bhushan steel ic-28-05-10

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

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]: Company, Angel Research

Key FinancialsY/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]

May 28, 2010 2

Bhushan Steel | Initiating Coverage

Investment Arguments

Entering a new orbit

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


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


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

Exhibit 5: Other projectsDetail Capacity (tonnes) Timeframe Location Cost (Rs cr)

Color-coated plant 80,000 Jun'2010E Sahibabad 150

ERW plant 500,000 FY2013E Khopoli 1,200

Power plant* 185MW Mar'2012E Orissa 750

Power plant 197MW Oct'2012E Orissa 960

May 28, 2010 4


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


Exhibit 6: Sales volume growth to jump in FY2014E Exhibit 7: Highest volume growth amongst peers


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


Exhibit 8: Upstream operations gaining steam Exhibit 9: Product profile skewed towards the flat segment


May 28, 2010 5


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.


Exhibit 12: ...leading to higher EBITDA/tonne. Exhibit 13: EBITDA/tonne vis-à-vis other players


May 28, 2010 6


Exhibit 14: BSL to register higher EBITDA growth


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


FY2003 FY2009

May 28, 2010 7


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.

Total estimated investment in the auto

component industry is likely to be

Rs510-560bn for the next five years

Domestic OEMs International OEMs

Players Additional Capacity Planned Investments Players Additional Capacity Planned Investments

Mahindra & Mahindra 200,000 4,000 Renault-Nissan 400,000 4,500

Tata-Fiat 100,000 4,000 Ford India 100,000 2,500

Tata Motors 250,000 3,000 Intl. Cars & Motors 24,000 800

Honda Siel Cars India 180,000 3,000 Bosch - 2,000

Toyota Kirloskar Motors 100,000 1,400 Setco Automotive - 1,000

Exhibit 16: Major Investment plans announced by OEMs (Rs cr)

Source: Crisil Research, D&B

Significant gap between car ownership

in developed markets and emerging

markets

India a preferred hub for global OEMs: Labor advantage

The move towards India is also driven by the trained manpower at competitive costs.

The cost of labor in emerging countries like India is a fraction of that in the developed

world. The lower cost advantage is also increasing the attractiveness of India vis-à-vis

other markets for OEMs.

Trained manpower at competitive cost

in India

Exhibit 17: Huge potential exists to be tapped by OEMs

Source: Deloitte

May 28, 2010 8


Exhibit 18: Labor cost comparison (US $/hour)

Source: Deloitte

First mover advantage

Currently, Indian automakers import nearly 30% of high-grade automotive steel.

Annual demand for auto grade steel is expected to grow at ~13% till FY2015E. In

order to capitalize on the strong demand, Indian companies have recently entered

into technical tie-ups with their foreign counterparts. JSW Steel has entered into a

technical tie-up with Japan's JFE Corp and Uttam Galva has signed an agreement

with ArcelorMittal. JSW's tie-up will help the company produce high-grade skin panels,

now being imported, for cars and bikes. Recently, Tata Steel (India) has formed a

51:49 joint venture with Japan's Nippon Steel for the production of automotive CR

products. By virtue of being an early mover, BSL stands to gain as it had first entered

into a six-year strategic alliance with Sumitomo Metal Industries of Japan in 1997 for

making auto grade steel. Later in 2003, the alliance for the process know-how was

further extended for six years. Recently, Sumitomo has inked an agreement with BSL

for sourcing HR coils from the latter's new plant in Orissa. In our view, the strategic

alliance complements its OEMs' relationships, and we believe it is likely to help the

company in mitigating demand risks.

Cost of labor in India is a fraction of

that in the developed world

India imports nearly 30% of high-grade

automotive steel

Strong track record and a consistent profit-making company

Traditionally, BSL has been a pure converter (converting HR coils into CR and other

value added products). The company's margins were dependent on the differential of

HR coil and CR coil prices, which resulted in stable margins withstanding the cyclicality

of the industry. BSL's EBITDA margin has remained stable between 15-20% for FY1999-

2009. Moreover, timely servicing of debt and regular dividends to shareholders over

the years are other positives about the company.

Stable EBITDA margin, timely servicing

of debt and regular dividends paying

company

May 28, 2010 9


Future catalyst: Raw material linkages in progress

BSL is trying to increase its raw material integration to reduce its raw material costs.

Currently, BSL sources 60-70% of its iron ore requirements from NMDC and the

balance is procured from the spot market. The company imports its coking coal

requirements from Australia and thermal coal is sourced from Mahanadi coal fields

and e-auction.

Over the last couple of years, the company has been allotted iron ore and coal

blocks in India and has also made investments overseas. However, we have not

factored the benefit of the same in our estimates.

Iron ore

BSL has been allocated Marsua Tirba mines in Keonjhar district, Orissa with reserves

of 70mn tonnes. The company is in the process of receiving the forest and environmental

clearance.

Coal and coking coal

BSL has been allotted coal mines in New Patrapara, Orissa, in a joint venture with

Visa Steel, SMC Power Generation Ltd, Orissa Sponge Iron and Steel, Deepak Steel

and Power, Sri Metaliks and Adhunik Corp.; BSL owns a 50% stake in the joint venture.

Total reserves are estimated to be 650mn tonnes, of which BSL's share will be 325mn

tonnes.

In addition, BSL has been allotted the Andal East Coal block in West Bengal, with

estimated reserves of 235mn tonnes, and the Urtan North coking coal block in Madhya

Pradesh, which has an estimated reserves of 55mn tonnes.

Bowen Energy

BSL, through its subsidiary Bhushan Steel (Australia) Pty, holds a 60% stake in Bowen

Energy. The company has already spent US $50mn for the development of mines. It

has the right to explore four major coal mines: 1) 2 open-cut steam thermal mines

(West Rollestone and Tarang Projects), 2) one underground coking coal mine (black

water south projects) and 3) one underground coking, Pulverised coal injection (PCI),

thermal coal mine (East Middlemount).


Exhibit 19: Stable margins over the years Exhibit 20: Consistently paying dividend


May 28, 2010 10


Financial Analysis

Muted revenue growth in the near term

We expect BSL's net revenue to grow at a 12.4% CAGR over FY2010-12E, mainly

driven by the commissioning of its 1.9mn tonnes of HR coil capacity. As HR produced

will be used for captive consumption (100% in FY2011E, 70% in FY2012E), sales

volumes are expected to grow at a 14.0% CAGR. Average realisations are expected

to dip marginally in FY2012E as external sales of HR takes place. Consequently, net

revenue is expected to grow by 11.5% yoy to Rs6,290cr in FY2011E and by 13.4% yoy

to Rs7,131cr in FY2012E.

BSL's net revenue to grow at a 12.4%

CAGR over FY2010-12E


Exhibit 21: Revenue growth muted Exhibit 22: Average realisation to dip marginally


OPM and net profit to increase significantly

Despite muted revenue growth, the company's EBITDA is likely to grow at a 42.3%

CAGR over FY2010-12E as captive HR replaces external purchase of HR. This will be

supported by low conversion costs and technological advantage of the BF-EAF process

for steelmaking, which will result in lower utilisation of coking coal.

EBITDA is expected to increase by 62.7% yoy to Rs2,357cr in FY2011E and by 24.4%

to Rs2,933cr in FY2012E. Consequently, EBITDA margin is likely to expand by 1178bp

to 37.5% in FY2011E and by 365bp to 41.1% in FY2012E. Thus, driven by the strong

operational performance, we expect net profit to increase by 16.7% yoy to Rs968cr in

FY2011E and by 30% to Rs1,259cr in FY2012E. Net profit margin is expected to

improve from 14.7% in FY2010 to 15.4% in FY2011E, which is further expected to

extend to 17.7% in FY2012E.

EBITDA likely to grow at a 42.3% CAGR

over FY2010-12E as captive HR

replaces external purchase of HR

May 28, 2010 11



Exhibit 23: EBITDA margins on an uptrend... Exhibit 24: followed by improved net profit margin...


Return ratios improving

As Phase-II expansion starts contributing to the cash flows we expect RoCE to increase

to 12.6% and 14.0% in FY2011E and FY2012E, respectively, from 8.7% in FY2009.

RoE is also expected to increase from 20.8% in FY2009 to 26% in FY2011E and

26.1% in FY2012E.

Exhibit 25: ...leading to higher ratios.


Net debt/equity to decline

BSL's net debt is expected to increase until FY2012E as the funding of Rs8,500cr for

Phase-III expansion is still remaining. However, we believe the increase in cash flow

resulting from Phase-II expansion will lead to a decline in the company's net

debt-equity ratio. We expect net debt/equity to decline to 2.5x in FY2011E and 2.0x in

FY2012E from 3.3x in FY2009. Net debt/EBITDA is also expected to decline from

7.7x in FY2009 to 3.7x in FY2012E.

Return ratios to improve

Net debt/equity to decline to 2.5x in

FY2011E and 2.0x in FY2012E from

3.3x in FY2009

May 28, 2010 12



Exhibit 26: Net Debt/Equity to decline


Free cash flow turning positive from FY2013E

Given that most of the capex is expected to be incurred in FY2011E and FY2012E, we

expect the company's free cash flow to turn positive from FY2013E onwards, as

Phase-III starts generating cash flows.

Exhibit 28: Free cash flow to turn positive


Exhibit 27: Net Debt/EBITDA to dip

May 28, 2010 13


Exhibit 29: Key FinancialsKey Assumptions FY2011E FY2012E FY2013E FY2014E FY2015E

Revenue/tonne (Rs) 39,696 37,786 38,271 34,991 34,387

Fines/tonne (Rs) 2,250 2,275 2,275 2,275 2,275

Lumps/tonne (Rs) 3,600 3,625 3,625 3,625 3,625

Coal/tonne (Rs) 2,300 2,350 2,400 2,400 2,400

Coking coal/tonne (US $) 210 230 240 240 240

Sales Volume (mn tonnes) 1.6 1.9 2.0 4.1 4.6

Key Financials (Rs cr)

Revenue 6,290 7,131 7,663 14,191 15,984

% change 11.5 13.4 7.5 85.2 12.6

EBITDA 2,357 2,933 3,222 6,049 7,236

% change 62.7 24.4 9.9 87.7 19.6

EBITDA/tonne (US $) 331 345 358 331 346

Net Income 968 1,259 1,290 3,081 4,120

% change 16.7 30.0 2.4 138.9 33.7

EPS 228.0 296.4 303.6 725.3 970.0

BPS 990.6 1,284.2 1,584.8 2,307.2 3,274.3

Capex (Rs cr) 2,500 2,500 1,000 500 500

Financial Ratios

EBITDA margin (%) 37.5 41.1 42.1 42.6 45.3

Net margin (%) 15.4 17.7 16.8 21.7 25.8

Net debt/Equity 2.5 2.0 1.5 0.8 0.3

RoE (%) 26.0 26.1 21.2 37.3 34.8

RoCE (%) 12.6 14.0 14.4 26.3 31.3

Valuation Ratios

EV/EBITDA 7.0 5.7 5.0 2.3 1.5

EV/Total Assets 1.0 1.0 0.9 0.7 0.5

P/E (Diluted) 6.1 4.7 4.6 1.9 1.4

P/BV 1.4 1.1 0.9 0.6 0.4Source: Angel Research

May 28, 2010 14


(US $/tonne) 475 525 575 625 675

EPS (Rs) 150.8 189.4 228.0 266.5 305.1

Exhibit 30: Realisations

1% change will impact our FY11 EPS by 1.9%

(US $/tonne) 475 525 575 625 675

EPS (Rs) 168.3 232.4 296.4 360.5 424.6

1% change will impact our FY12 EPS by 2.5%

Source: Angel Research

(INR/US $) 40 42.5 45 47.5 50

EPS (Rs) 145.6 186.8 228.0 269.2 310.4

Exhibit 31: Exchange rate

1% change will impact FY11E EPS by 3.3%

(INR/US $) 40 42.5 45 47.5 50

EPS (Rs) 194.2 245.3 296.4 347.5 398.6



(Rs/tonne) 2150 2200 2250 2300 2350

EPS (Rs) 232.4 230.2 228.0 225.7 223.5

Exhibit 32: Iron ore costs


(Rs/tonne) 2175 2225 2275 2325 2375

EPS (Rs) 302.2 299.3 296.4 293.6 290.7



(US $/tonne) 190 200 210 220 230

EPS (Rs) 238.5 233.2 228.0 222.7 217.4

Exhibit 33: Coking coal costs


(US $/tonne) 190 210 230 250 270

EPS (Rs) 323.8 310.1 296.4 282.8 269.1



(Rs/tonne) 2200 2250 2300 2350 2400

EPS (Rs) 231.4 229.7 228.0 226.2 224.5

Exhibit 34: Coal costs


(Rs/tonne) 2250 2300 2350 2400 2450

EPS (Rs) 300.4 298.4 296.4 294.5 292.5



Risks and Concerns

Delay in expansion plans

The Orissa project is critical for BSL's growth. Any delay in ramping up of the new

capacities and commissioning of Phase-III may affect our estimates.

Adverse movement in product prices

Any adverse movement in product prices is likely to have a negative impact on the

company's earning and our estimates.

Captive raw material still missing

Currently, BSL does not have captive raw material linkages as the allotted mines are

in the preliminary stages of approvals. In the event of rising raw material prices and

the company's inability to pass on the cost push can affect our estimates negatively

Sensitivity Analysis

May 28, 2010 15


Outlook and Valuation

At the CMP, BSL is trading at 7.0x FY2011E and 5.7x FY2012E EV/EBITDA and 1.4x

FY2011E and 1.1x FY2012E P/BV, respectively. The company's stock price has corrected

by 21% over the last one month. With net debt/equity expected to decline from 3.3x in

FY2009 to 2.0x in FY2012E accompanied by volume growth of 14% CAGR over

FY2010-12E and EBITDA growth of 42.3% CAGR over the same period, we believe

the current valuation does not factor in the company's future growth potential fully.

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.

On a relative basis also, the company is trading cheaper than its peers. On the return

ratios front, BSL is expected to have a healthy margin of 37.5% and 41.1% in FY2011E

and FY2012E, respectively as compared to its peers, which are expected to have

EBITDA margin of 12-24% over the same period. The RoE for BSL is expected to be at

the higher end of around 26% in FY2011E and FY2012E as compared to its peers.

Companies CMP Target Price Reco P/E (x) P/BV (x) EV/EBITDA (x)

FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

SAIL 206 - Neutral 12.6 12.7 12.4 2.6 2.2 2.0 7.9 8.1 7.7

Tata Steel* 496 697 Buy - 8.1 8.7 1.6 1.4 1.2 11.7 6.5 5.9

JSW Steel* 1,090 1,360 Buy 17.2 11.8 9.3 2.3 1.9 1.6 8.6 7.0 5.4

Bhushan Steel 1,396 1,979 Buy 7.1 6.1 4.7 1.8 1.4 1.1 11.0 7.0 5.7

Exhibit 35: Valuation Ratio

Companies EBITDA margin (%) RoE (%) RoCE (%)

FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

SAIL 24.5 22.1 22.5 22.5 19.0 16.9 20.9 18.0 16.8

Tata Steel* 7.9 12.5 12.8 - 17.9 14.7 5.2 11.8 11.7

JSW Steel* 22.2 23.3 23.6 16.1 19.4 20.2 11.1 13.8 15.6

Bhushan Steel 25.7 37.5 41.1 29.2 26.0 26.1 10.0 12.6 14.0

Exhibit 36: Return Ratio

Source: Company, Angel Research; *Tata Steel, JSW Steel are consolidated numbers

Source: Company, Angel Research; *Tata Steel, JSW Steel are consolidated numbers

Exhibit 37: 1-year forward P/E band

Source: Bloomberg, Angel Research

May 28, 2010 16


Exhibit 38: 1-year forward P/BV band


Exhibit 39: 1-year forward EV/EBITDA band


May 28, 2010 17


Exhibit 41: Downstream profile


Business Overview

BSL is a leading player in India producing value-added steel products used in the

automobile and white goods sectors. The company offers a superior product mix in

the value-added segment. Incorporated in 1989, with a capacity of 0.06mn tonnes,

BSL has emerged as one of the fastest growing companies with the current capacity of

2.2mn tonnes of saleable steel.

Rich product portfolio

BSL produces CR steel, galvanized steel and special steel, ranging from CRCA, galume,

color-coated sheets, HTSS, H&T to drawn tubes. The company was the first to

manufacture and market auto grade CR steel in India. BSL manufactures CR coils

and sheets upto a width of 1,700mm and galvanised steel coils and sheets up to a

width of 1,350mm.

Exhibit 40: Growth path of BSL


Products Plants (tonnes) Total

Sahibabad Khopoli

Cold Rolling

Widest (upto 1700) 350,000 - 350,000

Wider (upto 1200) 100,000 350,000 450,000

Narrow (upto 550 mm) 50,000 150,000 200,000

Total Cold Rolling 500,000 500,000 1,000,000

Galvanized Sheets 225,000 240,000 465,000

Hardened & Tempered Strips - 11,000 11,000

Color Coated Sheets - 80,000 80,000

Galume (Aluminium and Zinc coated - 70,000 70,000

Drawn/Precision Tubes 15,000 85,000 100,000

High Tensile Steel Strappings - 25,000 25,000

Alloy Steel/Wire Rods 63,000 - 63,000

Service Centre 300,000 - 300,000

Captive Power 24MW 24MW 48MW

May 28, 2010 18


Location advantage

BSL's downstream operations are located at Sahibabad and Khapoli and its upstream

plant is strategically located in Orissa. While downstream plants are closely associated

to BSL's user industries, upstream operations enjoy close proximity to raw material

mines.

Diversified customer base

BSL is a regular supplier to white goods and automobile manufacturers. Over the

years, BSL has managed to develop strong relationships with OEMs and has the best

names, such as Daewoo, LG Electronics, Whirlpool, Electrolux, IFB and Carrier, in its

customer portfolio. The company exports to the US, China, Ethiopia, UAE, Myanmar,

Senegal, Iran, Australia, New Zealand, Saudi Arabia and African countries.

Exhibit 43: Key customers

Automobile sector

Maruti, Tata Motors, Mahindra & Mahindra, Ashok Leyland, Bajaj Auto, Hyundai,

Fiat, Ford, General Motors, Honda, Hindustan Motors, Neel Metal Products, Veegee

Industrial Enterprise, Yamaha

Consumer durable sector

LG, Godrej & Boyce, Electrolux, Whirlpool, Videocon, Samsung, BPL


Exhibit 42: Plants closely associated to user industries


May 28, 2010 19


Profit & Loss Statement Rs croreY/E March FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E

Gross sales 4,179 4,645 5,395 6,004 6,800 7,709

Less: Excise duty (364) (467) (452) (363) (510) (578)

Net Sales 3,815 4,177 4,943 5,641 6,290 7,131

Other operating income 23 28 14 0 40 50

Total operating income 3,838 4,205 4,957 5,641 6,330 7,181

% chg 37.4 9.6 17.9 13.8 12.2 13.5

Total Expenditure 3,210 3,370 3,928 4,192 3,973 4,248

Net Raw Materials 2,843 2,973 3,352 3,538 3,212 3,314

Other Mfg costs 316 323 475 570 650 793

Personnel 51 74 101 84 111 142

Other - - - - - -

EBITDA 628 835 1,029 1,449 2,357 2,933

% chg 58.6 33.0 23.2 40.8 62.7 24.4

(% of Net Sales) 16.5 20.0 20.8 25.7 37.5 41.1

Depreciation& Amortisation 209 211 234 220 495 605

EBIT 419 624 795 1,229 1,862 2,327

% chg 82.0 48.8 27.4 54.7 51.5 25.0

(% of Net Sales) 11.0 14.9 16.1 21.8 29.6 32.6

Interest & other Charges 77 137 252 217 557 647

Other Income 30 52 18 116 21 44

(% of PBT) 8.2 9.6 3.2 10.2 1.6 2.5

Share in profit of Associates - - - - - -

Recurring PBT 372 539 561 1,128 1,326 1,725

% chg 133.2 44.7 4.1 101.2 17.5 30.0

Extraordinary Expense/(Inc.) - - - - - -

PBT (reported) 372 539 561 1,128 1,326 1,725

Tax 59 115 139 299 358 466

(% of PBT) 15.9 21.4 24.9 26.5 27.0 27.0

PAT (reported) 313 424 421 829 968 1,259

Add: Share of earnings of associate - - - - - -

Less: Minority interest (MI) - - - - - -

Extraordinary Expense/(Inc.) - - - - - -

PAT after MI (reported) 313 424 421 829 968 1,259

ADJ. PAT 313 424 421 829 968 1,259

% chg 102.8 35.3 (0.6) 96.9 16.7 30.0

(% of Net Sales) 8.2 10.1 8.5 14.7 15.4 17.7

Basic EPS (Rs) 75.0 99.8 99.2 195.3 228.0 296.4

Fully Diluted EPS (Rs) 74.4 99.8 99.2 195.3 228.0 296.4

% chg 97.2 34.0 (0.6) 96.9 16.7 30.0

May 28, 2010 20


Balance Sheet Rs crore

Y/E March FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E

SOURCES OF FUNDS

Equity Share Capital 42 42 42 42 42 42

Reserves& Surplus 1,172 1,583 1,992 2,809 3,764 5,011

Shareholders Funds 1,215 1,625 2,034 2,851 3,807 5,054

Share Warrants - - 400 400 400 400

Minority Interest - - - - - -

Total Loans 3,242 5,718 8,066 10,366 11,346 11,826

Deferred Tax Liability 124 197 246 246 246 246

Total Liabilities 4,580 7,540 10,747 13,864 15,800 17,526

APPLICATION OF FUNDS

Gross Block 2,694 2,927 3,282 8,482 10,482 11,582

Less: Acc. Depreciation 970 1,168 1,396 1,616 2,110 2,716

Net Block 1,723 1,759 1,886 6,866 8,372 8,866

Capital Work-in-Progress 1,892 4,568 7,400 5,800 6,300 7,700

Goodwill - - - - - -

Investments 21 58 114 114 114 114

Current Assets 1,763 2,418 2,744 3,026 3,464 3,824

Cash 100 28 124 301 689 898

Loans & Advances 367 644 769 769 769 769

Other 1,295 1,747 1,850 1,956 2,006 2,157

Current liabilities 819 1,264 1,396 1,943 2,450 2,978

Net Current Assets 944 1,155 1,347 1,084 1,014 846

Mis. Exp. not written off - - - - - -

Total Assets 4,580 7,540 10,747 13,864 15,800 17,526

May 28, 2010 21


Cash Flow Statement Rs crore


Profit before tax 372 539 561 1,128 1,326 1,725

Depreciation 209 211 234 220 495 605

Change in Working Capital (230) (372) (468) 441 458 376

Less: Other income 42.9 123.9 255.9 0.0 - -

Direct taxes paid 41 63 46 299 358 466

Cash Flow from Operations 353 439 537 1,490 1,920 2,241

(Inc.)/ Dec. in Fixed Assets (1,323) (2,415) (1,770) (3,600) (2,500) (2,500)

(Inc.)/ Dec. in Investments (1) (36) (49) 0 0 0

(Inc.)/ Dec. in loans and advances

Other income 26 17 13 - - -

Cash Flow from Investing (1,298) (2,434) (1,806) (3,600) (2,500) (2,500)

Issue of Equity 20 - 400 - - -

Inc./(Dec.) in loans 1,206 2,430 1,956 2,300 980 480

Dividend Paid (Incl. Tax) 12 11 8 12 12 12

Others 251 495 982 - - -

Cash Flow from Financing 964 1,923 1,366 2,287 968 468

Inc./(Dec.) in Cash 19 (73) 97 177 388 208

Opening Cash balances 82 100 28 124 301 689

Closing Cash balances 100 28 124 301 689 898

May 28, 2010 22


Key Ratios


Valuation Ratios (x)

P/E (on FDEPS) 18.9 14.0 14.1 7.1 6.1 4.7

P/CEPS 11.4 9.3 9.0 5.7 4.1 3.2

P/BV 4.9 3.6 2.4 1.8 1.4 1.1

Dividend yield (%) 0.2 0.2 0.2 0.2 0.2 0.2

EV/Sales 2.4 2.8 2.8 2.8 2.6 2.4

EV/EBITDA 14.4 13.9 13.5 11.0 7.0 5.7

EV/Total Assets 2.0 1.5 1.3 1.2 1.0 1.0

Per Share Data (Rs)

EPS (Basic) 75.0 99.8 99.2 195.3 228.0 296.4

EPS (fully diluted) 73.8 99.8 99.2 195.3 228.0 296.4

Cash EPS 122.9 149.5 154.4 247.0 344.4 439.0

DPS 2.5 2.5 2.5 2.5 2.5 2.5

Book Value 286.0 382.7 573.2 765.6 990.6 1,284.2

Dupont Analysis

EBIT margin 11.0 14.9 16.1 21.8 29.6 32.6

Tax retention ratio (%) 84.1 78.6 75.1 73.5 73.0 73.0

Asset turnover (x) 1.0 0.7 0.5 0.5 0.4 0.5

RoIC (Post-tax) 9.6 8.2 6.6 7.5 9.5 10.8

Cost of Debt (Post Tax) 2.5 2.4 2.7 2.2 3.7 4.1

Leverage (x) 2.6 3.5 3.3 3.1 2.5 2.0

Operating RoE 28.0 28.7 19.2 23.7 24.2 24.2

Returns (%)

RoCE (Pre-tax) 11.1 10.3 8.7 10.0 12.6 14.0

Angel RoIC (Pre-tax) 19.9 22.6 25.8 22.4 22.5 26.2

RoE 29.7 29.8 20.8 29.2 26.0 26.1

Turnover ratios (x)

Asset Turnover (Gross Block) 1.7 1.5 1.6 1.0 0.7 0.7

Inventory (days) 97 139 134 130 130 130

Receivables (days) 52 54 46 45 50 50

Payables (days) 79 114 80 90 100 100

Working capital cycle (days) 48 57 62 67 64 61

Solvency ratios (x)

Net debt to equity 2.6 3.5 3.3 3.1 2.5 2.0

Net debt to EBITDA 5.0 6.8 7.7 6.9 4.5 3.7

Interest Coverage 5.4 4.6 3.2 5.7 3.3 3.6

Bhushan Steel

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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

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Bhushan Steel

Address: Acme Plaza, ‘A’ Wing, 3rd Floor, M.V. Road, Opp. Sangam Cinema, Andheri (E), Mumbai - 400 059.Tel : (022) 3952 4568 / 4040 3800

Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE: INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302

Research Team

Fundamental:

Sarabjit Kour Nangra VP-Research, Pharmaceutical [email protected]

Vaibhav Agrawal VP-Research, Banking [email protected]

Vaishali Jajoo Automobile [email protected]

Shailesh Kanani Infrastructure, Real Estate [email protected]

Anand Shah FMCG , Media [email protected]

Deepak Pareek Oil & Gas [email protected]

Puneet Bambha Capital Goods, Engineering [email protected]

Sushant Dalmia Pharmaceutical [email protected]

Rupesh Sankhe Cement, Power [email protected]

Param Desai Real Estate, Logistics, Shipping [email protected]

Sageraj Bariya Fertiliser, Mid-cap [email protected]

Viraj Nadkarni Retail, Hotels, Mid-cap [email protected]

Paresh Jain Metals & Mining [email protected]

Amit Rane Banking [email protected]

Rahul Jain IT, Telecom [email protected]

Jai Sharda Mid-cap [email protected]

Sharan Lillaney Mid-cap [email protected]

Amit Vora Research Associate (Oil & Gas) [email protected]

V Srinivasan Research Associate (Cement, Power) [email protected]

Aniruddha Mate Research Associate (Infra, Real Estate) [email protected]

Mihir Salot Research Associate (Logistics, Shipping) [email protected]

Chitrangda Kapur Research Associate (FMCG, Media) [email protected]

Vibha Salvi Research Associate (IT, Telecom) [email protected]

Pooja Jain Research Associate (Metals & Mining) [email protected]

Technicals:

Shardul Kulkarni Sr. Technical Analyst [email protected]

Mileen Vasudeo Technical Analyst [email protected]

Derivatives:

Siddarth Bhamre Head - Derivatives [email protected]

Jaya Agarwal Derivative Analyst [email protected]

Sandeep Patil Jr. Derivative Analyst [email protected]

Institutional Sales Team:

Mayuresh Joshi VP - Institutional Sales [email protected]

Abhimanyu Sofat AVP - Institutional Sales [email protected]

Nitesh Jalan Sr. Manager [email protected]

Pranav Modi Sr. Manager [email protected]

Sandeep Jangir Sr. Manager [email protected]

Ganesh Iyer Sr. Manager [email protected]

Jay Harsora Sr. Dealer [email protected]

Meenakshi Chavan Dealer [email protected]

Gaurang Tisani Dealer [email protected]

Production Team:

Bharathi Shetty Research Editor [email protected]

Bharat Patil Production [email protected]

Dilip Patel Production [email protected]

bhushan steel ic-28-05-10

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