Analysis: Beekay Steel Industries Ltd

The current section of the “Analysis” series covers Beekay Steel Industries Ltd, a secondary steel producer that converts one form of steel like billets into final forms like TMT bars, which can be used by end consumers.

The “Analysis” series is an attempt to share with all the readers, our inputs on the company analysis submitted by readers on the “Ask Your Queries” section of our website.

To benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.

Beekay Steel Industries Ltd Research Report by Reader

Sir,

Please find below my analysis of Beekay Steel Industries Ltd, a company that operates in the cyclical steel sector, but generates constant cash flows. Please share your views on the same.

Regards,

Abhinav Arora

Financial analysis of Beekay Steel Industries Ltd

i) Sales growth:

Sales growth of the last 10 years (2010 – 2019) is 13%; but if you see this growth is not linear on year on year basis. In the year 2011 (Sep 2010), the capacity of the plant located in Jamshedpur was extended by 1 lakh MT. Better capacity utilization led to 40% sales growth on a year-on-year (YOY) basis. In the year 2012, sales increased due to higher turnover from the conversion business.

In the next four years from 2013 to 2016, sales growth is almost flat due to various reasons like power supply shortage in Tamil Nadu and Andhra Pradesh, a slowdown in demand, the Hudhud cyclone in AP etc.

During the year 2016-17, capacity utilization of the newly commissioned TMT plant located at Parwada (AP) increased drastically, which led to a sharp up move in sales. In the year 2017-18, TMT export sales increased and helped to achieve an overall 36% revenue growth.

ii) Profit Growth:

The net profit margin (NPM) is in line with the operating profit margin (OPM). From the year 2010 to 2019, OPM is in the range of 9 to 18 % and mostly in the uptrend. In the year 2012, OPM fell from 10.95 % to 9.47% and a bit more down in 2013 to 9.17%.

In 2012, a 31% hike in furnace oil, which is major raw material, increased the production cost. Higher furnace oil costs and increases in coal prices also affected the OPM for the year 2013-14. From 2014 onwards, the management did some changes in operation and product mix to get better OPM. Like in the year 2015-16, Beekay Steel Industries Ltd implemented pulverizing and feeding equipment in the Jamshedpur plant to get better fuel efficiency.

There was a sharp up move in the OPM in the year 2018-19. The reason for that is a better realization of B2C TMT business from the Parwada plant and high capacity utilization. Management has also highlighted better realization and stronger trade terms.

In the credit rating report from India Ratings and Research dated 27 Nov 2019, it is mentioned that Beekay Steel Industries Ltd is a nonintegrated player and has been able to pass on the raw material price fluctuation to the customers with a time lag. In the conversion business, Beekay Steel Industries Ltd is getting free raw materials from the customers and earns fixed conversion charges.

Further, better performance in the last 2-3 years helped Beekay Steel Industries Ltd to reduce its debt drastically, which led to low borrowing costs and corresponding improvement in NPM.

iii) Tax Rate:

The company is paying standard tax of 30-35% and pays regular income tax.

Other Financial Parameters:

A) CFO vs. PAT: Beekay Steel Industries Ltd can convert profit into cash and do regular capex. After doing capex, there is a free cash flow, which was used in working capital requirements and debt & interest payments.

B) Self-Sustainable Growth Rate (SSGR): In the last 10 years, sales growth is 13%. From the year 2017 onwards, the net profit margin (NPM) of Beekay Steel Industries Ltd has improved, which led to a healthy SSGR. With the help of better working capital management, the company can reduce its debt and may continue to do so.

C) Working capital management: The inventory turnover ratio is stable and receivable days are improving over the years.

Valuation analysis of Beekay Steel Industries Ltd:

The stock is trading in a single-digit P/E ratio. In the case of Beekay Steel Industries Ltd, the more important thing to care about is earning sustainability rather than P/E multiple. As per management’s claim in annual reports of the last two years, they have changed their business model. The credit rating report also mentioned the fact that the conversion business generates around 50% of EBITDA providing a cushion to the bottom line and volume from the conversion segment is increasing each year on a YOY basis.

Management analysis of Beekay Steel Industries Ltd:

A) Background: Suresh Chand Bansal is the executive chairman and his brother Mr. Mukesh Chand Bansal is the managing director of the company. Mr Mukesh Chand Bansal is also on the board of AKC steel, which is a listed associate company of Beekay Steel Industries Ltd. Beekay Steel is paying rent for land use and machining charges for job work contract executed by M/s AKC steel Industries Ltd on behalf of Beekay Steel. If you see the annual reports of M/s AKC Steel Industries, it is mentioned that the major source of revenue is rent from the parent company.

B) Succession Plan: Next generation of the Bansal family is already on the board and engaged in the business.

C) Remuneration: It is in the range of 3% to 11% of net profit after tax (PAT). In the year 2014-15, remuneration increased by 44% from last year. In the annual report of the year 2014-15, the reason for the same is recorded that Mr Manav Bansal joined the board as a whole-time director (WTD) and was later appointed as the chief financial officer (CFO) of the company. In 2018-19, there was a steep jump in remuneration because of a higher performance-related bonus (around ₹3 cr), especially to Mr Suresh Chand Bansal.

D) Shareholding pattern: It seems that Beekay Steel Industries Ltd is a very closely held business. Until the year 2016-17, promoters’ shareholding was constant at 69.47%. In 2017-18, it decreased by 0.63 % to 68.48% due to the reclassification of some shareholders as public shareholding. In the year 2018-19, 68,550 shares were added from market purchase/transfer and promoter shareholding increased to 69.2%.

E) Related parties transactions: AKC steel industries Limited, which is an associate company of Beekay Steel Industries Ltd, also deals in the same business. A few more companies of promoters are in business transactions with Beekay Steel Industries Ltd. In the past, Beekay Steel Industries Ltd was actively engaged with related parties for purchase and sales but at present, it is very low to a negligible level. Other than the above transactions, there are few transactions for machining works, rent, electricity etc. In Beekay Steel’s books of accounts, there is a long-term borrowing of ₹29 cr from body corporates.

F) Capital Allocation: There is a mixed experience with capital allocation in the past. Until the annual report of the year 2013-14, Beekay Steel Industries Ltd was mentioning about ongoing capex for TLT (Transmission line tower) Plant. ₹85 cr had been already incurred on the project. Afterwards, there is no information about the commissioning of that project.

The company has successfully commissioned and is currently operating a TMT plant at Parwada (AP), which has helped the company to achieve growth in sales and bottom line in the last 2-3 years.

Currently, a greenfield expansion is going on for a 2-lakh MTPA TMT plant in Vizag. The expected capex for the project is around ₹60 cr. In addition to that, approval to establish a plant for 2 lakh MTPA in Kalinganagar, Odisha is also accorded by the state govt in September 2019. These expansions will fuel future growth.

In the year 2018-19, ₹1.54 cr investment have written off from the Bobbili project.

Peer comparison:

I tried to compare Beekay Steel Industries Ltd with Kalyani Steels Limited and Mukand Limited keeping in mind products, size and clients etc. Although operations are not comparable, even if we look at financial data as a whole, the numbers of Beekay Steel Industries Ltd show more stability in profitability and working capital management ratios.

Conclusion:

Beekay Steel Industries Ltd is operating in a cyclical sector, but doing something different from others. The consistent increase of OPM in the past indicates its advantageous position in the sector. If Beekay Steel Industries Ltd can maintain its margin in the future, then it will soon become debt-free. The future expansion plan will also boost the revenue. Quantum of trading activities, which is a low-margin business, with related parties is an area where an investor should be careful.

Regards,

Abhinav Arora

Dr Vijay Malik’s Response

Dear Abhinav,

Thanks for sharing the analysis of Beekay Steel Industries Ltd with us! We appreciate the time & effort put in by you in reading multiple annual reports and credit rating reports for the analysis.

While analysing Beekay Steel Industries Ltd, an investor would notice that until FY2015, the company used to report only standalone financials. However, from FY2016 onwards, the company started to report standalone as well as consolidated financials.

Currently, Beekay Steel Industries Ltd has one subsidiary and one associate whose financials it includes in the consolidated financials. FY2021 annual report, page 33:

Subsidiaries, Associates or Joint Ventures: Your Company has Wholly Owned Subsidiary Company namely M/S. Beekay Utkal Steel Pvt. Ltd. and one Associate Company, i.e. M/S. AKC Steel Industries Ltd. and does not have any joint ventures, during the year under review.

We believe that while analysing any company, an investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire company including its subsidiaries, joint ventures etc. Consolidated financials of any company, whenever they are present, provide such a picture.

Further advised reading: Standalone vs Consolidated Financials: A Complete Guide

Therefore, in this analysis of Beekay Steel Industries Ltd, we have studied standalone financials until FY2015 and consolidated financials from FY2016 onwards.

With this background, let us analyse the financial performance of the company.

Financial and Business Analysis of Beekay Steel Industries Ltd:

While analyzing the financials of Beekay Steel Industries Ltd, an investor notices that the sales of the company have grown at a pace of 5% year on year from ₹557 cr in FY2012 to ₹874 cr in FY2021. Further, the sales of the company have increased to ₹1,043 cr in the 12 months ended June 30, 2021, i.e. during July 2020-June 2021.

While analysing the revenue growth of the company over the last 10 years, an investor notices that the journey of the company has not been smooth. Beekay Steel Industries Ltd has witnessed its sales move in a cyclical pattern with periods of increasing sales followed by periods of declining sales and vice versa.

During FY2012-FY2013, the sales of the company increased from ₹557 cr to ₹571 cr. However, over the next two years (FY2014 and FY2015), the sales of the company declined to ₹519 cr. Thereafter, the sales started increasing and over FY2016-FY2018, the sales increased to ₹978 cr. However, thereafter, over the next two years (FY2019-FY2020), the sales of the company declined again and reached ₹812 cr. Recently, the sales of the company have started increasing and have reached ₹1,043 cr in the 12 months ended June 30, 2021, i.e. during July 2020-June 2021.

Beekay Steel Industries Ltd has witnessed fluctuations in its profit margins as well. The operating profit margin (OPM) of the company increased from 9% in FY2012 to 19% in FY2019. However, thereafter, the OPM declined sharply to 15% in FY2021. Recently, the company has reported an OPM of 19% in the 12 months ended June 30, 2021, i.e. during July 2020-June 2021.

Therefore, an investor would appreciate that Beekay Steel Industries Ltd has witnessed significant fluctuations in its business over the last 10 years.

To understand the reasons for such cyclical patterns of alternating periods of increasing performance followed by a declining performance for Beekay Steel Industries Ltd, an investor needs to read the publicly available documents of the company like annual reports, credit rating reports, as well as its corporate announcements. In addition, an investor should also read our following article explaining the key factors impacting the business of steel companies:

Advised reading: How to do Business Analysis of Steel Companies

After going through the above-mentioned documents, an investor notices the following key factors, which influence the business of Beekay Steel Industries Ltd. An investor needs to keep these factors in her mind while she makes any predictions about the performance of the company.

1) Business of Beekay Steel Industries Ltd is cyclical:

An investor would appreciate that Beekay Steel Industries Ltd operates in the steel industry, which is cyclical in nature i.e. it faces periods of good performance followed by periods of poor performance. The company has continuously highlighted this aspect to its investors in the annual reports.

FY2005 annual report, page 42:

The Company is conscious of the fact that steel is subject to cyclical risks

When an investor reads the rating methodology documents of various credit rating agencies for the steel sector, then she understands the reasons for the cyclicity in the steel sector. For example, credit rating agency, CARE, explained in its rating methodology for the steel sector in July 2019 (click here) that the sector is cyclical because its end-user industries: construction, infrastructure, automobiles and capital goods etc. are strongly dependent on the general economic situation in the country. When the economy is seeing a growth cycle, then the demand in the industries like construction, infrastructure, automobiles and capital goods increases. On the contrary, during an economic downturn, the demand for these industries declines.

Rating Methodology – Steel Sector, CARE, July 2019, page 2:

Steel is a cyclical industry, strongly correlated to economic cycles since its key users viz., construction, infrastructure, automobiles and capital goods are heavily dependent on the state of the economy.

CARE highlighted large investment requirements and the long gestation period of steel plants as another factor, which leads to frequent periods of demand and supply mismatches leading to cyclicity in the steel sector. It means that when demand increases, then many steel manufacturers announce capacity expansions. These plants take a long time to be completed. However, when this new capacity becomes operational, the economic cycle has turned and the demand for steel declines. As a result, the sector faces oversupply and a downturn resulting in cyclicity in the sector.

Rating Methodology – Steel Sector, CARE, July 2019, page 2:

Apart from the cyclicality of the end-user industries, heavy capital investment and a gestation of period of 3-5 years for a new plant also contribute to the cyclicality in steel industry. This results in several steel projects bunching-up and coming on stream simultaneously leading to demand supply mismatch.

From the above discussion, an investor would notice that the steel sector faces periods of high demand where the entire industry is not able to produce enough steel to meet the demand of its end-use industries like construction, infrastructure, automobiles and capital goods. As a result, the prices of steel increase and the steel manufacturers announce new plants. These plants take a long time to be completed and when they become operational by that time, the economic cycle takes a downturn and the demand for steel declines. Therefore, the steel industry faces an oversupply leading to a decline in steel prices.

Further advised reading: How to Analyse New Companies in Unknown Industries?

These alternate phases of economic cycles and periods of demand and supply mismatches lead to cyclicity in the steel sector. It is visible in the trend of revenue of Beekay Steel Industries Ltd over the years when sales of the company increased during FY2012-FY2013, declined during FY2014-FY2015, increased during FY2016-FY2018, declined during FY2019-FY2020 and then again increased during the last 12 months ending June 2021 (July 2020-June 2021).

Specifically in FY2012, FY2014 and FY2015, when Beekay Steel Industries Ltd witnessed a decline in its revenue, then it mentioned a fall in the demand from the automobile sector and engineering sectors, which are the key consumers of steel products, as one of the reasons for lower sales.

FY2012 annual report, page 22:

The recession in the Auto sector is likely to affect the operational performance of the Company in coming years as substantial part of the Company’s deliveries are to the Auto-ancillary manufacturers

FY2014 annual report, page 19:

Political uncertainty, the restriction of power supply and lower demand in the automobile & engineering sector were the main reasons of decline of sales turnover.

FY2015 annual report, page 41:

Political uncertainty, the restriction of power supply and lower demand in the automobile & engineering sector, natural calamity, i.e. hud-hud cyclone were the main reasons of decline of sales turnover

Therefore, an investor would appreciate that like all steel companies, the business of Beekay Steel Industries Ltd is exposed to the cyclicity of the steel industry.

2) Beekay Steel Industries Ltd is a price taker like all steel manufacturers:

While reading about the pricing dynamics in the steel industry, an investor realizes that the steel manufacturers are not in control of the prices of steel. It is a commodity product where the consumers can easily replace the steel of one manufacturer with the steel of another manufacturer. As a result, the consumers of steel manufacturers enjoy a higher negotiating power.

The credit rating agency, ICRA, highlighted this aspect of the business of steel manufacturers in its Rating Methodology for Ferrous Metal Entities, June 2021, page 4 (click here):

Steel players are largely price takers with their customers having a greater bargaining power

The credit rating agency, CRISIL, also highlighted in its ratings’ criteria for the materials sector, February 2021, page 22 (click here) that steel companies have no control over the prices of steel in the market.

Steel companies have little control over end prices.

The prices of steel in the Indian market are dependent on international prices and all the global events and changes in global demand and supply, lead to changes in the prices. As a result, the steel manufacturers have to accept whatever price is currently prevailing in the market.

Another credit rating agency, India Ratings, mentioned in its document Rating Indian Steel Producers, September 2012, page 1 (click here) that steel companies are price takers.

Given that steel producers are price takers, they have to rely on cost competitiveness to remain profitable.

The investor gets to know the reasons for the low bargaining power of steel manufacturers while reading the rating methodology document of the steel industry by CARE. She notices that steel is a global commodity, which is very standardized and a consumer of a particular grade of steel can easily replace it with the same grade of steel made by another manufacturer. In addition, steel can be easily transported across long distances including overseas. Therefore, consumers have the option of buying steel even from other countries, if the domestic steel manufacturers quote a high price.

Rating Methodology – Steel Sector, CARE, July 2019, page 1:

Steel is a globally traded commodity due to standardisation and ease of transportation of the products. As a result, domestic prices of steel products generally move in tandem with international prices

As a result, an investor would appreciate that the steel manufacturers do not have pricing power and have to sell steel at whatever price is prevalent in the market, which is influenced by all the international factors of demand and supply. ICRA highlighted the competition steel manufacturers face from countries, which have surplus steel production in its rating methodology document, page 3:

Domestic steel industry also faces significant competition in the form of low-cost imports from countries having large surplus steel capacity. In a weak demand scenario, such imports trigger price cuts by manufacturers, thereby exerting pressure on their margins.

Therefore, an investor would note that a steel manufacturer including Beekay Steel Industries Ltd does not have the luxury of dictating pricing terms to its customers. Steel manufacturers have to sell their products at the prevailing market price.

Further advised reading: How to do Business Analysis of a Company

The following chart shows the historical steel prices at National Commodity & Derivatives Exchange Limited (NCDEX), from 2007 to 2021.

An investor can notice the wild fluctuation in the steel prices over 2007-2021:

• 2007-2008: increase in steel prices
• 2008-2009: decrease in steel prices
• 2010-2013: increase in steel prices
• 2014-2016: decrease in steel prices
• 2017-2019: increase in steel prices
• 2020: decrease in steel prices
• 2021: increase in steel prices

If an investor looks at the above chart of movement in the steel prices and then analyses the trend of sales of Beekay Steel Industries Ltd over the years, then she can identify the reasons for fluctuations in its sales.

For example, during FY2014-FY2016 when the sales of Beekay Steel Industries Ltd declined from ₹571 cr in FY2013 to ₹519 cr in FY2016, then it was caused by a downturn in the steel industry as seen in the decline in steel prices in the above chart. However, soon thereafter, the steel prices increased in FY2017-FY2019 and the sales of Beekay Steel Industries Ltd recovered sharply and reached ₹965 cr in FY2019.

In the year FY2019, despite a decrease in production volumes, the company reported a much higher profit after tax (PAT), ₹99 cr in FY2019 against ₹71 cr in FY2018. Beekay Steel Industries Ltd intimated to its shareholders that it is due to a very sharp increase in steel prices, which is not seen in the entire previous decade.

FY2019 annual report, page 7:

The improvement was on account of a 30% upturn in steel product realisations between December 2017 and March 2018. This was one of the sharpest increases seen over the last decade.

This sharp increase in steel prices was due to the restrictions placed by China on the steel plants producing steel by using polluting processes.

FY2019 annual report, page 7:

The sharp improvement in realisations and the health of the country’s steel sector was based on the decision of the Chinese government to regulate its environment… Consequent decline in steel output in China helped moderate the export of steel products from that country

Thereafter, the steel industry cycle turned and the prices started declining in FY2020 and the revenue of the company declined to ₹812 cr in FY2020. However, then in 2021, the steel prices witnessed a sharp recovery and the sales of the company increased to ₹1,043 cr in the 12-months ended June 30, 2021, i.e. during July 2020-June 2021.

From the above discussion, an investor would appreciate that the steel industry including Beekay Steel Industries Ltd is a price taker. It does not have pricing power over its customers. As a result, steel manufacturers have to sell their goods to their customers at the price, which is prevalent in the market. Their products are a commodity in nature, which a customer can easily replace with the products of their competitors or overseas steel producers.

Therefore, the cyclical changes in steel prices have a significant impact on the business of steel producers including Beekay Steel Industries Ltd. As a result, the revenue of Beekay Steel Industries Ltd has witnessed frequent periods of declining sales over the last 10 years.

If an investor increases her analysis horizon beyond the last 10 years, then she notices that in the past, Beekay Steel Industries Ltd had reported net losses when the steel industry faced a downturn in FY2002 and FY2003. As per the summary of the last 10 years performance (FY1997-FY2006) given in the FY2006 annual report, page 45, Beekay Steel Industries Ltd reported a net loss of (₹1.99) cr in FY2002 and a net loss of (₹1.33) cr in FY2003.

The stage of facing losses in the business during the downturn in the steel industry arrives because; in the steel industry, prices go through very wild fluctuations, which many times go below the cost of production. For example, in FY2011, Beekay Steel Industries Ltd intimated to its shareholders that it is not possible to reduce prices further because many of the inputs like carbon steel are already being sold at the cost of production.

FY2011 annual report, page 25:

Going forward, the slowdown in demand and rising costs may decrease profitability of steel producers. Smaller steelmakers may have to resort to production cuts… There is no possibility of price cuts to improve demand as carbon steel is already being produced at cost levels.

As a result, an investor should always keep the sensitivity of the business of Beekay Steel Industries Ltd to the cyclical changes in the steel industry whenever she attempts to project the performance of the company in the future.

3) Profit margins of Beekay Steel Industries Ltd:

While analysing the profit margins of the company, an investor notices two patterns in the company’s performance over the last 10-years. First, the operating profit margin (OPM) of the company has shown cyclical fluctuations where the OPM increased from 9% in FY2012 to 19% in FY2019. Thereafter, the OPM declined to 15% in FY2020 and then increased to 19% in the 12 months ended June 2021 (i.e. July 2020-June 2021).

The second pattern in the OPM is the significant increase over the last 10 years from 9% in FY2012 to 19% in the 12 months ended June 2021 (i.e. July 2020-June 2021).

An investor would appreciate that the cyclical fluctuations in the OPM are a result of the dependence of Beekay Steel Industries Ltd on the market for the price it can charge to its customers. When the steel prices in the market decline, Beekay Steel Industries Ltd has to sell its products at a lower price irrespective of its costs. As a result, its profit margins decline.

For example, in FY2020 when the OPM of Beekay Steel Industries Ltd declined sharply to 15% from 19% in FY2019, then the company intimated to its shareholders that it was due to a decline in steel prices.

FY2020 annual report, page 6:

EBIDTA margin is also down by 3% from Rs. 182.30 crores in previous year to Rs.125.94 crores due to lower net realization rate.

Similarly, an investor would notice that in FY2019, when the company witnessed a sharp increase in its OPM to 19% from 15% in FY2018, then it was due to better steel prices prevailing in the market.

When an investor tries to analyse the reasons for the improvement in the OPM of Beekay Steel Industries Ltd, from 9% in FY2012 to 19% in the 12 months ended June 2021 (i.e. July 2020-June 2021), then she comes across a few key aspects of it business.

The first thing an investor notices is that Beekay Steel Industries Ltd does not produce steel from raw materials like iron ore, coal etc. Instead, it sources one form of steel from primary steel producers like Tata Steel Ltd, Steel Authority of India Ltd (SAIL), Rashtriya Ispat Nigam Limited (RINL) etc. and coverts it into another form, which can be used by the end-users of steel. It is, basically, a converter.

For example, Beekay Steel Industries Ltd sources steel in the form of billets from primary steel producers (Tata Steel, SAIL, RINL etc.) and coverts it into TMT bars etc., which can be used in construction, infrastructure etc. Such players in the steel industry are called secondary steel producers, which are different from primary steel producers who produce steel from raw materials like iron ore, coal etc.

Secondary steel producers have a benefit in their business model. It is that their raw material (e.g. billets), as well as their final product (e.g. TMT bars) both, are a form of steel. Therefore, the prices of both, their raw material as well as their final product move with each other depending upon the prevailing market price of steel.

As a result, their profit margins are relatively stable when compared to primary steel producers whose raw material prices (iron ore, coal etc.) are determined by the miners who are large enterprises like (NMDC, Vale, BHP Billiton etc.), which may not follow the price of steel.

Therefore, an investor would notice that the profit margins of Beekay Steel Industries Ltd are relatively less volatile than the profit margins of any primary steel producer. An investor may note in the following table comparing the OPM of Beekay Steel Industries Ltd, a secondary steel producer, with the OPM of Steel Authority of India Ltd (SAIL) and Tata Steel Ltd, both of whom are primary steel producers.

In the above table, an investor would notice that the operating profit margin (OPM) of Beekay Steel Industries Ltd is comparatively less volatile than the OPM of primary steel producers. In FY2016 when due to a sharp decline in steel prices, both SAIL and Tata Steel Ltd reported almost 0% OPM, and Beekay Steel Industries Ltd reported an OPM of 13%.

Moreover, another aspect of the business of secondary steel producers is that they may act as outsourced players for the large primary integrated steel players. In such an arrangement, the large steel players like Tata Steel Ltd, SAIL, RINL etc. give one form of steel like billets to secondary steel producers like Beekay Steel Industries Ltd. In turn, the secondary steel players covert this one form of steel (billets) into another like TMT bars and supply it back to the large steel player who sells it in the market under its own brand.

Beekay Steel Industries Ltd has such arrangements with Tata Steel Ltd for its Jamshedpur plant, which supplies TMT bars to Tata Steel Ltd.

FY2012 annual report, page 20:

At Jamshedpur unit TMT is the single product being manufactured on behalf of TATA Steel.

In addition, Beekay Steel Industries Ltd has tied up with SAIL and RINL to supply TMT bars from its unit in Parwada, Andhra Pradesh.

Credit rating report by India Ratings, March 2017:

BSIL entered into job work contracts with the Steel Authority of India Limited (‘IND AA’/Negative) and Rashtriya Ispat Nigam Limited (‘IND A’/Negative) during FY17 for manufacturing TMT bars for around 60% of its capacity.

In such a business arrangement, secondary steel producers like Beekay Steel Industries Ltd earn a fixed conversion fee, which may be fixed irrespective of the price of steel prevailing in the market.

Credit rating report by India Ratings, January 2019:

company’s conversion business offers consistent margins due to a free supply of raw material from the principals, thereby mitigating risk of price volatility

Credit rating report by India Ratings, March 2017:

BSIL’s manufacturing business is exposed to volatility in raw material and finished goods prices as compared to its conversion business (contributes around 20% of revenue), which receives fixed conversion charges, despite price volatility.

The credit rating agency, CRISIL, highlighted this aspect of secondary steel producers in its rating guidelines for the material industry in February 2021, page 21 (click here):

There are many small and mid-sized steel companies and quite a few of these are not primary producers of steel, but engaged in re-rolling of flat and long products. These entities cater to the customised requirements of their end-users and operate on fixed conversion margins.

Therefore, on one hand, the presence of a conversion business offers a consistent profit margin. On the other hand, the profit margin in the conversion business is higher when compared to selling products in its own brand name to end-users.

The credit rating agency, India Ratings, highlighted it in its report for the company in November 2019:

company’s EBITDA margin improved to 18.26% in FY19 (FY18: 13.64%) due to higher sales from the conversion segment, which offers higher margins.

Advised Reading: Credit Rating Reports: A Complete Guide for Stock Investors

Therefore, an investor notices that the business of Beekay Steel Industries Ltd has multiple features, which enable it to have a comparatively less volatile profit margin when compared to primary steel producers:

• Its raw material, as well as the final product, are a form of steel; therefore, their prices move along with each other.
• Its conversion business for large integrated primary steel producers offers fixed profits without price volatility.
• Its conversion business for large integrated primary steel producers has a higher profit margin than its business of selling products directly to consumers.

As a result, an investor notices that Beekay Steel Industries Ltd has less volatility in its profit margins than primary steel producers. Nevertheless, it is not immune to a decline in steel prices. As a result, when steel prices decline sharply, then it does face a decline in its profit margins like in FY2020.

When an investor notices the share of business in which it converts one form of steel into another e.g. billets into TMT bars, then it notices that this is one of the major business segments of Beekay Steel Industries Ltd.

In FY2021, about two-thirds of the total manufacturing capacity of 760,000 TPA of Beekay Steel Industries Ltd was dedicated to the production of TMT bars i.e. 500,000 TPA, which is a comparatively high-margin business.

FY2021 annual report, page 3:

Beekay Steel scaled its total production capacity in Rolled Bars to 232,000 TPA, bright bar production capacity of 28,000 TPA and TMT bar production capacity of 500,000 TPA as of March 31, 2021.

When an investor compares it with the manufacturing capacity of the company in FY2012 where about 300,000 TPA out of the total capacity of 510,000 TPA (FY2012 annual report, page 19), then she notices that most of the capacity expansion over the years has taken place in the segment of production of TMT bars.

From the above discussion, an investor would appreciate that conversion of steel billets into TMT bars is a comparatively high-profit margin segment. Therefore, it seems that the decision of Beekay Steel Industries Ltd to increase its capacity in this segment might have contributed to the consistent increase in OPM over the years.

Another key factor in increasing profit margins of Beekay Steel Industries Ltd over the years is the focus of the company on fuel expenses.

4) Energy-intensive operations of Beekay Steel Industries Ltd:

While reading about the business of Beekay Steel Industries Ltd, an investor gets to know that the manufacturing operations of the company are highly energy-consuming. As a result, power & fuel cost is one of the major expenses for the company and any changes in the cost of fuel have a significant impact on the profitability of the company.

In the past, Beekay Steel Industries Ltd used to rely on furnace oil as a source of energy in its plants to produce steel. The prices of furnace oil are linked to crude oil prices. As a result, the company suffered when the cost of crude oil and therefore, furnace oil increased.

For example, in FY2008 and in FY2012, the profit margins of the company suffered when furnace oil prices increased significantly.

FY2008 annual report, page 27:

The profitability has come under pressure due to increased Furnace Oil costs on account of continuously strengthening of crude oil prices

FY2012 annual report, page 22:

the cost of Furnace Oil (which is a major consumable for Furnace Heating) has gone up drastically by 31% over the previous year level and this along with increasing Power tariff continues to adversely affect the margins.

As a result, the company took steps to shift away from the usage of furnace oil and, in turn, reduced its fuel cost expenses by shifting to coal-fired furnaces.

Credit rating report by India Ratings, January 2015:

BSIL has also completed the conversion of its oil fired furnace to a coal fire furnace resulting in savings of around INR400 per ton in FY14 and in improved EBITDA margins of 10.8% (FY13: 9.1%, FY12: 9.5%).

FY2019 annual report, page 8:

Company invested in coal pulverisers, strengthening the Company’s transition from the consumption of furnace oil to coal… The pulverisers resulted in a superior combustion of coal for billet heating and the result was that fuel costs per tonne of manufactured steel declined during the year, resulting in a notional saving of ₹12 Crores.

Advised Reading: Understanding the Annual Report of a Company

It looks that the steps taken by the company to control its power & fuel costs have also contributed to the increase in profit margins of the company from 9% in FY2012 to 19% in the 12 months ended June 30, 2021, i.e. during July 2020-June 2021.

An investor gets to see another instance of the importance of power in the operations of Beekay Steel Industries Ltd when she notices that during FY2012 to FY2014, for almost 3 consecutive years, there was a power crisis in Andhra Pradesh and Tamil Nadu and during this period, the operations of the company were significantly affected.

The power crisis during this period was so intense that the state govt. had to impose power holidays when the power was rationed and was supplied to the industries was supplied only for limited days.

FY2012 annual report, page 20:

due to power-crisis in Andhra Pradesh and Tamilnadu leading to imposition of Power-holidays for manufacturing sector, the operational days of the units are largely affected throughout the year.

In the FY2013 annual report, Beekay Steel Industries Ltd intimated to its shareholders that due to power holidays in these states, the manufacturing plants are allowed to run only on 60% of the days i.e. the capacity utilization of the units is capped at 60% by govt.

FY2013 annual report, page 9:

Owing to imposition of Power-holidays by State Electricity Boards in Andhra Pradesh and Tamilnadu, the capacity utilization has been restricted to 60% for manufacturing sector in both these states.

The forced lower capacity utilization imposed by the govt. affected the profitability of the company, as the fixed costs had to be absorbed only by a small amount of production volume. Beekay Steel Industries Ltd highlighted the power crisis as one of the threats to its shareholders.

FY2013 annual report, page 24:

The grim power situation in Tamilnadu and Andhra Pradesh also prevents the offsetting of higher production costs by increasing production volumes.

In FY2014, the company continued to face the power crisis in Andhra Pradesh and Tamil Nadu and as a result, it mentioned that it lost about 15% of its production volume.

FY2014 annual report, page 4:

Production had been adversely affected in the last year because of political uncertainty in Andhra Pradesh and the imposition of Power-holidays by State Electricity Boards in Andhra Pradesh & Tamil Nadu. It resulted in a decline of 15% in our production volume in both these two states.

Therefore, an investor would note that the heavy dependence of the company on power puts it in a precarious situation where any disruption in the power supply or increase in fuel costs can have a significant impact on its profit margins.

As a result, it does not come as a surprise to the investor that in the steel industry, companies with captive-assured sources of power like self-owned power plants are always better placed when compared to companies without captive-assured sources of power.

The credit rating agency, CARE, highlighted this aspect of the business of steel manufacturers in its Rating Methodology document, July 2019, page 4:

CARE Ratings views steel manufacturers who have captive power plants (CPP) as superior to other manufacturers not having such CPP on account of stable supply source & relatively lower cost, especially where the technology used is power -intensive.

From the above discussion on the business of Beekay Steel Industries Ltd, an investor would note that the company is a price taker and does not have the freedom of asking for a higher-than-market price for its products. It is affected by the cyclicity of the steel industry; therefore, it faces periods of declining prices and demand alternating with periods of rising prices and demand. The profit margins of the company have increased over the years; however, they are still affected by the cyclical nature of the steel industry.

Therefore, whenever, an investor extrapolates the current performance of Beekay Steel Industries Ltd in the future, then she should keep these aspects of its business in her mind, which should always caution the investor that the business of the company is cyclical where periods of declining performance usually follow the periods of good performance.

An investor should keep a close watch on the growth of the volume of steel sold by the company as well as its profit margins going ahead to assess whether the business of the company is improving on the ground.

Further advised reading: How to do Financial Analysis of a Company

While analysing the tax payout ratio of Beekay Steel Industries Ltd., an investor notices that for most of the years, the tax payout ratio of the company has been in line with the standard corporate tax rate prevalent in India.

The tax payout ratio in FY2020 is 16%, which seems lower than the standard tax rate; however, it seems the impact of the transition from the old tax rate of 30% to the new tax rate of 22%. As a result, most of the companies adjusted their deferred tax assets and liabilities to the new tax rate.

FY2020 annual report, page 123:

Impact of tax rate change: The Company elected to exercise the option permitted under section 115BAA of the Income Tax Act, 1961 as introduced by the Taxation Laws (Amendment) Ordinance, 2019. Accordingly, the Company has re-measured Deferred Tax Assets basis the rate prescribed in the said section.

Due to these adjustments, in FY2020, most of the companies reported very low tax payout ratios. Thereafter, in FY2021 as well as the 12 months ended June 2021 (i.e. July 2020-June 2021), Beekay Steel Industries Ltd has reported tax payout ratios in line with the standard corporate tax rate in India.

Advised reading: How to calculated deferred tax assets?

Operating Efficiency Analysis of Beekay Steel Industries Ltd:

a) Net fixed asset turnover (NFAT) of Beekay Steel Industries Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Beekay Steel Industries Ltd in the past years (FY2013-21), then she notices that the NFAT of the company has stayed in the range of 3.5 to 4.5.

The NFAT of the company has declined, primarily, in two periods: FY2015-FY2016 and FY2020. Both these periods are associated with a decline in the revenue of the company due to a downturn in the steel industry and a decline in steel prices.

In addition, these were the periods when Beekay Steel Industries Ltd had just completed its capacity expansion projects, which took some time to stabilize in production.

In FY2014, the company completed its TMT bars unit of 200,000 TPA at Parwada (Andhra Pradesh).

FY2014 annual report, page 19:

The Company has successfully completed 2,00,000 MTPA TMT manufacturing unit at Parwada, Vishakhapatnam and started trial rolling of TMT Bars from 8 mm to 40 mm in Sep, 2013.

The company witnessed a fall in NFAT because it could not utilize this unit properly. In FY2015, the company could not utilize this unit even at 10% utilization levels.

Credit rating report by India Ratings, February 2016:

The ratings however continue to be constrained by the delays in stabilisation of BSIL’s rolling mill plant in Parwada. The company declared achievement of commercial date of operations in September 2013 however, the production commenced in April 2015. Also, the unit was operating below 10% capacity utilisation during 1HFY16 due to weak demand.

However, soon, in FY2017, the NFAT of the company witnessed a recovery as the steel industry witnessed an upcycle and the utilization levels at Parwada (Andhra Pradesh) unit increased to about 50%.

Credit rating report by India Ratings, March 2017:

The upgrade reflects ramping up of production and sales volume at BSIL’s new unit in Parwada in FY17 and achievement of 51% of capacity utilisation in 9MFY17

Finally, Beekay Steel Industries Ltd could achieve 100% utilization of its TMT units at Parwada and Jamshedpur only in FY2020.

FY2020 annual report, page 3:

During the year under review, the company has achieved 100% utilization in TMT bars production capacity with scale of 5,00,000 MPTA in its Jamshedpur and TMT bar division at Parwada.

Going ahead, an investor should keep a close watch on the utilization levels of the manufacturing capacity at different units of the company.

Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors

b) Inventory turnover ratio of Beekay Steel Industries Ltd:

While analysing the efficiency of inventory utilization by Beekay Steel Industries Ltd, an investor notices that over the last 10 years, the consolidated inventory turnover ratio (ITR) of the company has declined from 5.6 in FY2013 to 3.7 in FY2021.

The decline in the ITR indicates that the business operations of the company are becoming more working capital intensive.

The company had intimated to its shareholders that it has to produce many different products as per the requirements of its customers. The decision of the company to manufacture many different products forces it to carry inventory for each of these different types of products forcing it to carry a large amount of inventory.

In the FY2008 annual report, it highlighted its compulsion to maintain a high inventory due to a wide range of products being manufactured by it.

FY2008 annual report, page 26:

The wider range of the products requires huge inventory build-up for meeting requirements from different category of customers, thus entailing substantial blockage of working capital and internal accruals.

Once again, in FY2012, Beekay Steel Industries Ltd highlighted to its investors that its manufacturing units attempt to produce many different types of products instead of one single type of product manufactured by other similar steel manufacturers. As a result, an investor may appreciate that Beekay Steel Industries Ltd would have to maintain a large amount of inventory for each of these different products.

FY2012 annual report, pages 19-20:

Unlike most of the rolling mills, where single product (like TMT or Angles) is manufactured continuously, your Company is manufacturing rolled products like rounds, squares, flats, hexagonals and special profiles of various sizes, shapes and dimensions at Visakhapatnam and Chennai Units.

The strategy of the company to produce goods of various sizes, shapes and dimensions also affects its business, as it is not able to achieve a higher capacity utilization of its manufacturing units. The company highlighted this constraint to its shareholders in FY2012.

FY2012 annual report, page

This process of manufacturing multi-sections results in frequent change of Rolls in the mills as per the production requirements and has inherent limitation of relatively lower capacity utilization.

In addition, in FY2018, Beekay Steel Industries Ltd highlighted to its investors that it has a strategy of accumulating a lot of inventory by buying raw materials when the steel prices are low.

FY2018 annual report, page 18:

The Company buys raw materials at low prices and maintains inventory levels, which helps it to avoid buying at high prices.

An investor would appreciate that such a strategy would result in a comparatively higher amount of inventory in the stores of the company. One of the downfalls of the strategy to carry a large inventory in cyclical industries like steel is that at times, the prices may decline substantially, even more than what the company may imagine. As a result, the company may face inventory losses when the raw material prices fall significantly.

Beekay Steel Industries Ltd had faced inventory losses in the past. For example, in FY2009, the company faced an inventory loss of about ₹4 cr, which was substantial when compared to its size. The company had a profit after tax (PAT) of ₹5.3 cr in FY2009.

FY2009 annual report, page 6:

The high production costs together with steep fall in sales prices in the 3rd quarter caused the inventory value loss of Rs 403.05 lacs.

Nevertheless, the changes in the inventory valuation due to fluctuations in steel prices are a two-way affair. It means that when steel prices increase significantly, then the companies report inventory gains as well. For example, Beekay Steel Industries Ltd reported one-off inventory gains in FY2018.

Credit rating report by India Ratings, January 2019:

The EBIDTA margin improved to 13.6% in FY18 (FY17:11.7%) because of a one-off stock valuation gain

Going ahead, an investor should keep a close watch on the inventory utilization efficiency as well as the inventory levels of Beekay Steel Industries Ltd so that she may be aware of the sign of excess inventory as well as any future instances of inventory losses.

Further advised reading: Inventory Turnover Ratio: A Complete Guide

c) Analysis of receivables days of Beekay Steel Industries Ltd:

Over the last 10 years, the receivables days of Beekay Steel Industries Ltd have consistently been in the range of 40-50 days. This seems a result of a substantial portion of its sales to large primary steel players like Tata Steel Ltd, RINL and SAIL, which are financially strong companies.

However, when an investor notices the trend of receivables days in the last few years, then she observes that during FY2018-FY2021, the receivables days of the company have consistently increased from 40 days in FY2018 to 53 days in FY2021.

While analysing the business decisions of the company, an investor notices that for the last few years, Beekay Steel Industries Ltd has attempted to enter into the selling to consumers (B2C) segment. The company has developed its sales channel and marketing teams for the same. It has started brand building by way of spending money on advertising.

Credit rating report by India Ratings, March 2017:

BSIL started selling thermo-mechanically treated (TMT) bars under its own brand by setting up a distribution network.

In FY2020, the company bought out the business of its sole distributor and took direct control over its distribution channel.

FY2020 annual report, page 2:

The Company has strengthened its retail marketing by taking over the entire business from its sole-selling distributors in Coimbatore, Bangalore, Hyderabad, Mumbai & Pune with effect from 1st February, 2020 to increase the market penetration of all products on pan India basis.

At the same time, the company has started spending resources on creating a brand in the minds of retail customers by way of advertising.

FY2021 annual report, page 15:

Brand awareness: The Company enlarged its TMT bar business around the ‘Beekay Turbo TMT’ brand. The Company promoted its brand across various places in Andhra Pradesh through hoardings, radio, bus advertisements, TV tickers and wall paintings. The Company initiated extensive branding to enhance revenue share from TMT bars within the sales mix.

In FY2020, the company intimated to its shareholders that direct sales to retail customers are now contributing about 69% to its overall revenue.

FY2020 annual report, page 2:

During the year under review, 69% of the Company’s revenue was derived from B2C segments.

From the above discussion, an investor would appreciate that from FY2017 onwards, the company has increased its focus on the B2C segment. It has invested money in building marketing and distribution channels and on advertisement to build a brand.

An investor would also appreciate that in B2C sales, the distribution channel acts as an intermediary, which results in delays in converting the finished goods into sales and cash inflow.

It might the one of the reasons for an increase in the receivables days of Beekay Steel Industries Ltd in recent years.

Going ahead, an investor needs to keep a close watch on the receivables position of the company. She should monitor its disclosures for checking write-offs of receivables etc. to assess the true financial position of the company.

Further advised reading: Receivable Days: A Complete Guide

When an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of Beekay Steel Industries Ltd for FY2012-21 then over the last 10 years (FY2012-FY2021), the company has reported a positive cash flow from operations.

Over FY2012-21, Beekay Steel Industries Ltd reported a total net profit after tax (cPAT) of ₹454 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹533 cr.

It is advised that investors should read the article on CFO calculation, which would help them understand the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors would also understand the situations when the companies would have their CFO higher than the PAT.

Further advised reading: Understanding Cash Flow from Operations (CFO)

Learning from the article on CFO will indicate to an investor that the cCFO of Beekay Steel Industries Ltd is higher than the cPAT due to the following factors:

• Depreciation expense of ₹155 cr (a non-cash expense) over FY2012-FY2021, which is deducted while calculating PAT but is added back while calculating CFO.
• Interest expense of ₹171 cr (a non-operating expense) over FY2012-FY2021, which is deducted while calculating PAT but is added back while calculating CFO.

The Margin of Safety in the Business of Beekay Steel Industries Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it can convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.

An investor may calculate the SSGR using the following formula:

SSGR = NFAT * NPM * (1-DPR) – Dep

Where,

• SSGR = Self Sustainable Growth Rate in %
• Dep = Depreciation rate as a % of net fixed assets
• NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
• NPM = Net profit margin as % of sales
• DPR = Dividend paid as % of net profit after tax

(For systematic algebraic calculation of SSGR formula: Click Here)

While analysing the SSGR of Beekay Steel Industries Ltd, an investor would notice that initially, the company had a low SSGR of 1%-4%; however, since FY2018, when the company benefited from the increasing steel prices, its SSGR has increased to almost 30%. An investor would notice that over the last 10 years, the company has grown its sales at a CAGR of about 5%.

In the initial period, up to FY2017, when the company did not have a high SSGR, then it needed additional capital both in the form of additional debt as well as equity. The total debt of the company increased from ₹137 cr in FY2012 to ₹186 cr in FY2017.

In FY2012, the shortage of funds faced by the company was acute and it had to raise money at a very high cost.

FY2012 annual report, page 6:

On one hand the cost of existing working capital escalated, while on the other, high cost external borrowings had to be arranged to temporarily cushion the late sanction of regular working capital limits.

An investor notices that, in FY2012, even the high-cost debt was not sufficient for the company in meeting its funds’ requirements. As a result, in FY2012, the company had to raise money by way of equity dilution (preferential issue of shares) to meet its funds’ requirements.

FY2012 annual report, page 6:

PREFERENTIAL ISSUE OF SHARES: For the purpose of meeting the working capital requirements and part finance the ongoing projects, the Company has raised funds of Rs.20.00 crores by way of Preferential Issue

In previous years also, e.g. in FY2008, the company had to rely heavily on debt to meet its funds’ requirements.

FY2008 annual report, page 9:

Company has also geared up infusion of working capital into operations in the year under review by substantially increasing the borrowings from its existing as well as new bankers.

Such kind of pressure on Beekay Steel Industries Ltd to meet its requirements of working capital seems natural for steel manufacturing companies because the sector is capital intensive both for creating and maintaining the plants as well as for working capital needs.

The credit rating agency, CARE, has highlighted this aspect of steel companies in its rating methodology document for the industry in July 2019, page 2:

industry is fragmented and highly capital intensive both from the perspective of fixed capital and working capital.

The credit rating agency, CRISIL, highlighted this aspect of steel producers in its rating guidelines for the material industry in February 2021, page 23 (click here):

The steel industry requires regular, large capex to maintain modern and efficient facilities.

In the FY2020 annual report, page 42, the company also acknowledged the capital-intensive nature of business as a threat.

Threats: Industry by nature is capital intensive and requires high capital

As a result, during FY2012-FY2017, Beekay Steel Industries Ltd had to raise money by way of both additional debt as well as equity dilution to meet its funds’ requirements.

Nevertheless, from FY2018, the steel industry witnessed an upcycle and the prices of steel started increasing. As a result, the profitability of steel companies started increasing significantly.

FY2019 annual report, page 9:

The improvement was on account of a 30% upturn in steel product realisations between December 2017 and March 2018. This was one of the sharpest increases seen over the last decade.

Because of the increased profitability, the company could reduce its debt over FY2018-FY2020 and the total debt of the company declined from ₹186 cr in FY2017 to ₹86 cr in FY2020.

In FY2021, the company raised a debt of about ₹66 cr; however, the entire money seems to be held in the form of cash & investments, which increased by ₹67 cr in FY2021.

An investor would appreciate that due to wild fluctuations in the cyclical phases of the steel industry, all the companies go through phases of liquidity stress during the downturn and surplus liquidity during the upcycle.

The credit rating agency, India Ratings, in its rating methodology document for the steel industry in September 2012 (click here), at page 1, highlighted that when faced with high profitability and liquidity, the low-cost producers of steel go for expansions/acquisitions whereas the high-cost producers can manage only debt reduction or maintenance of their facilities.

Costs and Flexibility: The higher profitability/cash flows of lower-cost producers means that they have more funds to expand/strengthen their operational profile through acquisitions or plant modernization… In contrast, higher-cost producers will often use periods of strong prices to reduce debt levels and will not typically be able to significantly expand their operations, with the focus being more on the maintenance or refurbishment of existing operations.

Advised Reading: Credit Rating Reports: A Complete Guide for Stock Investors

An investor arrives at a similar conclusion when she analyses the free cash flow (FCF) position of Beekay Steel Industries Ltd.

b) Free Cash Flow (FCF) Analysis of Beekay Steel Industries Ltd:

While looking at the cash flow performance of Beekay Steel Industries Ltd, an investor notices that during FY2012-2021, it generated cash flow from operations of ₹533 cr. During the same period, it did a capital expenditure of about ₹227 cr.

Therefore, during this period (FY2012-2021), Beekay Steel Industries Ltd had a free cash flow (FCF) of ₹306 cr (=533 – 227).

In addition, during this period, the company had a non-operating income of ₹31 cr and an interest expense of ₹171 cr. As a result, the company had a total free cash flow of ₹166 cr (= 306 + 31 – 171). Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.

While looking at the overall cash-flow position of Beekay Steel Industries Ltd over the last 10 years (FY2012-2021), an investor notices that the company has primarily used its free cash flow in the following manner:

• Payment of dividends to the shareholders: ₹15 cr excluding dividend distribution tax (DDT). The company might have paid about ₹3 cr (about 20% of the dividend amount) as DDT.
• Cash & investments: ₹105 cr as the cash & investments of the company have increased from ₹4 cr in FY2012 to ₹109 cr in FY2021 (109 – 4 = 105)

Going ahead, an investor should keep a close watch on the free cash flow generation by Beekay Steel Industries Ltd to understand whether the company continues to generate surplus cash from its operations.

Further advised reading: Free Cash Flow: A Complete Guide to Understanding FCF

Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin of safety in the business model of any company.

Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

Additional aspects of Beekay Steel Industries Ltd:

On analysing Beekay Steel Industries Ltd and after reading annual reports, DRHP, its credit rating reports and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.

1) Management Succession of Beekay Steel Industries Ltd:

Beekay Steel Industries Ltd is a part of the Beekay group of industries and is run by the promoter Bansal family. Currently, two brothers: Mr Suresh Chand Bansal (age 72 years), executive chairman, and his brother Mr Mukesh Chand Bansal (age 65 years), managing director, run the company.

They are assisted by the members of their next-generation: Mr. Manav Bansal (age 46 years), a whole-time director (WTD) & chief financial officer (CFO) and Mr Vikas Bansal (age 50 years), an executive director who are sons of Mr Suresh Chand Bansal. Son of Mr Mukesh Chand Bansal, Mr Gautam Bansal (age 40 years) is also working in the company as a WTD.

September 29, 2020 AGM notice, page 8:

Mr. Manav Bansal: (Name of relationships): Mr. Suresh Chand Bansal – Father, Mr. Mukesh Chand Bansal- Father’s Brother, Mr. Vikas Bansal – Brother & Mr. Gautam Bansal – Son of Mr. Mukesh Chand Bansal

The presence of younger family members at executive positions within the group, while the senior members are still handling responsibilities, looks like a good succession plan. This is because the young members can learn about the fine nuances of the business under the guidance of senior members until the seniors decide to take retirement.

Going ahead, an investor may keep a close watch on the relationships among the promoter’s family members to understand whether any ownership issues arise between brothers Mr Suresh Bansal and Mr Mukesh Bansal or between the next generation. An investor may contact the company directly for any clarifications in this regard.

Further advised reading: How to do Management Analysis of Companies?

2) Issues in the CFO calculation by Beekay Steel Industries Ltd:

While analysing the financial statements of Beekay Steel Industries Ltd, an investor notices that the company has shown changes (inflows as well as outflows) related to short-term debt i.e. working capital loans in the cash flow from operations (CFO). An investor would appreciate that as a general practice, companies show changes in the working capital under cash flow from financing activities (CFF).

For example, in FY2021, Beekay Steel Industries Ltd included an increase of ₹67.5 cr in its short-term-borrowings as an inflow under cash flow from operating activities (CFO).

FY2021 annual report, page 126:

An investor would appreciate that this inflow of ₹67.5 cr should have been an inflow under cash flow from financing activities (CFF). Including it under CFO may lead an investor to believe that the company has a much higher cash flow from operations than it actually has. In the above example, in FY2021, the CFO of the company seems higher by about ₹67.5 cr.

After analysing each of the annual reports of Beekay Steel Industries Ltd, an investor notices that the company started this practice of including changes in short-term-borrowings in the CFO from the FY2018 annual report in which it edited the data for FY2017 as well for reference to the previous year. Before that, Beekay Steel Industries Ltd used to show changes in both the long-term as well as short-term borrowings in the cash flow from financing activities.

The following table calculates the cash flow from operations (CFO) of Beekay Steel Industries Ltd after adjusting for the impact of the inclusion of short-term-borrowings for FY2017 to FY2021.

An investor notices that overall, from FY2017 to FY2021, the CFO was shown higher by about ₹18 cr by Beekay Steel Industries Ltd by way of inclusion of short-term borrowings.

It is advised that whenever an investor comes across such instances where companies have used assumptions in the preparation of financial statements, which are different from generally accepted principles, then she should make adjustments to assess the correct financial picture of the company.

An investor may contact the company directly to understand the reasons for including short-term-borrowings in CFO instead of including them in CFF.

Advised reading: How Companies Manipulate Cash Flow from Operating Activities (CFO)

3) Project execution by Beekay Steel Industries Ltd:

When an investor reads the annual reports of Beekay Steel Industries Ltd to analyse its project execution capabilities, then she comes across many initiatives of capacity expansion undertaken by the company.

3.1) Cost overruns:

She notices that on many occasions, the company could not complete the projects on time. Because of the delay in project completion, Beekay Steel Industries Ltd faced cost overruns.

In FY2009, Beekay Steel Industries Ltd started expansion of its TMT bars unit at Jamshedpur when it received a big order from Tata Steel Ltd. The company started the expansion of this unit by 100,000 TPA for a cost of ₹17 cr and expected to complete it by July 2010.

FY2009 annual report, page 22:

The Company has bagged a major conversion order for 1,80,000 MTPA from Tata Steels Ltd. in the month of October, 2008 involving manufacturing of TMT Bars from Billets for a period of three years at the Company’s existing manufacturing unit at Jamshedpur… Company is expanding the capacity at its adjacent land with 1,00,000 MTPA for TMT manufacturing with a capital outlay of Rs.1,698 lacs at Jamshedpur… The commercial production under the expansion is expected to be commenced from July 2010

On reading further annual reports, an investor notices that the company had a slight delay in the completion of this plant, which was completed in September 2010; however, there was a substantial cost overrun in the project. The company could complete it by spending ₹23 cr against original plans of ₹17 cr; a cost overrun of about 35% (= 23 / 17 = 1.35)

FY2011 annual report, page 8:

TMT expansion unit at Jamshedpur with installed capacity of 1,00,000 MTPA has been successfully completed in September, 2010 with a capital outlay of Rs.2,300 lacs

On another occasion, in FY2010, Beekay Steel Industries Ltd started work on a TMT rolling mill project of 200,000 TPA at Parwada, Andhra Pradesh. The cost of the project was expected to be ₹56.3 cr and it was expected to be complete in October 2011.

FY2010 annual report, page 26:

setting up a new TMT Rolling Mill.. with installed capacity of 2,00,000 MTPA at Parwada in Andhra Pradesh… The total cost of the project is envisaged at Rs. 5,630.90 lakhs excluding margin money for working capital… The Company has started the project work from April 2010 and the same is expected to be completed by September, 2011 including the commissioning of plant. The commercial production will commence in October, 2011.

However, instead of completing the project in October 2011, the company could complete the project in FY2014. Because of the delay, the cost of the project had increased to ₹67.9 cr, an increase of about 20%.

FY2014 annual report, page 19:

The Company has successfully completed 2,00,000 MTPA TMT manufacturing unit at Parwada, Vishakhapatnam and started trial rolling of TMT Bars from 8 mm to 40 mm in Sep, 2013. The total investment of the unit amounted to Rs. 67.90 crores up to 31st March 2014

Therefore, the TMT plant at Parwada, Andhra Pradesh represents another instance where Beekay Steel Industries Ltd faced delays in the project completion and as a result, it had to face cost overruns.

The delay in the implementation of projects by Beekay Steel Industries Ltd is not restricted to the manufacturing projects alone. In the case of technological projects like enterprise resource planning (ERP) also, the company faced delays in completing the projects.

In FY2009, the company intimated to its shareholders that it has successfully implemented ERP in its Kolkata and Jamshedpur units. The company promised that it would complete the ERP implementation in its remaining units at Visakhapatnam and Chennai by the middle of FY2011 i.e. by September 2010.

FY2009 annual report, page 22:

Company has successfully implemented ERP at its Jamshedpur and Kolkata Locations in April 2009. The system will subsequently bring other units at Vizag and Chennai within its ambit by the middle of the year 2010-11.

However, as per the FY2012 annual report, the Chengalpet, Chennai (Tamil Nadu) unit was yet to be brought under ERP. The company indicated that ERP might be implemented there by FY2013 i.e. a delay of about 2.5 years from the earlier anticipated date of September 2010.

FY2012 annual report, page 23:

The successful roll-out of ERP system at Jamshedpur unit and four units at Visakhapatnam facilitates online and transparent information flow… The Chengalpet (Tamilnadu) unit of the Company is also going to be covered under ERP in the year 2012-13.

An investor would appreciate that any time delays in the implementation of projects are invariably associated with cost overruns.

Advised reading: How to do Management Analysis of Companies?

3.2) Completed within cost but reduced the project size:

While analysing the project execution by Beekay Steel Industries Ltd, an investor comes across instances when the projects were seemingly completed within prior estimated costs. However, on deeper analysis, she notices that the company could restrict the costs within prior estimates because; it had reduced the scope of the projects.

For example, in FY2006, Beekay Steel Industries Ltd announced capacity expansion plans for two locations: Autonagar and Vellanki at Visakhapatnam. At Autonagar, the company had planned to put up 60,000 TPA of Hot Rolled Steel Bars & Rods and 54,000 MTPA of M.S. Ingot plants. At Vellanki, it had planned to put up a Bar Mill of 40,000 TPA. The company expected to complete these plants by FY2008 at a cost of about ₹38 cr.

FY2006 annual report, page 10:

The Company is setting up a Structure mill and Steel Smelting shop at Autonagar, Visakhapatnam with a production capacity of 60,000 MTPA of Hot Rolled Steel Bars & Rods and 54,000 MTPA of M.S. Ingot and a Bar Mill at Vellanki, Vishakapatnam with a capacity of 40,000 MTPA of Special Steel Sections. The estimated cost of the project is Rs 3.794.12 lacs against… The benefits of this enhanced capacity will be figured in the financial results of the Company in 2007-08 onwards.

By FY2008, Beekay Steel Industries Ltd had completed two units out of the above with slight adjustments in the final capacities and at a total cost of about ₹29 cr. It seems that the company did not complete the M.S. Ingot facility at Autonagar and reduced the capacity of the Bar Mill from an earlier planned 40,000 TPA to 30,000 TPA.

FY2008 annual report, pages 25-26:

The company has expanded capacity by setting-up two new Units at Visakhapatnam– one structural unit named Beekay Structural Steels with a capex of Rs.2,267 lacs and another Re-Rolling mill named Beekay Special Steels with a capex of Rs.624 lacs for making specially tailored Sections at Visakhapatnam.

Beekay Structural Steels manufacturing units have an installed capacity of 60,000 MTPA for manufacturing heavy structural steel products at Autonagar, Vishakhapatnam,

Beekay Special Steels manufacturing unit with a production capacity of 30,000 MTPA has already commenced its commercial production of Hot Rolled Sections catering to the demand from auto sector.

Advised Reading: Understanding the Annual Report of a Company

3.3) Taking on an economically unviable project:

While analysing the project execution by Beekay Steel Industries Ltd, an investor also comes across instances where the project once initiated by the company could not be completed even with delays of about 3-years. Moreover, even after 3-years and spending crores of rupees, there were question marks about the economic viability of the project.

For example, in FY2010, Beekay Steel Industries Ltd started a project to establish a Transmission Line Tower manufacturing unit of 24,000 TPA at Pydibhimavaram in Visakhapatnam for ₹26 cr. The unit was originally expected to be complete by April 2011.

FY2010 annual report, pages 25-26:

your Company is now moving into forward integration and is setting up 24,000 MTPA Transmission Line Tower manufacturing unit at Pydibhimavaram in Visakhapatnam… The total cost of the project is envisaged at Rs. 2600.00 lakhs… The commercial production under the proposed expansion is expected to be commenced from April 2011

However, the project witnessed significant delays and it was not completed even by the end of FY2014, which is almost 3-years since the original envisaged date of completion.

FY2014 annual report, page 22:

TLT (Transmission Line Tower) Manufacturing at Pydibhimavaram, (Andhra Pradesh): Against the estimated project cost of Rs.26.00 crores (being funded solely from internal accruals), the Company has already made project investment of Rs.21.85 crores till 31st March, 2014. At the moment the power sectors are not performing well and the unit will start production once the said sector will be considered economically viable.

It looks like the company was stuck with investment in the transmission-line tower (TLT) project as the cyclical changes in the steel industry led to the project becoming financially unviable. As a result, the company’s investment of about ₹22 cr in the TLT project was stuck without producing any returns.

In the subsequent annual reports, the company stopped giving any updates about the progress of this project. In the FY2021 annual report, the TLT project at Pydibhimavaram, (Andhra Pradesh) does not appear in the list of manufacturing units of Beekay Steel Industries Ltd.

FY2021 annual report, page 26:

WORKS:

• Jamshedpur (Jharkhand)
• Chennai (Tamil Nadu)
• Visakhapatnam (Andhra Pradesh) (a. Autonagar b. Bheemlipatnam c. Vellanki d. Parwada)
• Howrah (West Bengal)

An investor may contact the company directly to understand the fate of this project. Whether the project was finally completed and started production or the amount of ₹22 cr invested in the TLT project is dead or the project is reoriented for producing some other project. Assessment of the TLT project would provide insight into the capital allocation skills of the management.

Advised reading: How to Identify if Management is Misallocating Capital

3.4) Losses due to inability to meet the conditions of a project:

While assessing the project execution, an investor also comes across instances where the company made grand plans for ambitious manufacturing projects; however, despite many years of waiting by shareholders, it could not meet the conditions set up by the govt. authorities and in the end, it had to write-off the money spent on the project. Therefore, the shareholders had to take a loss.

To illustrate, in FY2010, the company intimated to its shareholders its plans to go for backward integration by establishing a 300,000 TPA integrated steel plant in Bobbili (Vizianagaram) in Andhra Pradesh to be completed by FY2013. The plant was to be completed in phases and the cost of the first phase was estimated to be ₹250 cr. The company intimated that it has already acquired 250 acres of land for the project at the cost of ₹7.42 cr.

FY2010 annual report, pages 26-27:

Company proposes to set up an Integrated Steel Plant at Bobbili (Vizianagaram), Andhra Pradesh to produce 3,00,000 MT of Steel per annum… by 2012-13.

During the 1st phase of the project, the Company proposes to complete SMS (2,50,000 MTPA) and Rolling Mill (1,50,000 MTPA)… and a 30 MW Captive Power Plant… Company has already acquired 250 Acres of land… at a total cost of Rs.742.00 lacs. The estimated cost of the 1st phase of the project (Rs. 25,000.00 lacs)

However, an investor notices that the company could not make any progress on the project. In fact, it could not meet the conditions put by the land-owning govt. authority, Andhra Pradesh Industrial Infrastructural Corporation Limited (APIIC). As a result, in FY2019, the company had to recognize a loss of ₹1.54 cr.

FY2019 annual report, page 156:

During the Financial Year the Company have written off ₹1.54 Crores due to dis-embarkment of Bobbili Project of the Company because of non fulfilment of terms & conditions set by Andhra Pradesh Industrial Infrastructural Corporation Limited (APIIC).

An investor may contact the company directly to understand the challenges faced by it in this project, and why the company could not go ahead with the project. She may seek clarifications about the conditions set by APIIC, which it could not fulfil and the shareholders had to suffer a loss of ₹1.54 cr.

Advised reading:  Are professionally managed companies safer for shareholders?

3.5) Prior projects, which are no longer included in current projects:

During analysis of project execution history, an investor comes across a project, which was once highlighted as an ambitious project being executed by the company; however, soon thereafter, the name of the project was removed from the annual report as if it was not a project being executed by Beekay Steel Industries Ltd at all.

In the FY2005 annual report, Beekay Steel Industries Ltd intimated to its shareholders about one of its ongoing projects at Barbil, Odisha. As per the company, some parts of this integrated project became operational in 2004 and the remaining parts were to become operational in 2005 and 2006.

FY2005 annual report, page 26:

Recently, the Beekay group has established a green-field project: an integrated steel project at Barbil, Orissa. It is a backward integration project, which has successfully been producing sponge iron / DRI since September 2004. Subsequent phases i.e. steel making and captive power generation are scheduled to go on-stream by end of 2005 and 2006 respectively.

However, the subsequent annual reports are silent on this project. The company stopped providing further details and the status of this project. Upon a search on Google, an investor comes across the following webpage, which has the following key details about the project of Beekay group at Barbil, Odisha (Click here)

• The project seems to be now under the company: Beekay Steel & Power Ltd (BSPL)
• At some point in time, Passary group joined the Beekay group in this project.
• 40MW power project at the site was expected to become operational in November 2012. The current status is unknown.
• Shyam Steel Industries of Kolkata had announced to the takeover of Beekay Steel (i.e. the company owning this project).

While analysing the annual reports of Beekay Steel Industries Ltd, an investor notices that in FY2006, its investment in Beekay Steel & Power Ltd (BSPL) declined significantly when its shareholding reduced from 494,750 shares in FY2005 to 107,500 shares in FY2006 (FY2006 annual report, page 27).

Beekay Steel Industries Ltd carried its investment in Beekay Steel & Power Ltd (BSPL) until FY2012 when this investment disappeared from its list of investments due to either sale or write-off.

An investor may contact the company directly to understand more about the project at Barbil, Odisha. She may seek clarifications about the investment done by Beekay Steel Industries Ltd in this project, and whether it could make any money/returns on this investment. She may ask whether the company made any losses on this investment, whether the project is still with Beekay group or it has been sold off as mentioned on the above-cited webpage.

3.6) Delays in current projects:

In FY2019, Beekay Steel Industries Ltd announced capital expenditure to create a new greenfield expansion in Kalinganagar, Odisha by spending ₹150 cr and an expansion of the unit at Visakhapatnam for a cost of ₹60 cr. The Odisha plant was expected to complete by FY2022 and the Visakhapatnam plant was expected to be completed by FY2021.

FY2019 annual report, page 7:

• ₹150 Crores in greenfield expansion in three years in Odisha (commissioning 2021-22)
• ₹ 60 Crores in greenfield TMT plant in Vizag (2 Lakh MTPA, commissioning in 2020-21)

However, as per the FY2021 annual report, both these projects are running behind schedule.

FY2021 annual report, pages 9 – 10:

embarked on a project to process hot rolled coils into cold rolled strips, likely to be located in Kalinganagar… project is expected to be commissioned by 2022-23.

Company proposed an increase in its capacity by 50,000 TPA in special steel mill at Vishakhapatnam. But due to lower demand in the automobile sector and negative effects of the Covid-19 pandemic, the capacity expansion was stopped.

Going ahead, an investor should keep a close watch on the progress of these projects. She should monitor whether the company faces any cost overruns due to delays in executing these projects.

Advised reading: How To Monitor Stocks In Your Portfolio

4) Related party transactions of Beekay Steel Industries Ltd:

While assessing the business of the company, an investor notices that Beekay Steel Industries Ltd is a part of the Beekay promoter group, which has many other companies, which are operating in a similar line of business.

Let us see a few of such transactions between the company and the promoter-group-entities, which had the potential of shifting the economic benefits from the minority/public shareholders to the promoters.

4.1) Amalgamation of promoter-group-entities in Beekay Steel Industries Ltd:

In FY2006, Beekay Steel Industries Ltd merged two promoter group entities, M/s. Radice Ispat (India) Ltd. (RIIL) and M/s. Venkatesh Steel & Alloys Pvt. Ltd. (VSAL) with the Company.

These companies own small steel-producing units. As per the FY2010 annual report, page 25, RIIL has an annual production capacity of 30,000 MT of hot-rolled sections and VSAL has an installed capacity of producing 10,000 MT of bright bars.

Beekay group had acquired these companies in the past. For instance, as per the FY2019 annual report, page 5, the group acquired RIIL in 1981 and commenced production in VSAL in 2003.

Thereafter in FY2006, the promoters sold their shareholding in these companies (RIIL and VSAL) to Beekay Steel Industries Ltd in exchange for shares.

FY2006 annual report, page 10:

In case of RIIL:

• To Equity Shareholders – two equity shares of Rs. 10/- each of the Company against every three equity shares of Rs. 10/- each held by them.
• To Preference Shareholders- one preference share of Rs. 100/- each against every one preference share of Rs. 100/- each held by them.

In case of VSAL:

• To Equity Shareholders – one equity share of Rs. 10/- each of the Company against every six equity shares of Rs. 10/- each held by them.

Such transactions where the promoters sell the stake owned by them in the group entities to the listed company provide opportunities for shifting of economic benefits from the minority/public shareholders to the promoters. Therefore, the investor should always do deeper due diligence for such transactions.

In addition, the example of Beekay Steels & Power Ltd (BSPL) discussed in the above section comes in handy now because, originally, the company highlighted the integrated steel project of BSPL in Barbil, Odisha as if it was one of its own. At that point in time, it made significant investments in the shares of BSPL. However, later on, the company stopped mentioning the project in its annual report and sold its stake in BSPL over the years.

An investor is not certain about the investment done by the company in the project, who were the other shareholders, and to whom it was sold. Whether it was to the promoters or outside parties. Whether the company made any profit on its investment in the project.

4.2) Sale and purchase of goods by Beekay Steel Industries Ltd from promoter-group entities:

While analysing the related party transactions of Beekay Steel Industries Ltd, an investor comes across an entity, AKC Steel Industries Ltd (ASIL), which had frequently had large sale and purchase transactions with the company.

ASIL has the same address as the registered address of (click here): Lansdowne Towers, 4th Floor, 2/1A, Sarat Bose Road, Kolkata – 700 020, West Bengal

In addition, as per the corporate directory, Zaubacorp, ASIL has the following directors who are common with Beekay Steel Industries Ltd (click here):

• Mukesh Chand Bansal
• Manav Bansal
• Bhal Chandra Khaitan
• Shyanthi Dasgupta
• Bharat Kumar Nadhani

In addition, Beekay Steel Industries Ltd owns a 27.95% stake in ASIL (FY2021 annual report, page 38).

The transactions of Beekay Steel Industries Ltd with ASIL were significantly large until FY2016 and thereafter, the size of transactions has declined sharply. The below table highlights the sale and purchase transactions between Beekay Steel Industries Ltd and ASIL during FY2006-FY2016.

From the above table, an investor would notice that during FY2006-FY2016, Beekay Steel Industries Ltd had sold goods for about ₹250 cr to ASIL and had purchased goods of about ₹500 cr from it.

An investor would appreciate that the size of these transactions had been significant when compared to the size of operations of Beekay Steel Industries Ltd.

All these sale/purchase transactions between the listed entity and the promoter-owned entities provide opportunities for shifting economic benefits from the minority/public shareholders to the promoters. If the listed entity sells goods to the promoter-entity at a price lesser than the market price or buys goods at a price higher than the market price, then effectively, these transactions may benefit promoters at the cost of minority/public shareholders.

Therefore, the investor should always do deeper due diligence on the related party transactions between the listed company and the promoter-owned entities.

If an investor attempts to ascertain whether Beekay Steel Industries Ltd and in turn its shareholders have benefited from the investment done by them in ASIL, then in the FY2017 annual report, page 6, the company highlighted to the shareholder that ASIL has not passed on any profits to the company.

The Revenue and the profit earned by the Associate Company have not directly contributed since they have not passed on any profit to the Company earned by them

4.3) Unsecured loans taken by Beekay Steel Industries Ltd from directors and other corporate bodies:

While analysing the debt of Beekay Steel Industries Ltd, an investor notices that the company has consistently had a large amount of unsecured loans from many corporates and directors.

The below table provides a glimpse of the loans outstanding at the end of each year from FY2006 to FY2021, which are taken by the company from directors and corporate bodies.

An investor may notice that consistently, the amount of these loans is between ₹25 cr to ₹50 cr.

Moreover, the annual reports of the company do not disclose the interest rate applicable to these loans. Therefore, an investor is uncertain regarding the benefits of these loans to the company.

An investor may contact the company directly to know the interest rate that Beekay Steel Industries Ltd is paying on these loans. If the interest rate is higher than the rate at which Beekay Steel Industries Ltd can get loans from other lenders like banks/NBFCs, then it may be tantamount to shifting economic benefits from public/minority shareholders to the directors/owners to bodies corporate who have given these loans.

While reading the credit rating report by India Ratings for the company in February 2021, an investor gets to know that the company aims to repay these unsecured loans in the next 2-3 years.

The management has stated that it will repay the unsecured loans over the next two-to-three years.

Going ahead, an investor should keep a close watch on the amount of unsecured loans taken by the company from directors and others. She should contact the company to know the interest rate payable on these loans.

Advised reading: How Promoters benefit from Related Party Transactions

5) Errors in the annual reports of Beekay Steel Industries Ltd:

While analysing the annual reports of Beekay Steel Industries Ltd, an investor notices that some sections of the financial statements contain information, which does not seem to be correct. These might be typographical errors or some other mistakes.

Let us see a few such instances.

5.1) Income tax reconciliation table does not reconcile the income tax:

While assessing the FY2020 and FY2021 annual reports, an investor notices that the income tax reconciliation tables, which are supposed to reconcile the differences in the standard corporate income tax and the tax payout rate in the profit and loss statement, do not reconcile it.

Ideally, the income tax reconciliation table will start with the profit before tax. It will then calculate what would have been the tax payout at the standard corporate tax rate. Thereafter, the company provides details of all the adjustments to the tax payout in the form of tax incentives, income to be taxed at different rates, prior period items etc. and then shows the calculations to arrive at the actual tax payout shown by the company in the profit and loss statement.

This is the purpose of the income tax reconciliation table in the annual report.

Let us now see the income tax reconciliation table in the FY2021 annual report, pages 140-141, which contains the calculation for both FY2020 and FY2021 and observe whether the table reconciles the tax calculations with the actual tax payout shown by Beekay Steel Industries Ltd in its profit and loss statement.

From the above table, an investor would notice that the income tax reconciliation table does not reconcile the tax payout for both, FY2020 and FY2021.

For FY2020, the income tax reconciliation table calculates an income tax payout of ₹24.57 cr whereas, in the profit and loss statement, Beekay Steel Industries Ltd had shown an income tax payout of ₹14.51 cr, which is a big difference.

For FY2021 as well the data does not reconcile. The income tax reconciliation table calculates an income tax payout of ₹27.21 cr whereas, in the profit and loss statement, Beekay Steel Industries Ltd had shown an income tax payout of ₹27.92 cr.

An investor may contact the company directly to understand the income tax reconciliation calculations and seek clarifications about the data presented in the annual report. She may get clarity on whether these are typographical errors or some data is missing in the annual report, which the company should have provided but missed.

5.2) Typographical error in the FY2007 annual report of Beekay Steel Industries Ltd:

In the FY2007 annual report, an investor notices a typographical error in the directors’ report segment where the company has elaborated its financial performance for the year to its shareholders.

As per the FY2007 annual report, page 6, the company reported a sales turnover of ₹330.67 cr in FY2007 against a sales turnover of ₹328.88 cr in FY2006. Therefore, in FY2007, the company achieved a higher turnover. However, while describing the financial performance, it described that it reported a lower turnover.

FY2007 annual report, page 6:

PERFORMANCE REVIEW: Your Company has achieved a lower turnover of Rs.33,067.95 lacs against Rs.32,888.65 lacs during the previous.

On another occasion, in the FY2012 annual report, while providing the status of the TMT rolling mill project at Parwada, the company mentioned that its trial runs would commence in the third quarter of FY2012 (2011-12). However, an investor would note that reading this information in the FY2012 annual report means that FY2012 is already over.

FY2012 annual report, page 20:

The constructions of factory sheds and other civil structures like boundary wall, office building, canteen, staff room, security room, stores etc. have already been completed by incurring Rs.22.61 crores till 31-03-2012 and trial run will commence by the end of 3rd quarter of 2011-12.

Similarly, while providing details of disputed and undisputed statutory dues in the audit report, the company seems to have mixed up whether the pending dues are disputed or undisputed. The same dues, which are pending for a few years, are initially shown as undisputed but then described as disputed.

If an investor reads the audit reports, then she notices that sections of FY2016 and FY2017, the income tax dues relating to FY2011 amounting to ₹1,156,430/- are shown as undisputed in FY2016 and FY2017 annual reports. Similarly, the income tax dues relating to FY2014 for ₹267,322/- are shown as undisputed until the FY2017 annual report.

FY2017 annual report, page 54:

According to the information and explanations given to us, there were undisputed amount payable in respect of Income Tax relating to F.Y. 2010-11 amounting Rs. 11,56,430/- and Rs. 2,67,322/- relating to F.Y 2013-14 which have remained outstanding as at 31st March, 2017 for a period of more than six months from the date they become payable.

However, from the FY2018 annual report onwards, these dues are shown as disputed.

FY2018 annual report, page 72:

According to the information and explanations given to us, there were disputed amount payable in respect of Income Tax relating to F.Y. 2010-11 amounting ₹11,56,430/- and ₹2,67,322/- relating to F.Y 2013-14 which have remained outstanding as at 31st March, 2018 for a period of more than six months from the date they become payable.

As per the FY2021 annual report, page 86, these dues have stayed unpaid until FY2021.

An investor may contact the company directly to understand whether the above-mentioned dues are disputed or undisputed. If these are disputed, then why were they mentioned as undisputed until FY2017? Moreover, if they are undisputed, then why are they unpaid until FY2021?

Advised Reading: Understanding the Annual Report of a Company

The Margin of Safety in the market price of Beekay Steel Industries Ltd:

Currently (October 24, 2021), Beekay Steel Industries Ltd is available at a price-to-earnings (PE) ratio of about 5.9 based on consolidated earnings of the last 12 months (July 2020-June 2021). An investor would appreciate that a PE ratio of 5.9 offers a margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.

However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, which takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.

In the absence of any strength in the business model of the company, even a low PE ratio of the company’s stock may be sign of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.

• 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
• How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
• Hidden Risk of Investing in High P/E Stocks

Analysis Summary

Overall, Beekay Steel Industries Ltd seems a company, which has grown its sales at a growth rate of 5% year on year for the last 10 years. However, this growth journey has not been smooth for the company. It has witnessed periods of declining sales and profit margins indicating the impact of the cyclicity of the steel industry. The company is a price taker that has to sell its products at the market price and does not have pricing power. As a result, the company has attempted to improve its profit margins by way of reducing its operating costs like power & fuel costs.

Beekay Steel Industries Ltd is a secondary steel producer and both its raw material costs as well as final product prices move together. In addition, it works as a contractor for large steel producers where it takes steel billets from them and converts the billets into TMT bars etc. for them. For its work, it gets fixed conversion margins. As a result, Beekay Steel Industries Ltd has reported less volatile profit margins than primary steel producers.

The company’s operations are working capital intensive as it produces many different types of products for its customers and has to keep an inventory for all of them. In addition, it follows a strategy of buying raw materials when prices are low. As a result, it carries significant inventory, which exposes it to the risk of losses on inventory valuations when steel prices decline.

In recent years, the company has focused on expanding sales, which are to retail consumers by establishing a marketing team, and distribution channel, creating a brand and spending on advertising. Because of the intermediary distribution channel, it seems that more money is being stuck in the working capital.

The business of the company generally requires a lot of funds in working capital and in the past, the company had to rely on higher borrowings, equity dilution, and unsecured loans from its directors and other related parties to meet its needs. It is only recently when the steel industry turned into upcycle that the company started producing a lot of surplus cash and has reduced its debt significantly.

The company’s project execution history leaves scope for improvement because many of its projects saw delays in completion and cost overruns. At times, when the company was about to complete a project, then it realized that it has become financially unviable and had to stop the project. At times, it could not meet the conditions put by govt. authorities and suffered losses.

The company’s promoters seem to have put in place a succession plan where the next generation of promoters is actively involved in the management of the company. The promoters also have many related party transactions with the company. There have been instances where they sold their stake in the group entities to Beekay Steel Industries Ltd. At times, the company entered into large sale and purchase transactions with promoter-group entities. In addition, there have been many financial lending transactions between the promoters and the company. All these transactions increase the risk for the public/minority shareholders.

The annual reports of the company, at times, have certain information, which seems erroneous like the tax payout reconciliation table that does not reconcile the tax payout. It has included the changes in the short-term borrowings into cash flow from operating activities (CFO), which should ideally be included in cash flow from financing activities (CFF). An investor may seek clarifications from the company about the same.

Going ahead, the investor may focus on the sales growth and profit margins of the company to assess the impact of the cyclicity of the steel industry. She may focus on the inventory and receivables of the company to assess whether the company is managing its operations efficiently. She may focus on the progress of the capacity expansion projects being executed by the company to monitor time and cost overruns. She may focus on the related party transactions of the company with its promoters so that she can analyse the instances where economic benefit may be transferred from the minority shareholders to the promoters.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views on Beekay Steel Industries Ltd. However, investors should do their own analysis before making any investment-related decisions about the company.

You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks”

I hope it helps!

Regards,

Dr Vijay Malik

P.S.

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Disclaimer

Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.