubes in the Asia Pacific Region. Currently ISMT Limited has
an installed capacity of 155,000 tpa and 250,000 tpa for seamless tubes and alloy
steel respectively.

Apart from tubes, ISMT Limited also manufactures a wide range of value added
products. These include items such as bearing rings, gear blanks, shifter sleeves,
cages for constant velocity joints, swaged & machined axles, threaded and
coupled casings, couplings and a host of similar products.

Manufacturing Plants
ISMT operates from three plants across Maharashtra: two Seamless Tubes plants
located at Baramati and Ahmednagar and a Steel Plant located at Jejuri. The pipes
plants located at Baramati has an installed capacity of 90000 tpa; and Ahmednagar
has an installed capacity of 65000 tpa. Both plants are equipped with state-of-
the-art tube making, finishing and testing facilities, which include Hot Finishing
equipment (Piercing mill, Assel mill, Stretch Reducing mill and Hot Sizing mill),
Cold Finishing equipment (Cold Pilger mills, Draw Benches and Sizing mill),
Finishing facilities (which include heat treatment furnaces, end finishing
machines and cold ring rolling machines) and Inspection and Testing Facilities
(Ultrasonic testing, Hydro testing and leakage flux testing, amongst others).
The company�s steel plant is located at Jejuri. The unit has an installed capacity
of 250000 tpa. The plant manufactures Alloy & Alloy Spring steels, High Alloy
Steels, Micro Alloys & Boron Steels, Ball rearing steels and Carbon &
Carbon Spring Steels. Steel Billets from the plant are primarily used as inputs in
company�s seamless pipes & tubes production.

Expansion Project
The company is currently undertaking expansion at both the Baramati and Ahmednagar
Units. The capacity at Baramati unit is being enhanced from 90,000 tpa to 4,00,000
tpa and at Ahmednagar Unit from 65,000 tpa to 75.000 tpa. Post expansion, the
total capacity will go up three fold from 1,55,000 tpa to 4,75,000 tpa making it
the second largest manufacturer of Seamless Pipes after Maharashtra Seamless. The
total cost of expansion project is estimated at Rs.250 crores and shall be
financed through a mix of Debt and Internal Accruals.
Acquisition of Structro Hydraulics AB, Sweden
The company and its subsidiaries have acquired 100% Shareholding in Structro
Hydraulics AB, Sweden. Structo Hydraulics AB, a part of the Vobarno SP Group, and
is engaged in the manufacturing of tubular components for the hydraulic cylinder
industry. The company�s facility is located at Storfors in Sweden with an
installed capacity of 40000 tpa. The company has an annual turnover of Rs.300
crores.

Structo manufactures tubular products for the hydraulic cylinder industry, which
are downstream products made from seamless tubes manufactured by suppliers such as
ISMT. Structo is an established supplier to many multinationals particularly to
those in the construction and agricultural equipment industry. Over 80% of
Structo�s revenues are earned from markets other than Sweden. The company�s
exports are focused primarily in the European region, particularly to countries
such as England, Germany, France and Belgium. In the Component space, Structo is a
supplier to leading equipment manufacturers such as Caterpillar and Volvo.
Structo sources hollow alloy steel tubes from three major suppliers � Vollourec
& Mannesmann Tubes (France), Okavo (Sweden) and ISMT. The hollows are then
further processed by the company to be used in Hydraulic equipments.
The acquisition would make ISMT one of the largest producers of tubes and tubular
components for hydraulic components in Europe and Asia. It would provide ISMT a
share in the growing domestic market for hydraulic cylinders components and tubes
on the one hand and also help the company leverage on the marketing base of
Structo to market its own products in the European markets. ISMT plans to
introduce Structo�s product line in India, offering a full range of cold drawn
tubes, skived and roller-burnished tubes and components for hydraulic cylinders.
Structo's market positioning in Europe will be strengthened as a result of access
to a captive raw material base through ISMT.

Conclusion
ISMT Ltd. is currently undertaking a massive capacity expansion currently which
will see its capacity go up three fold from 1,55,000 tons per annum to 4,75,000
tons per annum by the end of the current FY. After the expansion, the company will
become the second largest seamless tubes manufacturer after Maharashtra Seamless.
With a products pipeline catering to various sectors including Oil & Gas,
Power, Construction, Automotive, Engineering and Bearings, ISMT is all set to
emerge as niche speciality steel producer rather than just a commodity play.

The Company is also augmenting steel manufacturing capacity at Jejuri from

2,50,000 tpa currently to 3,50,000 tpa by adding a new Ladle refining furnace and
related balancing equipments. The capacity expansion will benefit the company in
three ways � It will increase Sales Volumes, reduce operating costs and increase
the size of the addressable market. We believe the expansion would lead the
company into a new growth orbit. The expansion project at Baramati has been
accorded 'Mega Project' status by the Government of Maharashtra which entitles the
Company to incentive upto Rs 195 Crore on VAT payable to the State Government over
a period of Seven years.

All the end user sectors for the company�s products � viz � Oil & Gas, Power,
Construction, Automotive and the Bearing are witnessing buoyant times. The company
enjoys strong operating margins of around 22%. The cost reductions together with
the volume growth are expected to lead to further improvements in operating
margins.
The stock currently trades at a PE of under 10. Given the expected growth in
revenues in the coming years after the expanded capacities go on stream, the Sales
and Earnings are expected to grow by atleast 30%-40% per annum for the next few
years, making the stock an ideal re-rating candidate. The stock seems to be
consolidating over the last few months and may do so for some more time � long
term investors many choose to ACCUMULATE the stock around the current levels.