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Sarda Energy and Minerals (SEML IN, Mkt Cap US$208m, CMP 232, Buy)

Net sales increased 7% QoQ to Rs.2.1b. Revenues from steel division grew 10% QoQ to Rs.1.1b due to higher steel volumes. EBITDA increased 27% QoQ to Rs.205m, well below our estimates of Rs.378m due to poor performance from Ferro Alloy division.Standalone adjusted PAT of Rs.55m (down 67% YoY) vs loss of Rs.4m in 2QFY11. Reported standalone PAT of Rs.63.4m included Rs.12m of forex gains.

Pellet plant has failed to operate satisfactorily even after 2 years of operations and numerous modifications thereby paying hugely by way of loss of opportunity. The spread between cost of pellet and market price is too big to ignore operational failure for such a long period. This has raised concerns on operational and execution skills.

We have cut FY11 EPS by 38% to Rs.11.6 to factor below expected results. We have also incorporated lower pellet production and higher raw material costs in our FY12 estimates. Thus, we cut FY12 EPS by 30% to Rs.25.3 from Rs.36.5 earlier.

The stock is trading at P/E of 10.8x FY12E and EV/EBITDA of 10.1x FY12E. We downgrade the stock to Neutral.