Multi Baggers

Bhushan Steel

Bhushan Steel (BSL), formerly Bhushan Steel & Strips, is a value added steel manufacturer catering primarily to the auto/white goods industry. BSL is the third largest secondary player after SAIL & Tata Steel, however it is now moving towards becoming an integrated primary steel producer from a secondary player. The product portfolio consist of Cold Rolled Coil, Cold Rolled Sheet, Galvanised, Bhushan Galume, Colour Coated Coil, Colour Coated Tiles / Profile Sheet, Drawn Tubes of OEM Grade, Hardened & Tempered Steel Strips High Tensile Steel Strapping - For Packaging, Wire Rods and Alloy Billets and Sponge Iron.

Investment Rationale:-

Orrisa the key driver:

BSL is aiming for backward integration into steel making, it is in the process of expanding it capacity to 4.7mtpa in three phases of which its phase one is already commissioned and phase two is expected to be in commissioned by end of FY10 and phase three in FY12-13. Commissioning of Phase-II capacity would ensure BSL access to an endto- end steel production capability of 2.2m tpa (HR capacity of 1.9m and billet making capacity of 0.3m tpa). This would also provide raw material (HRC) hedge to its secondary steel making units. In Phase-III, BSL envisages setting up a 2.9m tpa integrated slab capacity. This would ensure optimum utilization of the 4.5m tpa HRC rolling mill (that would be commissioned in Phase-II itself). BSL has already placed orders for major equipment required for phase III.

Backward integration to reduce costs:

The company has Iron ore mines in barbil, coal mines in Orissa & West Bengal. All these mines are located in the close proximity of the plant along with this the company has proposed to install a combination of BF and EAF processes to manufacture steel along with a sinter plant, coke oven battery and captive power plant. The unique combination technology offers BSL a flexible cost structure in the scenario of a surge in raw material prices (particularly coking coal). Efficient planning manufacturing process along with the close proximity of mines will help BSL to one of the lowest cost producers of steel.

Strong Q4FY10 results:

The sales of the company grew by 44% (y-o-y) to Rs 1608 crores. Mainly driven by higher volumes (increase of 23% as compared to Q4FY09) & better realizations (an increase of 17% y-o-y). EBITDA of the company grew by 62% (y-o-y) mainly due to better realizations. Net profit of the company posted a strong growth of 93% (y-o-y) to Rs 240.9 crore driven mainly on account of higher other income which grew by 468% (y-o-y) and decline in interest payment by 2% (y-o-y).

Peer comparison:-

(Rs in crore)

Valuations:-

At CMP of Rs 1494.05, the stock is trading at P/E of 7.5 for FY10EPS of Rs 195.2. We believe that the recently commissioned HR & slabs facility, will drive the volumes going forward. Along with the demand from Auto sector expected to be strong we recommend a “BUY” on the stock we value the stock at 9.5x P/E multiple on its FY10 EPS of Rs 195. which gives us a target price of Rs 1755 with a potential upside of 19.5%.

Disclaimer:

This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, investors are advised to satisfy themselves before making any investments. Kisan Ratilal Choksey Shares & Sec Pvt Ltd., does not bear any responsibility for the authentication of the information contained in the reports and consequently, is not liable for any decisions taken based on the same. Further, KRC Research Reports only provide information updates and analysis. All opinion for buying and selling are available to investors when they are registered clients of KRC Investment Advisory Services. As a matter of practice, KRC refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that,Kisan Ratilal Choksey Shares & Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale thereof while this report is in circulation.