Tata Sponge soaked in gains on Wednesday after the company on Tuesday cleared a capacity expansion programme.

The scrip of the sponge iron maker gained 2.4% on BSE to Rs 35 in early noon trades. The scrip was trading at the day's high then. Volumes were thin with 1,450 shares changing hands on BSE.

The stock was rising on a sustained basis for weeks, but then fell, after recovering from an April 2002 low of Rs 15-16. Still, the stock is currently trading at more than double the April 2002 low of Rs 15-16. The average daily volume in the stock in the last one year (till 14 February 2003) stands at 31,170 shares.

Today's rise in Tata Sponge Iron comes after the company's board of directors on Tuesday cleared the expansion of its sponge iron manufacturing capacity through the installation of the third kiln having a capacity of 1,50,000 tonnes per annum. This will raise capacity from 240,000 tonnes to 390,000 tonnes. The estimated cost of expansion is pegged at Rs 67.35 crore. The project will be financed by borrowings and retained earnings.

A firmness in the entire steel sector as a result of strengthening steel prices (including sponge iron prices) has been witnessed for quite some time now. Sponge iron is a raw material in the making of steel.

Most sponge iron makers like Tata Sponge and Jindal Steel and Power came out with buoyant Q3 results on the back of prices and demand growth.

Tata Sponge Iron reported an 11% increase in sales to Rs 31.30 crore in the quarter ended 31 December 2002 over the corresponding previous quarter. Margins zoomed by 1600 basis points to 16.3% in the quarter ended 31 December 2002 from negative 0.3% in the corresponding previous quarter. As a result, operating profits were at Rs 5.11 crore in the quarter ended 31 December 2002 as against a loss of Rs 0.10 crore in the corresponding previous quarter.

However, one cause for concern, according to analysts, is that TSIL has not been able to aggressively cut down its debt costs unlike other Tata group companies. TSIL's interest charges declined 12% in Q3 to Rs 0.82 crore. In FY 2002, interest charges fell 17.1% to Rs 4.31 crore from Rs 5.20 crore. The extent of borrowings that TSIL could use for the proposed expansion is not known but it could add to interest costs.

International sponge prices continue to rule firm and the trend in international prices will be the key to TSIL's performance.

The Tatas are consolidating their holding in Tata Sponge. The promoter's stake in the company has been progressively increasing, though, at a snail's pace. The promoter's stake increased from 39.74% in December 2001 to 40.39% in Mar 2002 and further to 40.97% in December 2002.

At the current Rs 35, TSIL trades at a PE multiple of 3.9 based on its nine-month April-December 2002 annualised EPS of Rs 8.80. TSIL has a low equity base of Rs 15.40 crore.