bhushan steel - result...

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Edelweiss Securities Limited

Bhushan Steel’s (BSL) Q4FY14 EBITDA at INR6.6bn (down ~29% YoY) was

~20% below our estimate led by lower-than-expected volumes and

margins. While sales volume at 513kt dipped ~18% YoY, EBITDA/t at

INR12.8kt also disappointed. The company reported net loss of

INR196mn. FY14 sales volume dipped ~14% YoY to 2mt. In FY15 and FY16

we have assumed 45% and 60% capacity utilisation, respectively, in the

recently commissioned 2.5mtpa steel expansion despite the recent delays

and accidents in the plant. Considering the FY14 performance, we

perceive downside risks to our forward volume of 3.5mt and 4.0mt for

FY15E and FY16E, respectively. In view of this and rising debt levels, we

maintain ‘REDUCE’ with target price of INR358/share.

Volumes remain lackluster

Revenue at INR25.1bn (down ~11% YoY) was ~15% below our estimate driven by

disappointing volumes. Sales volume at 513kt dipped ~18% YoY against our assumption

of 5% YoY dip. Volumes were affected by soft demand from auto and white goods

segments (galvanised steel volumes down ~22% YoY) and partly due to lower

production. BSL’s blended realisation at INR48.9k/t (up 9% YoY) rose by INR475/t

against our expectation of INR1,175/t increase.

EBITDA disappoints led by top line fall

Total cost/t at INR36.1k was broadly in line with our estimate. However, lower

realisations led to EBITDA/t of INR12.8kt against our expectation of INR13.8k/t. Lower

margin combined with lower volumes led to EBITDA at INR6.6bn (down ~29% YoY),

~20% below our estimate. Sequentially, depreciation and finance charges surged ~4%

and ~2%, respectively, against our expectations of them being flat QoQ. As a result, BSL

reported net loss of INR196mn (our estimate: profit of INR1,128mn).

Outlook and valuations: Expensive; maintain ‘REDUCE’

Considering the FY14 performance, we perceive downside risks to our forward volume

assumptions of 3.5mt and 4.0mt for FY15 and FY16, respectively. Net debt rose to

INR333bn in Q4FY14 from INR327bn at Q2FY14 end. With downside risk to estimates

and high debt levels we maintain ‘REDUCE/SU’ with TP of INR358 based on 6x FY16E

EV/EBITDA. At CMP, the stock trades at expensive valuation of 7.2x FY16E EV/EBITDA.

RESULT UPDATE

BHUSHAN STEEL Weak volumes continue

EDELWEISS 4D RATINGS

Absolute Rating REDUCE

Rating Relative to Sector Underperformer

Risk Rating Relative to Sector Medium

Sector Relative to Market Overweight

MARKET DATA (R: BSSL.BO, B: BHUS IN)

CMP : INR 414

Target Price : INR 358

52-week range (INR) : 561 / 408

Share in issue (mn) : 226.5

M cap (INR bn/USD mn) : 94/ 1,594

Avg. Daily Vol.BSE/NSE(‘000) : 116.0

SHARE HOLDING PATTERN (%)

Current Q3FY14 Q2FY14

Promoters *

71.2 71.3 71.3

MF's, FI's & BK’s 3.9 3.9 3.1

FII's 1.8 1.8 1.8

Others 23.0 23.0 23.8

* Promoters pledged shares

(% of share in issue)

: 13.0

PRICE PERFORMANCE (%)

Stock Nifty

EW Metals

and Mining

Index

1 month 17.2 9.1 22.3

3 months 38.2 16.8 42.6

12 months 50.9 20.1 40.9

Prasad Baji

+91 22 4040 7415

[email protected]

Navin Sahadeo

+91 22 6623 3473

[email protected]

Salvin Shah

+91 22 6623 3392

[email protected]

India Equity Research| Metals and Mining

May 30, 2014

Financials (INR mn)

Year to March Q4FY14 Q4FY13 % change Q3FY14 % change FY14 FY15E FY16E

Net rev. 25,103 28,197 (11.0) 24,072 4.3 96,758 153,616 176,785

EBITDA 6,556 9,216 (28.9) 6,016 9.0 26,935 45,171 55,047

Net profit (196) 2,802 NA (548) NA 620 9,471 16,283

Diluted EPS (INR) (0.9) 12.8 NA (2.4) NA 2.7 41.8 71.9

Diluted P/E (x) 151.3 9.9 5.8

EV/EBITDA (x) 15.3 8.9 7.2

ROAE (%) 0.7 9.7 14.3

Metals and Mining

2 Edelweiss Securities Limited

Table 1: Sales volumes drop ~18% YoY, rise ~3% QoQ

Q4FY14 Q4FY13 Y-o-Y (%) Q3FY14 Q-o-Q (%)

Sales volume (MT) 512,927 628,332 (18.4) 496,667 3.3

Export vol. (MT) 60,545 101,603 (40.4) 108,885 (44.4)

Domestic vol. (MT) 452,382 526,729 (14.1) 387,782 16.7

Blended gross realisation/t (INR) 54,003 49,097 10.0 52,932 2.0

Blended net realisation/t (INR) 48,941 44,875 9.1 48,466 1.0

EBITDA/t (INR) 12,782 14,668 (12.9) 12,114 5.5

EBITDA/t (USD) 207 271 (23.6) 195 5.9 Source: Company, Edelweiss research

Bhushan Steel


Financial snapshot (INR mn)

Year to March Q4FY14 Q4FY13 % change Q3FY14 % change FY14 FY15E FY16E

Gross revenues 27,699 30,849 (10.2) 26,290 5.4 106,004 165,463 190,419

Domestic sales 24,471 26,066 (6.1) 20,893 17.1 86,995 131,212 151,002

Export sales 3,228 4,784 (32.5) 5,397 (40.2) 19,010 34,251 39,417

Excise duty 2,596 2,653 (2.1) 2,218 17.0 9,246 12,578 14,475

Net revenues 25,103 28,197 (11.0) 24,072 4.3 96,758 153,616 176,785

(Inc)/dec in Stock-in-Trade 17 (277) (106.1) 2,051 (99.2) (214) - -

Raw material consumption 13,368 14,779 (9.5) 11,412 17.1 51,894 76,151 88,610

Purchase of trading goods 200 171 17.1 - 391 - -

Staff costs 493 433 13.9 487 1.2 1,885 2,113 2,282

Other expenses 4,469 3,874 15.4 4,106 8.8 15,868 30,181 30,846

Total expenditure 18,547 18,980 (2.3) 18,055 2.7 69,824 108,445 121,738

EBITDA 6,556 9,216 (28.9) 6,016 9.0 26,935 45,171 55,047

Depreciation & amortization 2,526 2,103 20.1 2,423 4.2 9,640 13,896 13,717

EBIT 4,031 7,114 (43.3) 3,594 12.2 17,295 31,274 41,331

Other income 133 56 135.6 34 290.9 291 865 812

Net finance expense 4,394 3,351 31.1 4,321 1.7 16,633 19,165 19,837

Profit before tax (230) 3,819 NA (693) NA 953 12,974 22,306

Tax (34) 1,017 NA (145) NA 334 3,503 6,022

Current taxes (34) 1,017 NA (145) NA 334 - -

Deferred taxes

Core profit (196) 2,802 NA (548) NA 620 9,471 16,283

Net profit (196) 2,802 NA (548) NA 620 9,471 16,283

Equity capital 453 439 453 453 453 453

No. of shares (mn) 227 219 227 227 227 227

Diluted EPS (INR) (0.9) 12.8 NA (2.4) NA 2.7 41.8 71.9

As % of net revenues

Raw material 53.3 51.4 55.9 53.4 49.6 50.1

Employee cost 2.0 1.5 2.0 1.9 1.4 1.3

Other expenditure 17.8 13.7 17.1 16.4 19.6 17.4

EBITDA 26.1 32.7 25.0 27.8 29.4 31.1

Adjusted net profit (0.8) 9.9 (2.3) 0.6 6.2 9.2

Tax rate 14.9 26.6 21.0 35.0 27.0 27.0

Metals and Mining


Company Description

Bhushan Steel (BSL), formerly Bhushan Steel & Strips, is a value added steel manufacturer

catering primarily to the auto/white goods industry. It was established in 1989 and started

business at Sahibabad (Uttar Pradesh) with a CR capacity of 120ktpa. This plant was

gradually scaled up to 475ktpa by 1997. In 2004, a plant in Khopoli (Maharashtra) was

commissioned with similar configuration. BSL is moving towards becoming an integrated

primary steel producer from a secondary player currently. It has embarked upon a major

expansion plan in three phases (in Orissa) to set up feed facilities of hot metal, sponge iron,

slabs, HR and billets for its current product portfolio of value added products. Phase I

(0.3mtpa) of this expansion was completed in FY09 while phase II (2mtpa) was completed in

FY10. Work on phase III is in full swing and management expects it to commission in FY14

which will take BSL’s total crude steel capacity to ~5.2mtpa in FY14.

Investment Theme

With the completion of its phase III project, BSL will become self sufficient in its HR

requirement with total HR capacity of 4.4mtpa. We assume 80% capacity utilization for the

2.5mtpa expansion project in FY15E leading to 43% YoY volume growth. In spite of the

volume growth and the resultant earnings increase, we find the stock expensive and

recommend ‘REDUCE’.

Key Risks

• Earlier and faster than expected ramp up of new capacity

• Sharp increase in steel prices and/or sharp decline in raw material cost


Bhushan Steel

Financial Statements

Income statement (INR mn)

Year to March FY13 FY14 FY15E FY16E

Net revenue 107,443 96,758 153,616 176,785

Materials costs 57,986 51,894 76,151 88,610

Accretion to stock (1,058) (214) - -

Employee costs 1,735 1,885 2,113 2,282

Total SG&A expenses 14,819 2,932 12,193 11,688

Other Expenses (247) 13,112 17,988 19,158

EBITDA 33,150 26,935 45,171 55,047

Depreciation & Amortization 8,309 9,640 13,896 13,717

EBIT 24,841 17,295 31,274 41,331

Other income 173 291 865 812

Interest expenses 12,874 16,633 19,165 19,837

Profit before tax 12,140 953 12,974 22,306

Provision for tax 3,051 334 3,503 6,022

Net profit 9,089 620 9,471 16,283

Profit after minority interest 9,089 620 9,471 16,283

Shares outstanding (mn) 227 227 227 227

Diluted EPS (INR) 40.1 2.7 41.8 71.9

Dividend per share (INR) 0.5 0.5 0.7 0.7

Tax rate (%) 25.1 35.0 27.0 27.0

Common size metrics


Operating expenses 69.1 72.2 70.6 68.9

EBITDA margins 30.9 27.8 29.4 31.1

Net profit margins 8.5 0.6 6.2 9.2

Growth ratios (%)


Revenues 8.1 (9.9) 58.8 15.1

EBITDA 10.3 (18.7) 67.7 21.9

Net profit (11.2) (93.2) 1,428.4 71.9

EPS (16.7) (93.2) 1,428.4 71.9

Key Assumptions

Year to March FY13 FY14E FY15E FY16E

Macro

GDP(Y-o-Y %) 5.0 4.8 5.4 6.3

Inflation (Avg) 7.4 6.2 5.5 6.0

Repo rate (exit rate) 7.5 8.0 7.8 7.3

USD/INR (Avg) 54.5 62.0 60.0 58.0

Sector

HRC price - Europe (ex-works,USD/t) 640 625 600 600

HRC price - India (net, INR '000/t) 35 36 37 37

Hard coking coal price (FOB, USD/t) 192 152 121 125

Soft coking coal price (FOB, USD/t) 129 128 102 106

India steel demand growth (%) 3 1 4 5

Company

Sales volume- Flats (mt) 1.8 1.7 3.1 3.5

Sales volume- Longs (mt) 0.5 0.3 0.4 0.5

Blended Realisation / t (INR) 47,143 47,995 44,291 44,253

Blended EBITDA / t (INR) 14,545 15,443 13,024 13,779

Iron ore 5,575 3,771 4,136 4,466

Thermal Coal 2,800 3,750 3,844 3,940

Coking Coal 11,810 11,593 10,176 9,176

Employee Cost (INR mn) 1,735 1,885 2,113 2,282

Average Interest rate (%) 5.3 5.7 5.9 6.2

Average Depreciation rate (%) 5.1 4.5 4.6 4.6

Tax rate (%) 25.0 27.0 27.0 27.0

Dividend payout ratio (%) 1.2 18.3 1.7 1.0

Net borrowings (INR mn) 280,920 319,136 307,078 303,861

Capex (INR mn) 67,663 58,000 10,000 10,000

Debtor days 61 60 60 58

Inventory days 280 310 280 300

Payable days 82 90 95 95

Cash conversion cycle (days) 258 280 245 263


Metals and Mining

Peer comparison valuation

Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%)

Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E

Bhushan Steel 1,594 9.9 5.8 9.1 7.4 9.7 14.3

Jindal Steel & Power 4,606 8.2 6.4 6.5 5.8 13.7 15.0

JSW Steel 4,955 13.9 9.6 2.7 2.1 9.8 13.7

Steel Authority of India 6,153 21.4 14.6 12.8 9.1 3.8 5.3

Tata Steel 7,674 10.5 8.7 6.6 6.2 11.8 12.9

Usha Martin 196 13.1 7.3 5.0 3.6 4.5 7.9

Median - 11.8 8.0 6.5 6.0 9.7 13.3

AVERAGE - 12.8 8.7 7.1 5.7 8.9 11.5

Source: Edelweiss research

Cash flow metrics


Operating cash flow 259 49,142 28,220 32,430

Investing cash flow (67,490) (57,210) (9,135) (9,188)

Financing cash flow 65,417 19,459 (25,798) (23,318)

Net cash flow (1,814) 11,392 (6,713) (76)

Capex (67,663) (58,000) (10,000) (10,000)

Dividends paid (134) (187) (187) (187)

Profitability & efficiency ratios


ROAE (%) 11.2 0.7 9.7 14.3

ROACE (%) 7.2 4.2 7.1 9.1

Inventory day 280 422 295 270

Debtors days 61 91 59 55

Payable days 82 139 104 88

Cash conversion cycle (days) 258 374 251 237

Current ratio 3.2 1.9 3.3 3.5

Debt/EBITDA 8.8 12.6 7.1 5.8

Debt/Equity 3.2 3.8 3.0 2.6

Adjusted debt/equity 3.2 3.8 3.0 2.6

Operating ratios


Total asset turnover 0.3 0.2 0.3 0.4

Fixed asset turnover 0.4 0.3 0.4 0.5

Equity turnover 1.3 1.1 1.6 1.6

Valuation parameters


Diluted EPS (INR) 40.1 2.7 41.8 71.9

Y-o-Y growth (%) (16.7) (93.2) 1,428.4 71.9

CEPS (INR) 76.8 45.3 103.2 132.4

Diluted PE (x) 10.3 151.3 9.9 5.8

Price/BV (x) 1.0 1.0 0.9 0.8

EV/Sales (x) 3.5 4.3 2.6 2.2

EV/EBITDA (x) 11.6 16.1 9.1 7.4

Dividend yield (%) 0.1 0.1 0.2 0.2

Market cap/Sales (x) 0.9 1.0 0.6 0.5

Balance sheet (INR mn)

As on 31st March FY13 FY14 FY15E FY16E

Equity capital 453 489 453 453

Reserves & surplus 89,026 90,126 105,062 121,158

Shareholders funds 89,479 90,614 105,515 121,611

Preference capital 1,002 1,002 1,002 1,002

Short term debt 52,329 62,730 52,329 52,329

Long term debt 238,437 277,330 269,273 265,979

Borrowings 290,765 340,060 321,602 318,308

Deferred tax liability 13,428 13,752 20,238 23,643

Sources of funds 394,674 445,762 448,357 464,564

Tangible assets 190,751 326,651 292,389 288,672

Intangible assets 12 12 12 12

CWIP (incl. intangible) 116,618 58,000 58,000 58,000

Total net fixed assets 307,380 384,663 350,401 346,684

Non current investments 4,025 3,830 4,025 4,025

Other non current assets 214 - 214 214

Current Investments 248 1 248 248

Cash and equivalents 1,536 850 6,215 6,139

Inventories 55,597 64,803 58,417 72,830

Trade receivables 23,431 24,645 25,252 28,092

Loans and advances 40,186 32,301 45,178 51,168

Total current assets (ex cash) 119,461 121,759 129,095 152,337

Trade payable 16,170 23,523 19,820 23,063

Others current liabilities 21,772 41,817 21,772 21,772

Total current liabilities & 37,942 65,339 41,592 44,835

Net current assets (ex cash) 81,519 56,420 87,503 107,503

Uses of funds 394,674 445,762 448,357 464,564

Book value per share (INR) 395.0 400.0 465.8 536.9

Free cash flow (INR mn)


Net profit 9,089 10,344 12,876 19,688

Depreciation 8,309 11,083 13,896 13,717

Others 17,802 16,846 18,300 19,025

Gross cash flow 35,200 38,273 45,073 52,430

Less: Changes in WC 34,940 (10,869) 16,853 20,000

Operating cash flow 259 49,142 28,220 32,430

Less: Capex 67,663 58,000 10,000 10,000

Free cash flow (67,404) (8,858) 18,220 22,430


Bhushan Steel

Holding - Top 10

Perc. Holding Perc. Holding

Life Insurance Corp. of India 2.70 Dimensional Fund Advisors LP 0.90

The Vanguard Group, Inc. 0.16 Mellon Capital Management Corp. 0.14

Dimensional Fund Advisors Ltd. 0.09 SSgA Funds Management, Inc. 0.07

Bessemer Investment Management LLC 0.03 Motilal Oswal Asset Management Co. Ltd. 0.01

Northern Trust Investments, Inc. 0.01 Nomura Asset Management Co., Ltd. 0.00

*as per last available data

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

*in last one year

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available

*in last one year

Additional Data

Directors Data

Brij Bhushan Singal Chairman Neeraj Singal Vice Chairman & M.D.

Mohan Lal Director O P Davra Company Secretary

P K Aggarwal Whole Time Director -Commercia Nittin Johari Whole time Director (Finance)

Rahul Sengupta Whole Time Director- Technical V K Mehrotra Director

B B Tandon Director M V Suryanaryana Director

Sunita Sharma Nominee (LIC)

Auditors - Mehra Goel & Co

*as per last annual report


Company Absolute

reco

Relative

reco

Relative

risk

Company Absolute

reco

Relative

reco

Relative

Risk

Bhushan Steel REDUCE SU M Coal India HOLD SU M

Hindalco Industries BUY SO M Hindustan Zinc BUY SO L

Jindal Steel & Power REDUCE SU M JSW Steel BUY SP H

NMDC BUY SO M Sesa Sterlite BUY SP M

Steel Authority of India REDUCE SU M Tata Steel BUY SO M

Usha Martin HOLD SU M

RATING & INTERPRETATION

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria

Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe

within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return


Bhushan Steel

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.

Board: (91-22) 4009 4400, Email: [email protected]

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Co-Head Institutional Equities & Head Research [email protected] +91 22 4063 5476

Nirav Sheth Head Sales [email protected] +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s): Metals and Mining

Bhushan Steel, Coal India, Hindalco Industries, Hindustan Zinc, Jindal Steel & Power, JSW Steel, NMDC, Steel Authority of India, Sesa Sterlite, Tata Steel,

Usha Martin

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 133 40 16 190

* 1 stocks under review

Market Cap (INR) 126 55 9

Date Company Title Price (INR) Recos

Recent Research

29-May-14 Steel

Authority of

India

Margin weakness continues;

Result Update

88 Reduce

28-May-14 Usha Martin Margins under pressure;

Result Update

36 Hold

27-May-14 JSW Steel Triggering next growth phase;

Result Update

1,230 Buy

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to


Metals and Mining

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Bhushan Steel

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