Monday, February 22, 2010

Bhushan Steel Result in line, Tgt:1,843

Bhushan Steel

 

Result in line


ACCUMULATE       

 

CMP: Rs 1,621                                    Target Price: Rs 1,843


Bhushan Steel Ltd. (BSL) reported 3QFY10 results, which were in line with our estimates. Net sales stood at Rs14.3bn (yoy up 42.6%, qoq up 10.1%), EBITDA stood at Rs3.9bn (yoy up 149%, qoq up 13.9%) and Adj PAT stood at Rs2.1bn (yoy up 900.1%, qoq up 9.7%). During the quarter, EBITDA margins increased by 1,168bps on yoy basis and by 91bps on sequential basis to 27.3%, due to redcution in raw material costs by 1,329bps on yoy basis and 166bps on sequential basis. The company's backward integration plans to set up 2.2mtpa integrated steel plant at Meramandali, Orissa are progressing as per schedule and its Hot Strip Mill (HSM) is expected to commence operations by Mar-Apr '10. We believe that post commissioning of its HSM and other facilities, the company will be able to reduce cost of production significantly. This will enable BSL to replace costly imported HRC with the inhouse manufactured HRC. We believe, this could lead to cost savings of around USD130/t of steel. However, the majority of the savings will accrue only in FY11, post fully ramping up of all the plants.

BSL also has phase III expansion plan to increase the capacities of HSM and other facilities to 5mtpa, which we expect to commence operations only in FY13. As on 31st Dec '09, the company has net begt of Rs110bn. At the CMP of Rs1,621, the stock is trading at 6.6x FY11E EPS of Rs244.4 and at 5.5x FY12E EPS of Rs297.2. On EV/EBITDA basis, the stock is trading at 6.3x FY11E EV/EBITDA and at 5.7x FY12E EV/EBITDA; while on P/B basis, the stock is trading at 1.6x FY11E book value and at 1.3x FY12E book value. Though we remain directionally positive on the growth of the company; however, we believe that the CMP largely captures in the benefits of backward integration. Moreover our target price of Rs1,843 also offers reasonable returns from the current levels; hence, we are downgrading the stock from BUY to ACCUMULATE, with revised target price of Rs1,843 (6x FY12E EV/EBITDA) (Previous target – Rs1,615).

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