Sell Bhushan Steel - Margins expand on captive HRC; benefits factored in price - PINC Result Review

Margins expand on captive HRC; benefits factored in price

Bhushan Steel's Q2FY11 revenue at Rs17bn grew 32% YoY, mainly as sales volume surged 22% YoY to 413kt on sale of 49kt of HRC from Orissa phase-II (1.9mntpa HRC), still under trial production. Operating profit rose 43% YoY to Rs4.9bn as OPM expanded 207bps to 28.5% mainly due to partial captive consumption of HRC (154kt out of total HRC requirement of ~350kt). PAT grew 37% YoY to Rs2.6bn.

Phase-II expansion update: While company's revenue and margin is being expanded by HRC output from Orissa phase-II, higher interest and depreciation cost would impact net profit from Q3FY11 onwards, when the project is expected to be capitalised. Coke oven battery of 0.85mntpa is expected to commission by Q4FY11.

Balance sheet: The company has Rs132bn of debt on its book, up from Rs114bn as on Mar'10, mainly due to increase in inventory.

VALUATIONS AND RECOMMENDATION

In spite of higher interest and depreciation cost from Q3 onwards on capitalisation of phase-II expansion, we expect Bhushan's profitability to improve with increased captive consumption of HRC. Phase-III expansion remains major volume growth driver for the future. We expect company's EBITDA and EPS to grow at a CAGR of 26% and 10% respectively over FY10-FY13E.

However, at CMP of Rs529, the stock looks overvalued at 6.8x FY12E EV/EBITDA. High financial leverage (current D/E of 3.0x) is additional concern. We maintain 'SELL' with a target price of Rs353 at which it will trade at 5.5x FY12E EV/EBITDA.

Source : Equity Bulls

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