Bhushan Steel - Q1 FY14 Result Update – SELL - IIFL

CMP Rs450, Target Rs403, Downside 10.4%

- Bhushan steel's Q1 FY14 results were lower than our estiamtes on account of weak sales volume. The company reported 14.1% decline in sales volume during the quarter due to the subdued demand in the domestic market. Sales volume was also lower due to increase in internal consumption of HRC for value addition.

- Topline of Rs24.9bn was lower by 12.3% yoy and lower than our estiamte of Rs27.7bn. The impact of lower volumes on topline was marginally offset by higher realisations. Blended realisatiosn for the company increased by 2% yoy and 7.5% qoq, which was a surprise for us. We were expecting ASPs to be flat on a qoq basis. We believe the outperformacne in ASPs was due to an increase in share of Value added products (VAP) in overall sales. Share of sales from Khopoli, company's value added products plant, increased from 34% in Q4 FY13 to 41% during the quarter. Sales of VAP of the total sales of 0.52mn tons was 80% agaisnt the share of 67% in Q4 FY13 and 65% in Q1 FY13.

- Operating profit declined 14.5% yoy to Rs7.3bn on the back of lower volumes. However, EBIDTA/ton for the quarter stood at Rs14,279/ton higher than our estiamte on account of higher realisations. Costs too were higher than our estimate due to higher production of VAPs. Raw material costs and coversion costs jumped 10.7% and 18.3% qoq, respectively due to lower volumes and higher VAPs. Raw material costs per ton of saleable steel is expected to decline going ahead on the back of a decline in coking coal costs and lower iron ore prices. NMDC had taken price cuts over the last two quarters and we expect the local miners in Orissa to follow the same.

- Bhushan Steel's structural growth story, driven by strong volume growth and backward integration is encouraging. Yet, we believe the upside from this has already been built in the price. At the CMP of Rs455, the company is trading at 8x FY14 EV/EBIDTA and 5.9x FY15 EV/EBIDTA, which is at a premium to its peers. Historically, premium valuation to peers was perhaps due to the high margins enjoyed by its product mix; but with the business model converging with that of its peers, the premium should narrow. Lack of raw material integration and highly levered balance sheet (D/E of 3x) would continue to be an overhang on the stock. We maintain our SELL recommendation on the stock with a 9-month price target of Rs403.

Source : Equity Bulls

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