Bhushan Steel - Operating performance improves; high debt a concern; Maintain 'SELL'; TP Rs297 - PINC Research

Q3FY12 Result Review – Bhushan Steel

Operating performance improves; high debt a concern

Bhushan Steel's Q3FY12 revenue at Rs24.1bn grew 24% YoY on higher volumes (up 10% YoY) and improved blended realisations (up 13% YoY) on rupee depreciation. Operating profit surged by 35% YoY to Rs7.2bn further aided by higher consumption of captive HRC. OPM expanded by 241bps YoY to 30.1%. Net profit at Rs2.8bn declined 1.3% YoY on higher depreciation & interest cost on Odisha phase-II, despite lower effective tax rate.

Performance update: Sales volume at ~513kt grew 10% YoY on expanded capacities as HRC sales grew 75% YoY to 165kt. Further, blended realisation at Rs46,679/t grew 13% YoY on rupee depreciation, even though share of value added products declined to 67% vs 75% in Q3FY11. EBITDA/t grew 23% YoY to Rs14,118.

Balance sheet: As of Q3FY12, Bhushan Steel has ~Rs200bn of net debt (incl. Rs19.8bn of preference share as debt) with net D/E of 4.34x.

Fund raising plans post settlement between promoters: Bhushan's board approved raising of Rs7.0bn via rights issue, the premium for which would be decided later on. The fund rasing was much required for the highly leveraged balance sheet of Bhushan Steel. We view this development positively.

The company commissioned 0.5mntpa large dia pipe plant at Khopoli with a capex of Rs12bn during Q3FY12. The plant is currently under trial run.

Expansion projects: Odisha phase III expansion (2.5mntpa HRC) is running on track and is expected to commission by Oct'12. Further, the company is setting up 0.45mntpa CRM in Odisha (by FY13), 1.3mntpa coke oven, 197MW CPP and 1.8mntpa CRM in Odisha, expected in FY14-FY15.

VALUATIONS AND RECOMMENDATION

Bhushan Steel is in the midst of high growth, with contribution from Odisha phase-II providing volume growth in FY12E-FY13E. Further, Odisha phase-III (2.5mntpa HRC) and downstream expansions (2.8mntpa value-added products) are on track for completion in FY13E-FY14E that shall provide growth FY14E onwards. Consequently, we estimate Bhushan's FY11-FY14E EBITDA to grow at a CAGR of 28% drive by volume CAGR of 28%. However, we estimate EPS CAGR of 4% to be subdued by rise in interest and depreciation cost. Further, very high financial leverage (FY12E net D/E of 4.1x) and lack of captive resources amidst tight iron ore supply in Odisha are cause for concerns. Although company's fund raising plans via rights issue partly allays our concern, at CMP of Rs340, we find the stock expensive at 5.3x FY13E EV/EBITDA. We have revised our FY12 and FY13 estimates to factor in the change in macro assumptions and introduce FY14 estimates. We maintain 'SELL' rating on the stock with a TP of Rs297 (5x FY13E EV/EBITDA).

Source : Equity Bulls

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