By Steven Ralston, CFA
On November 8, 2013, after the close, India Globalization Capital, Inc. (NYSE MKT:IGC) reported financial results for the second fiscal quarter of 2014 ending September 30, 2013. Revenues declined 16.1% to $1.13 million from $1.35 million in the comparable quarter last year. The revenues were generated from iron ore trading as the mines in India remain closed and the three beneficiation plants in Inner Mongolia were not operating during the quarter. However, subsequently, one of the three plants commenced beneficiation operations in mid-October.
Selling, General and Administrative (SG&A) expenses were higher than expected increasing 39.0% to $474,951 (representing 41.9% of sales versus 25.3% of sales in last year’s comparable quarter), primarily due to the expense associated with the grant of ESOP shares. Other income swung from a gain of $204,375 to a loss of $114,577, primarily from the foreign exchange re-measurement of certain intercompany receivables between the US holding company and the company’s foreign subsidiaries as the Indian rupee depreciated 11.3% against the USD. The average INR/USD exchange rate declined from 51.91 (0.0193 USD) during the second fiscal quarter of 2013 to 58.55 (0.0171 USD) during the second fiscal quarter of 2014. The net loss attributable to shareholders was $615,187 (or $0.09 per diluted share) compared to a loss of $142,708 (or $0.02) in the second quarter of fiscal 2013.
India Globalization is an infrastructure materials company, primarily through the beneficiation of iron ore in Inner Mongolia for delivery of high-grade iron ore to steel mills in China. The company is positioned to benefit from the high-grade iron ore demands of the steel industry in China. Last month’s report that the Chinese economy grew 7.8% in the third quarter (up from 7.5% in the prior quarter) allayed fears that China was heading for an abrupt slowdown. As a result, iron ore prices have held steady in the $130-$135 per metric ton range.
We reaffirm our Outperform rating. Our price target is $2.70, which is based on an estimated share value of attributable resources and utilizes the current price of high-grade iron ore. Our calculation of the per-share value of attributable resources is based on the estimated value of the iron ore deposits, adjusted for balance sheet items, namely working capital and debt. The assessment of the iron ore properties is determined by adjusting the value of current in situ resources for the expected recovery rate, mining & processing costs and royalties. Based on our valuation of attributable resources, our target for India Globalization’ stock is $2.70.
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By Steven Ralston, CFA