I have studied VSSL (Competitor of Sunflag in specialty steel segment) and I have shared my work on the forum.
Sunflag iron lacks disclosures and I think this is the main reason for the stock to trade cheap (if you consider the market value of investments held by Sunflag). I wish to share my research on the Company so that the management can answer few questions about their business in future, conduct concalls and share presentations. Following is my research on Sunflag
About Sunflag Group:
- 1930’s: The Group was founded by Satyadev Bhardwaj. He identified a need for quality garments and textiles in East Africa and established the first textile plant in Kenya to serve the local market.
- 1950’s: The textile operation in Kenya became one of the leading companies in the country. Satyadev’s three sons; Bhushan, Vijay and Ravi started to take an active role in the business. The operations included knitting, dyeing and finishing, and garment making.
- 1960’s: The Group embarked on its first expansion outside Kenya with investment in “Nigeria”. The potential was huge with a desperate need for quality garments and textiles for a rapidly expanding population.
- 1970s: The founder handed over the running of the business to his sons. The Group expanded into Tanzania and embarked on an ambitious program of vertical integration adding spinning and weaving to all its operations. Professional management was brought in to run operations with the family concentrating on policy and strategy.
- 1980’s: Despite political and financial difficulties in Africa the Group continued to expand its textile operations in Kenya, Tanzania, and "“Nigeria”. The Group diversified in India with an integrated steel plant, invested widely in property, and established a filament yarn-making plant in Thailand.
- 1990s: The Group consolidated its worldwide operations and diversified into the healthcare and power generation industry. In India, the Group invested in a hospital a Medical Research Centre, and a power generation plant. Towards the end of the decade, the Group entered the North American market.
- 2000s: The North American operations were expanded with additional manufacturing units. The African units were modernized and steel manufacturing started in “Nigeria”. The steel mill in India was expanded.
- The future: The Group has a strong management team and continuity is assured. The Group plans aggressive expansion of its manufacturing operations in India, and investments in Eastern Europe and across South America.
- Mr. Bhardwaj’s legacy is the transformation of the company he founded into a highly profitable and dynamic industrial global conglomerate.
Sunflag Iron And Steel Co Limited
- Sunflag Iron and Steel Company Limited ( ) has set up a ‘state of the art’ Integrated Steel Plant at Warthi, Bhandara Road in the State of Maharashtra, to produce high quality Special Steels with an installed capacity of 6.68 Lakh MTPA for rolled products.
- Product: Supplier in Flat Bars, Round Bars, Bright Bars, and Wire Rods of Alloy Steel, Spring Steel, Ball Bearing Steel, and Stainless Steel and captured a better position in these market segments.
- Supplying to various customers in South East Asian, North American, and South American Countries, East African Countries, Europe, Japan, Taiwan, China, Turkey, South Korea, and Vietnam.
- SISCL has been collaborating with Daido Steel Co. Ltd (Japan’s leading specialty steel producer), since November 2010 which also has an equity stake in SISCL to the tune of 10.00% as of September 30, 2023. The association with Daido helps SISCL in the improvement of production Processes and Product Quality, Development of New Grades, and Localization of Steel by the Automobile OEMs. SISCL has its manufacturing facility located at Warthi, Bhandara Road (Maharashtra)
Who is Daido?
- Daido Steel is one of Japan’s major specialty steel makers. Initially founded in 1916 as Electric Steel Manufacturing Co., Ltd, the firm became Daido Steel in 1976 after a reorganisation and having merged with three companies. Currently, comprising of the parent company and 62 consolidated subsidiaries, Daido operates five businesses:
- Specialty Steel,
- High-Performance Materials and Magnetic Materials,
- Parts for Automobiles and Industrial Equipment,
- Engineering, and
- Trading and Service.
- According to the research conducted by the Japan Metal Daily on FY20 crude steel production volumes, Daido Steel was ranked 6th overall but was ranked 3rd among electric furnace steel makers
- Bearing steel: FY20 domestic production volume fell 18.2% YoY to 703,000 tonnes due to a drop in demand from the automobile use and inventory adjustment
- Tool Steel: FY20 domestic production volume fell 22.8% YoY to 161,000 tonnes. Steel bar and wire products combined occupy 50% of the market. The main user is the auto industry – steel sheets used as a raw material for auto components, and steel bars are used in die casting, jigs, and tools
- Structural Alloy Steel (or mechanical constructure steel): Structure steel is also mainly used by the auto industry. FY20 domestic production volume was approx. 3.0mil tonnes (-19.8% YoY).
- Spring Steel: The total production volume in FY20 was 309,000 tonnes (-16.6% YoY).
Settlement through arbitral tribunal – Investment holdings of 6 crore shares (CMP 690) – 900 crores of settlement awarded amount has grown to 4x (> 4000cr)
- 22nd April 2022 in the matter of arbitration between Sunflag Iron & Steel Company Limited (“Sunflag”) and Lloyds Metals and Energy Limited (“Company”). The matter in a nutshell is that the Company and Sunflag from the year 2004 have been entering into various understandings and contracts to have joint and equal control on the iron ore mine of the Company and sharing of the iron ore extracted in the ratio of 60% and 40% respectively. However, for reasons not attributable to both parties the said arrangements could not take place and the mining operations could not be commenced. During this period Sunflag had advanced funds to the Company towards the operation and commencement of the mine. In the year 2016, the Company started mining operations with minimal production; however, the Company could not share the iron ore extracted with Sunflag for various reasons.
- The Company and Sunflag were engaged in discussions to resolve the issue amicably but the same could not be resolved. Sunflag then invoked the arbitration clause as provided in documents and initiated arbitration proceedings. After hearing the arguments of both parties, the learned Arbitrator passed an award on 22nd April 2022. The gist of the award is as follows: The Company is liable to pay Rs. 900 crores to Sunflag (i.e., Rs. 312 crores on account of refund of advance along with accrued interest and the balance Rs. 588 crores as full settlement of all other claims).
- Given the amount being large, the Company proposed to settle the said liability, subject to the approval of shareholders and by applicable laws, by issuing six crores (6,00,00,000) Zero interest Optionally Fully Convertible Debentures (“OFCD”) which will settle the entire liability based on proposed issue price of Rs. 150/- (Rupees One Hundred and Fifty only). The OFCD would be converted not before 9 months but, not later than 18 months at a conversion ratio of 1:1.
- As per the settlement through the arbitral tribunal concerning dispute settlement with Lloyds Metals and Energy (LMEL), SISCL had been allocated optionally fully convertible debentures (OFCD) of LMEL in April 2022. The company exercised the OFCD on March 16, 2023, resultantly, the company now holds an 11.89% stake in LMEL.
Manufacturing
Manufacturing facilities like Sponge Iron Plant, Mini Blast Furnace, Sinter Plant, Captive Power Plant, Steel Melt Shop, Continuous Casting Machine with EMS facility, Ingot Casting and Rolling Mills. Modern annealing facilities include a Bell annealing furnace, hardening and tempering, Electric annealing furnace. Bright Bar facilities like peeling machines, Combined drawing machines, Wire drawing units, coil-to-bar peeling machines, polishing & grinding line,s and heat treatment facilities are available for value addition. Further, Ultramodern inspection and testing facilities which include Phased Assay Auto Ultrasonic testing machine, Magna flux leakage test, Eddy current test, MPI and mobile / XRF Spectrometer, Anti mix testing for ensure best quality.
Corporate governance
- 6 independent and 6 non-independent directors
Management / Key man
- Pranav Bhardwaj
- Mr. Pranav Bhardwaj, age 49 years, is a British National and Person of Indian Origin. He has graduated as B.Sc. majoring in Chemistry and Business Management (Joint Honors Degree) from the world-renowned Imperial College of London
- Pranav Bhardwaj, Managing Director (MD), is second generation entrepreneur, responsible for overall in charge of running the business affairs of the company
- He is Chairman of ASPA (the Alloy Steel Producers Association of India) which was established in 1968, with the principal objective of promoting trade, commerce and manufacture connected with alloy steel in the country.
- Other members of ASPA include Sachit Jain (MD, VSSL), RK Goyal (MD, Kalyani Steel), V M Mashruwala (CEO, Mukand Sumi Special Steel)
- Age 49
- Executive directors of the Company are above 70 years age
- Top executive’s salary is around 5% of PAT
Vision
- Super Alloy Steel manufacturing facility has been commissioned and now it shall be able cater to requirements related to Aircraft Parts, Defence, Space Vehicle, Nuclear Reactor, Super-critical Power Plants, Industrial and Vehicle Gas Turbines, Petro-Chemical Plants and other High Temp and Corrosive Applications. This will enable the Company to reduce its dependency on automotive and auto ancillary industries and create opportunity for expansion and foray in new markets.
- Besides, the Company is also looking forward to acquiring coal and iron ore mines to increase its business volume.
- Capacities for new products: Sunflag has added facilities like Electro Slag Refining (ESR); Vacuum Induction Melting (VIM) and Vacuum Arc Remelting (VAR), which will cater to Aerospace and Defence.
- Installation of Super Alloy Steel making:
- ESR-II (1.8 T Capacity) - Successfully commissioned
- ESR-I (22 T Capacity) - Successfully commissioned
- Vacuum Induction Melting (6.5 T Capacity) -Successfully commissioned
- Vacuum Arc Remelting (18 T Capacity)- Successfully commissioned
- Installation of Super Alloy Steel making:
- Other ongoing projects: The Company during the year commissioned its Blooming mill and Forging Plant which are now operating at their minimum capacity in view of operational requirements for stabilization.
- Installation of Solution Annealing Furnace
- Installation of new Pickling Plant & IVD
- Installation of Coil Spheroidizing Furnace with new shed
- Installation of LRF-3
- 4th Strand in CCM-1
- Installation of Abrasive Saw Machine in BSM
- Installation of Shot Blasting Machines for Rebar and Coils
- The Company during the year commissioned its Blooming mill and now operating at its minimum capacity in view of operational requirement for stabilization. Few approvals from customers for super alloy products have been received and accordingly the Company is now developing various grades of steel to cater to these customers
- Ultramodern Blooming Mill, can cater to higher section requirements for Automobile, Heavy Engineering, Railways, Defence, and Aerospace requirements with a higher reduction ratio. Further, with Bottom poured ingot facilities, is catering to special requirements of Railways and Defence for critical / core applications.
- Innovations in progress: Sunflag is actively involved in development activities for import substitution of special steel under the guidance of the Ministry of Steel, Government of India. Sunflag is developing various Special Steels that are presently not being made in India. The grades developed are in bearing grades for ball application, soft magnetic ferritic stainless steel, particularly duplex, super duplex stainless steel, precipitation hardening stainless steel, tool steels, and high-speed steels.
Clients
- Superalloy category: Sunflag is an approved vendor to VSSC (Vikram Sarabhai space Center), LPSC (Liquid Propulsion Systems Centre for ISRO), HAL, and GE Gas & Power (GE Gas Power is a world leader in gas power technology, services, and solutions) and has received orders for supply of high-quality Aero steels & Inconel’s.
- Super alloys:
- Annual import of super-alloys in the last three years averaged ₹1,374 crore, while for titanium alloys it was ₹618 crore and for speciality steel around ₹3,500 crore.
Sources:
Annual reports of the Company
Disclosure: Invested at lower levels
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