Electrosteel Steels - Plant visit note - Angel Broking

We visited Electrosteel Castings (ECL)' associate Electrosteel Steels (ESL)' upcoming 2.51mn tonne steel plant in Bokaro, Jharkhand. The construction work of the full plant is near completion stage; some of the facilities such as blast furnace, coke oven and sinter plant are up and running smoothly. ESL's product mix will primarily constitute long products including wire rod, TMT bars, ductile iron (DI) pipes, billets and pig iron.

Low capex per tonne compared to global standards: ESL has imported approximately 95% of equipments from China (mainly from Shandong Province Metallurgical Engineering) and its construction work has been assigned to China First Metallurgical Construction Group and Ershisanye Construction Group. This has resulted in lower capex per tonne of Rs.3,825, compared to global benchmark of Rs.4,500-5,000/tonne for a greenfield steel plant. Although we appreciate the lower capex per tonne, however, the benefits of lower capex will be known once all the facilities are synchronized and the plant is fully operational. Currently, one blast furnace, coke oven batteries, sinter plant etc are running satisfactorily. The company has acquired land of 2,185 acres which provides it with an option to expand its capacity by at least another 0.5mn tonne without further land acquisition (in the future).

ESL expects 80% utilization levels during FY2014: ESL expects to produce only 0.2mn tonne of steel in FY2013. Nevertheless, it expects to reach 80% utilization and 100% utilization in FY2014 and FY2015, respectively. We believe it could be challenging for the company to operate at 80% utilization levels from the beginning of FY2013.

Update on mining projects: ESL is currently producing small quantities (150,000 tonne in FY2012) of coking coal from its coking coal mine. ESL stated that it will spend a total of Rs.950cr (already spent Rs.650cr) to develop its coking coal mine. For iron ore, it is still awaiting a Forest stage-II clearance. ESL stated that it will start production from the mine within three to six months of signing a mining lease after it gets all clearances and signs a mining lease with the state government. Although the company was hopeful to start production from March 2013, we believe it is currently challenging to estimate the timelines for completion of clearance formalities. In the past, we have witnessed significantly higher-than-estimated time being taken for getting regulatory approvals for captive mines.

Key parameters to monitor: The stock price performance of ESL is likely to be determined by timely ramp-up of remaining facilities at its plant and efficiency of the plant. Further, receipt of stage-II clearance, signing of mining lease and production from its iron ore mine would be significant milestones for ESL. Currently, we do not have coverage on the stock.

Source : Equity Bulls

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