FINANCIAL STATEMENT ANALYSIS AND RESEARCH

REPORT ON BHUSHAN STEEL LTD.

Submitted To: Dr. Pawan Jain

Submitted By: Saurabh Singhal (2012282)

Incorporated in January 1983, Bhushan Steel is Indias third largest secondary steel producing company with an existing steel production capacity of 2.2mn tonne. The company is the largest auto-grade steelmaker in India and specializes in manufacturing value-added flat products. It has three manufacturing units in the states of Uttar Pradesh (Sahibabad Unit), Maharashtra (Khopoli unit), and Orissa (Meramandali unit) in India and has a sales network across many countries. The market capitalization of Bhushan Steel is Rs. 10,858 crores with the current market price of Rs. 480.40 per share which is 5.26% up from April 2013 price, which is quite consistent with the Sensex that also increases by 5.93% since April this year. The market cap of Bhushan steel is closer to its next competitor i.e. JSW steel (Rs. 15,790 crores) while still quite behind that of TATA steel (Rs. 30,583 crores). For First quarter of FY2014, Bhushan Steel reported a decline in top-line of 13.33% QoQ; however, its bottom-line declined 62.97% QoQ due to higher depreciation and interest costs. Raw material accounts for nearly 53% of sales and 72% of total expenditure. The iron ore prices have increased by almost 33% from a level of $101/ton to $133/ton from September last year. Coking coal prices have decreased by 19.33% to $65/ton from the levels of $80/ton. Any further hike in raw material prices would dent the margins to the tune of 3-5%. The decline in sales is majorly in domestic sales that fall by 17.75% while export sales have increased by 10.25%.

Sales Turnover
50,000.00 40,000.00 30,000.00 20,000.00 10,000.00 0.00 15000 10000 5000 0

Operating Profit

Bhushan

JSW

TATA

Bhushan

JSW

TATA

Bhushan steel has been growing at a rate of over 18% a year effectively from 2008 onwards. The operating and net profit has also been consistently increasing for the company.

EPS
250 200 150 100 50 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Bhushan JSW TATA 8000 6000 4000 2000 0

Net profit

Bhushan

JSW

TATA

Future Prospects: Steel manufactures have hiked steel prices nearly 21% during the last four months, thereby leaving little scope for further hikes. Adding to that high interest rate scenario is prevailing in the industry. Bhushan Steel which primarily caters to auto manufactures is likely to be affected by high interest, as the demand for auto grade steel is expected to slow down. A complete pass- through to final steel consumers remains unlikely, that means steel producers may have to bite into their margins for the next two quarters. Bhushan Steel has nearly doubled its steel capacity over the past five years. The benefits of its phase III expansion is expected to be witnessed during FY2014-15 with strong volume growth. However, its high leverage remain as the matter of concern. Depreciation expense increased 13.10% YoY to Rs.233cr on account of increased capacity. Interest expenses also increased 6.63% YoY to Rs.402cr due to increase in debt. Consequently, the reported net profit decreased by 62.97% YoY to Rs.76cr.

During the quarter the company commissioned 0.45 mtpa CRM in Odisha which is under trial and run process. The 2.5 MTPA HRC plant under Odisha phase III expansion is running on track and is expected to commission by October 2013. Further, the company is setting up 1.3 mtpa coke oven, 197MW CPP and 1.8 mtpa CRM in Odisha, expected in FY14 FY15. Considering the highly leveraged balance sheet (Total debt of INR 200 bn with a D/E of 4.34 x) company board has approved the fund raising plan of INR 7 bn through the rights issue. This would result in lower interest expenses and considered as a positive development in the long run. Recommendation: The company is continuously focusing; both on forward as well as backward integration which may provide it a high growth trajectory. However, higher interest expenses and abrupt raw material supply at Odisha would be a major concern for the company going forward but companys strategic moves towards financial restructuring and initiatives towards captive raw material sourcing may provide some relief going forward. At current market price, the stock is trading at 7.3x FY13E EV/ EBITDA which seems to be at the lower end considering the product basket and the expansion plans. We believe company to deliver better performance on the back of higher capacity along with better product mix and recommend ACCUMULATE on the stock with a price target of INR 510.