Initiating Coverage | Steel Please refer to important disclosures at the end of this report Bhushan Steel (BSL), India’s leading value-added steel producer, has extended its presence in the steel value chain with the commissioning of its 1.9mn tonnes HR steel capacity. We expect BSL to register 26.2% CAGR in volumes over FY2010-15E, on completion of Phase-III expansion by October 2012. This would be sweetened by EBITDA/tonne increasing to US $331 in FY2011E. Being one of the first entrants in auto grade steel in India, BSL with its strategic relationships with OEMs and growing investments by foreign OEMs would witness lower demand risks and uncertainties. With debt/equity expected to decline from 3.3x in FY2009 to 2.0x in FY2012E, we Initiate Coverage on the stock with a Buy recommendation and Target Price of Rs1,979, valuing the stock at 6.5x FY2012E EV/EBITDA. At our Target Price, the stock would trade at 1.2x FY2012E EV/IC. Entering a new orbit: With the commissioning of its new HR plant, BSL has moved from being a steel converter to a leading primary producer of steel, extending its presence in the steel value chain. The company is also expanding its HR capacity by 2.5mn tonnes by October 2012E, taking its total HR capacity to 4.4mn tonnes. Volume growth sweetened by increasing EBITDA/tonne: With the commissioning of BSL's Phase-III expansion plan, we expect sales volume to grow at a 26.2% CAGR over FY2010-15E, much higher than peers , which are expected to register 10-14% CAGR in volumes. Despite BSL not having raw material linkages, we expect EBITDA to register 42.3% CAGR over FY2010-12E through a combination of BF-EAF technology and low conversion cost. Thus, BSL is expected to earn EBITDA/tonne of US $331 in FY2011E and US $345 in FY2012E. Top supplier of niche auto grade products: Over the years, BSL has been shifting its customer base from the trade segment to OEMs/exports. We believe growing investments by foreign OEMs and the strategic alliance with Sumitomo Metal complement its OEM relationships and will likely help BSL mitigate demand risks. May 28, 2010 Bhushan Steel BUY Bullish on the Margin curve CMP Rs1,396 Target Price Rs1,979 Stock Info Shareholding Pattern (%) Sector Steel Market Cap (Rs cr) 5,929 Beta 1.6 52 Week High / Low 1,856/506 Avg. Daily Volume 131390 Face Value (Rs) 10 BSE Sensex 16,863 Nifty 5,067 Reuters Code BSSL.BO Bloomberg Code BHUS IN Promoters 69.2 MF / Banks / Indian FIs 24.8 FII / NRIs / OCBs 2.2 Indian Public / Others 3.8 Abs. (%) 3m 1yr 3yr Sensex 2.6 18.0 17.1 BSL (12.7) 119.5 110.2 Investment Period 12 Months Pooja Jain +91 22 4040 3800 Ext: 311 Email: [email protected]Source: Company, Angel Research Key Financials Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E Net Sales 4,943 5,641 6,290 7,131 % chg 18.3 14.1 11.5 13.4 Net Profit 421 829 968 1,259 % chg (0.6) 96.9 16.7 30.0 EPS (Rs) 99.2 195.3 228.0 296.4 OPM(%) 20.8 25.7 37.5 41.1 P/E (x) 14.1 7.1 6.1 4.7 P/BV (x) 2.4 1.8 1.4 1.1 RoE (%) 20.8 29.2 26.0 26.1 RoCE (%) 8.7 10.0 12.6 14.0 Net Debt/Equity 3.3 3.1 2.5 2.0 EV/IC (x) 1.3 1.2 1.1 1.0 EV/EBITDA (x) 13.5 11.0 7.0 5.7 Paresh Jain +91 22 4040 3800 Ext: 348 Email: [email protected]
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Initiating Coverage | Steel
Please refer to important disclosures at the end of this report
Bhushan Steel (BSL), India’s leading value-added steel producer, has extended itspresence in the steel value chain with the commissioning of its 1.9mn tonnes HRsteel capacity. We expect BSL to register 26.2% CAGR in volumes overFY2010-15E, on completion of Phase-III expansion by October 2012. This wouldbe sweetened by EBITDA/tonne increasing to US $331 in FY2011E. Being one ofthe first entrants in auto grade steel in India, BSL with its strategic relationships withOEMs and growing investments by foreign OEMs would witness lower demandrisks and uncertainties. With debt/equity expected to decline from 3.3x in FY2009to 2.0x in FY2012E, we Initiate Coverage on the stock with a Buy recommendationand Target Price of Rs1,979, valuing the stock at 6.5x FY2012E EV/EBITDA.At our Target Price, the stock would trade at 1.2x FY2012E EV/IC.
Entering a new orbit: With the commissioning of its new HR plant, BSL has movedfrom being a steel converter to a leading primary producer of steel, extending itspresence in the steel value chain. The company is also expanding its HR capacityby 2.5mn tonnes by October 2012E, taking its total HR capacity to 4.4mn tonnes.
Volume growth sweetened by increasing EBITDA/tonne: With the commissioningof BSL's Phase-III expansion plan, we expect sales volume to grow at a 26.2%CAGR over FY2010-15E, much higher than peers , which are expected to register10-14% CAGR in volumes. Despite BSL not having raw material linkages, weexpect EBITDA to register 42.3% CAGR over FY2010-12E through a combinationof BF-EAF technology and low conversion cost. Thus, BSL is expected to earnEBITDA/tonne of US $331 in FY2011E and US $345 in FY2012E.
Top supplier of niche auto grade products: Over the years, BSL has been shiftingits customer base from the trade segment to OEMs/exports. We believe growinginvestments by foreign OEMs and the strategic alliance with Sumitomo Metalcomplement its OEM relationships and will likely help BSL mitigate demand risks.
May 28, 2010
Bhushan Steel BUY
Bullish on the Margin curve CMP Rs1,396Target Price Rs1,979
BSL is a leading player in India producing value-added steel products used in theautomobile and white goods sectors. The company offers a superior product mix inthe value-added segment as compared to large players like Tata Steel (India), SAIL,JSW Steel and Essar Steel. In addition to offering galvanized steel, cold rolled (CR)steel, galume, color-coated steel - which the large players also offer - BSL also offersprecision pipes, hardened and tempered cold rolled steel strips (H&T) and high tensilesteel strappings (HTSS).
BSL has undertaken an expansion plan in Orissa to increase its foothold in the industry.
The project is being executed in three phases, with Phase-I already commissioned in
FY2007 and Phase-II commissioned recently. Post the completion of Phase-II, the
company's primary steel-making capacity has increased to 2.2mn tonnes. Moreover,
commissioning of the HR capacity has extended BSL's presence in the steel value
chain, from being a converter to a primary steel producer. Phase-III is currently under
execution and is expected to come on stream by 3QFY2013E. On completion of
Phase-III, BSL's primary capacity will increase to 4.7mn tonnes, making it one of the
leading steel producer.
BSL has moved from being a converterto a primary steel producer
Source: Company, Angel Research
Exhibit 2: Existing Capacity
Source: Company, Angel Research
Exhibit 3: Total estimated capacity by FY2015E
Source: Angel Research; *Partly integrated; ** Post commissioning of the Phase-II expansion
Exhibit 1: BSL extending its presence in the steel value chain
May 28, 2010 3
Bhushan Steel | Initiating Coverage
Under Phase-II, BSL is also setting up a 300MW power plant under Bhushan Energy,
where it holds a 26% stake. While 150MW of the power plant was commissioned in
June 2009, the remaining is likely to get commissioned by June 2010E. The transfer
pricing for the power plants under Bhushan Energy is fixed at Rs4.0 per unit.
BSL is expanding its color coated capacity by 80,000 tonnes at Sahibabad and is
setting up a 0.5mn tonne ERW plant at Khopoli. The total project cost of the color-
coated and ERW plant is estimated to be Rs150cr and Rs1,200cr, respectively. The
color-coated plant is expected to come on stream by June 2010E and the ERW plant
is likely to be commissioned by FY2013E. The company is also in the process of
setting up power plants of 185MW (under Bhushan Energy) and 197MW (under BSL),
which are likely to be commissioned by March 2012E and October 2012E, respectively.
However, the financial closure for the 197MW power plant is yet to be achieved and
the expected cost is likely to be Rs960cr.
Source: Company, Angel Research; * Under Bhushan Energy
Exhibit 4: Orissa project details (tonnes) Phase I Phase II Phase III Total
Sponge iron 680,000 680,000 1,360,000
Hot metal 1,269,000 2,900,000 4,169,000
Billets 340,000 340,000
Slabs 2,000,000 3,000,000 5,000,000
HR coils 1,900,000 2,500,000 4,400,000
Coke oven 850,000 1,200,000 2,050,000
Sinter plant 1,670,000 3,810,000 5,480,000
Power (MW) 110 300* 410
Completion date FY2007 Q1FY2011E Q3FY2013E
Total Cost (Rs cr) 1,500 5,500 8,500 15,500
Orissa expansion plan executed in
various stages
Expanding its color coated capacity
and setting up an ERW plant
Volume growth sweetened by increasing EBITDA/tonne
BSL currently has a CR capacity of 1.0mn tonnes, and the total primary steel capacity
after completion of Phase-II has increased to 2.2mn tonnes, which is expected to
increase to 4.7mn tonnes post the Phase-III expansion. With the commissioning of the
Phase-III expansion plan, we expect BSL's sales volume to grow at a 26.2% CAGR
over FY2010-15E, much higher than its peers, including SAIL, Tata Steel (India) and
JSW Steel, which are expected to register volume growth at 10-14% CAGR. We expect
BSL's sales volume for FY2011E and FY2012E to be 1.6mn tonnes and 1.9mn tonnes,
respectively; post the Phase-III expansion plan, sales volume will likely increase to
4.1mn tonnes and 4.6mn tonnes in FY2014E and FY2015E, respectively.
Sales volume to grow at a 26.2% CAGR
over FY2010-15E
Source: Company, Angel Research; * Under Bhushan Energy
Despite BSL not being integrated, cost of production is expected to be low due to a) itsunique combination of BF-EAF technology to produce steel and b) lower conversioncosts. The usage of BF-EAF technology will result in lower coal costs. While the blastfurnace requires coking coal, the electric arc furnace requires thermal coal, which issignificantly cheaper than coking coal. This will help keep raw material prices undercheck and in line with its non integrated peers like JSW Steel.
The technological advantage is also accompanied by low conversion cost. ForFY2011E, we expect BSL's conversion cost to be around US $107/tonne as comparedto other players such as SAIL, Tata Steel (India) and JSW Steel, which are likely to incura cost of US $130-330/tonne.
Lower conve rsion cost andtechnological advantage to loweroverall cost
Source: Company, Angel Research
Exhibit 6: Sales volume growth to jump in FY2014E Exhibit 7: Highest volume growth amongst peers
Source: Company, Angel Research
With the recent commissioning of the Phase-II project, BSL's upstream sales volume is
expected to increase to 0.82mn tonnes in FY2012E from 0.27mn tonnes in FY2010,
as excess HR coils are sold in the open market (approx 0.5mn tonnes in FY2012E).
With no significant capacity being added downstream, sales volume is expected to be
flat at 1.07mn tonnes in FY2012E. The flat segment continues to dominate the
company's product mix, increasing to 78.2% in FY2012E from 72.0% in FY2010;
while the long portfolio as a percentage of total sales volume is expected to decline to
21.8% in FY2012E from 28% in FY2010.
Excess HR coils to be sold in the open
market from FY2012E
Source: Company, Angel Research
Exhibit 8: Upstream operations gaining steam Exhibit 9: Product profile skewed towards the flat segment
Source: Company, Angel Research
May 28, 2010 5
Bhushan Steel | Initiating Coverage
Source: Angel Research; Note: FY2011E numbers
Exhibit 10: Lower coal costs... Exhibit 11: along with lower conversion cost...
Source: Angel Research; Note: FY2011E numbers
Consequently, BSL is expected to earn an EBITDA/tonne of US $331 and US $345 in
FY2011E and FY2012E, respectively, which is likely to be at the higher end of the
industry curve, whereas SAIL, Tata Steel (India) and JSW Steel are expected to register
an EBITDA/tonne of US $170-300.
We expect BSL’s EBITDA to grow at a 42.3% CAGR from FY2010-12E - much higher
than its peers such as SAIL, Tata Steel (India) and JSW Steel which are expected to
grow at ~9-23% CAGR over FY2010-12E.
Source: Company, Angel Research
Exhibit 12: ...leading to higher EBITDA/tonne. Exhibit 13: EBITDA/tonne vis-à-vis other players
Source: Company, Angel Research
May 28, 2010 6
Bhushan Steel | Initiating Coverage
Exhibit 14: BSL to register higher EBITDA growth
Source: Company, Angel Research
Top supplier of niche auto grade products
BSL is a dominant supplier to the auto and white goods sectors. The company has its
manufacturing facilities at Shahibabad (Uttar Pradesh) and Khopoli (Maharashtra),
where it enjoys close proximity to its customers. At Sahibabad, BSL has a dedicated
service centre for large OEM customers. The company’s Khopoli facility is well
connected to ports, facilitating smooth export operations.
Over the period, BSL has shifted its customer base from the trade segment to OEMs/
exports. Consequently, the company's share in the OEM segment improved to 66% in
FY2009 from 55% in FY2003, while share in the trade segment declined to 7% in
FY2009 from 33% in FY2003. Moreover, contracts with OEMs are typically quarterly,
semiannual or annual; this reduces BSL's exposure to volatility in the spot market.
Dominant supplier to the auto and
white goods sectors
Exhibit 15: Increasing share in the OEM segment
Source: Company, Angel Research
FY2003 FY2009
May 28, 2010 7
Bhushan Steel | Initiating Coverage
OEMs increasing their foothold in the Indian market
The Indian economy's growth over the past few years and the ailing auto sector in
developed markets such as Europe, US and Japan are the primary drivers for setting
up of new capacities and capital flow to the Indian automobile industry. In order to
capitalize on growing demand, massive investment plans have been announced by
domestic and foreign OEMs, thus resulting into higher demand for auto components.
According to Crisil Research, the total estimated investment in the auto component
industry is likely to be in the range of Rs510-560bn for the next five years
(FY2011E-15E).
Although car ownership in emerging markets is rising, there is a significant gap
between car ownership in developed markets and emerging markets. In the UK there
are 511 cars on roads for every 1,000 citizens, whereas there are only 11 cars per
1,000 people in India and 22 per 1,000 people in China.
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Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)
Ratings (Returns) :
Disclosure of Interest Statement Bhushan Steel
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock Yes
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.