Monnet-Ispat CRISIL 170412

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CRISIL IERIndependentEquityResearch
Monnet Ispat & Apollo Hospitals Energy Ltd Enterprise Ltd

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Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a fivepoint scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).
CRISIL Fundamental Grade

5/5 4/5 3/5 2/5 1/5
Assessment
Excellent fundamentals Superior fundamentals Good fundamentals Moderate fundamentals Poor fundamentals
CRISIL Valuation Grade

5/5 4/5 3/5 2/5 1/5
Assessment
Strong upside (>25% from CMP) Upside (10-25% from CMP) Align (+-10% from CMP) Downside (negative 10-25% from CMP) Strong downside (<-25% from CMP)
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Monnet Ispat & Energy Ltd

Capacity expansion to take it a level higher
Fundamental Grade Valuation Grade Industry 4/5 (Superior fundamentals) 5/5 (CMP has strong upside) Metals & Mining
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April 16, 2012 Fair Value CMP CFV MATRIX

Excellent Fundamentals
Rs 660 Rs 470
Fundamental Grade
Monnet Ispat & Energy Ltd (Monnet) is expanding capacity to fuel the next level of growth and become an integrated steel company with total steel capacity of 1.8 mn MTPA. The operational captive coal mine along with other allocated iron ore and coking coal mines, once operational, will partially meet its raw material requirement and give it a cost advantage. Further, diversification into power generation with a 1,050 MW power plant in Orissa is expected to be value accretive given captive fuel linkages. However, regulatory approvals and delays remain key monitorables. We reaffirm a fundamental grade of 4/5 on Monnet, indicating that its fundamentals are superior relative to other listed securities in India. Transitioning into a mid-sized integrated steel player Monnet is transitioning from the second largest coal-based sponge iron producer to a midsized integrated steel company with a capacity of 1.8 mn MTPA by end-FY14. The expansion will help raise the share of value-added products (structural steel, longs (bars) and flats (plates)) in the revenue to 63% in FY13 and 79% in FY14 from 8% in FY11. The mining linkage for iron ore, coal and coking coal will partially meet its requirement and give it a cost advantage. Power plant to fuel growth Work on subsidiary Monnet Powers 1,050 MW power plant is progressing and is expected to be commissioned in FY14. The upcoming pit head plant has 100% coal linkage through its two captive blocks, making it very cost efficient and highly profitable. Utkal mine, the first block, has secured all approvals and is set to start operations once the mining lease is signed. The Mandani block is yet to secure regulatory approvals. Operates in a cyclical industry, faces regulatory delays Monnet operates in a highly cyclical industry - steel - where the profitability of the players is dependent on global steel prices. Further, the company faces the risk of delay in approvals for its mines (except Utkal mine), which can hamper its profitability and expansion plans. Standalone revenues to grow at a three-year CAGR of 35% We expect Monnets standalone revenues to grow to Rs 39 bn by FY14 from Rs 15.7 bn in FY11, largely driven by capacity expansion. EBITDA margin is expected to drop to 25% in FY13 from 29% in FY11 on account of lower margins from pig iron; however, it is expected to improve in FY14 to 28% with the commissioning of the pellet plant and iron ore mine. Margins are expected to improve in the long run as the captive coking coal block also becomes operational. Valuations the current market price has strong upside CRISIL Research has used the sum-of-the-parts (SOTP) method to value Monnet and arrived at a fair value of Rs 660 per share. Our valuation grade is 5/5, which indicates the market price has a strong upside from the current.
5 4 3 2 1
Poor Fundamentals
Valuation Grade
Strong Downside Strong Upside
KEY STOCK STATISTICS

NIFTY/SENSEX 5207/17090 MONNETISPA/ NSE /BSE ticker MONNET Face value (Rs per share) 10 Shares outstanding (mn) 64.3 Market cap (Rs mn)/(US$ mn) 30,240/588 Enterprise value (Rs mn)/(US$ mn) 50,077/974 52-week range (Rs)/(H/L) 535/305 Beta 0.97 Free float (%) 50.6% Avg daily volumes (30-days) 24,483 Avg daily value (30-days) (Rs mn) 8.9
SHAREHOLDING PATTERN
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 49.4% 49.4% 49.4% 49.4% 13.6% 4.5% 32.5% 14.1% 4.4% 32.1% 10.9% 4.4% 35.3% 11.5% 4.3% 34.8%
KEY FORECAST (STANDALONE)

(Rs mn) Operating income EBITDA Adj Net income EPS-Rs EPS growth (%) Dividend yield (%) P/E (x) P/BV (x) RoCE (%) RoE (%) FY10 14,825 4,487 2,709 51.8 15.2 1.2 9.1 1.5 13.3 19.0 FY11 15,705 4,522 2,819 43.8 (15.5) 1.1 10.7 1.4 9.6 15.1 FY12E 18,473 5,019 2,957 45.9 4.9 1.1 10.2 1.3 7.9 13.3 11.8 FY13E 29,794 7,311 3,019 46.9 2.1 1.1 10.0 1.2 8.4 12.2 9.0 FY14E 39,057 10,800 4,205 65.3 39.3 1.1 7.2 1.0 11.9 15.0 6.5
0% Mar-11 Promoter Jun-11 FII Sep-11 DII Dec-11 Others
PERFORMANCE VIS--VIS MARKET

1-m 2% -4% Returns 3-m 6-m 18% -3% 7% 3% 12-m -11% -12%
Monnet NIFTY
ANALYTICAL CONTACT
Chetan Majithia (Head) Vishal Rampuria Pravesh Rawat Client servicing desk +91 22 3342 3561 clientservicing@crisil.com chetan.majithia@crisil.com vishal.rampuria@crisil.com pravesh.rawat@crisil.com
EV/EBITDA (x) 8.3 11.1 NM: Not meaningful; CMP: Current market price Source: Company, CRISIL Research estimates
Table 1: Monnet Business environment (Standalone)
Product / Segment Revenue contribution (FY11) Sponge iron 68.7% Steel and others 11.3% Power 20.0%
Revenue contribution (FY12/FY13/FY14) Product / service offering
69% / 21% / 12%
19% / 68% / 82%
12% / 11% / 6%
Coal-based sponge iron
Various sizes of structural sections covering a wide range of structural grades, ferro alloys
Power generated through coal and waste heat
Geographic presence
Manufacturing facility: Raipur and Raigarh, Chhattisgarh
Manufacturing facility: Raipur, Chhattisgarh Manufacturing facility: Raipur and Raigarh, Chhattisgarh Manufacturing facility in Raigarh under construction
Market position Industry growth expectations Sales growth (FY08-FY11 3-yr CAGR) Sales forecast (FY11-FY14 3-yr CAGR)
Second largest coal-based sponge iron producer in India 33% Domestic steel demand is expected to increase at a healthier pace of 7-9% over the next couple of years International steel demand is expected to grow at a CAGR of 5-6% -38% 184%
-25% (captive consumption to lead to decline in sponge iron sales)
160%
-9% (captive consumption to lead to decline in power)
Demand drivers Key competitors Key risks
Strong growth in infrastructure, construction and automobiles sectors The government's increased focus on infrastructure development
JSPL, JSW Steel, Tata Steel, SAIL, Jai Balaji Steel, MSP Steel, Bhushan Steel and others Dependence on the open market for procuring iron ore and coking coal exposes Monnet to fluctuations in raw material prices Sale of residual power after captive use in the merchant market exposes Monnet to the risk of decrease in merchant rates in the future Monnet is yet to commence mining extraction. Any delay in that will negatively impact the companys profitability
Source: Company, CRISIL Research
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Grading Rationale
Second largest sponge iron producer in India...
Monnet, the second largest producer of coal-based sponge iron in India, also produces steel, structural steel and power. It has sponge iron capacity of 0.8 mn MTPA (million tonnes per annum), steel capacity of 0.3 mn MTPA, structural steel (long steel) capacity of 0.2mn MTPA and power capacity of 150 MW.
Second largest sponge iron player with nearly the highest utilisation rate in the industry
Table 2: Capacity of sponge iron players

000 MT Jindal Steel & Power Monnet Ispat Tata Sponge Iron Ltd Jai Balaji Sponge Bhushan Steel MSP Steel Godawari Power FY08 1,370 800 390 445 340 192 495 FY09 1,370 800 390 225 680 192 495 FY10 1,370 800 390 345 680 192 495 FY11 1,370 800 390 345 900 308 495
Source: Prowess, CRISIL Research
Table 3: Utilisation rates of sponge iron players

(%) Jindal Steel & Power Monnet Ispat Tata Sponge Iron Ltd Jai Balaji Sponge Bhushan Steel MSP Steel Godawari Power FY08 87 61 85 70 89 71 52 FY09 94 75 88 77 52 65 43 FY10 96 89 92 83 59 81 14 FY11 96 87 98 63 45 72 21
Source: Prowess, CRISIL Research
... Expanding capacity to fuel next level of growth

Monnet is in the process of transitioning from a sponge iron player to a mid-sized integrated steel company with total steel capacity of 1.8 mn MTPA. It is in the process of installing 0.81 mn MTPA of metallics (sponge iron 0.2 mn MTPA and pig iron 0.61 mn MTPA), 1.5 mn MTPA of steel and 80 MW of power during FY11-14 at its Raigarh facility. The expansion will enable the company to produce both long (bars) and flat (plates) products. The project also includes backward integration into pellet and sinter plants (one each) to reduce the cost of iron ore. We expect Monnets standalone revenues to grow at 35% CAGR to Rs 39 bn by FY14 from Rs 15.7 bn in FY11.
Transitioning from a sponge iron player to an integrated 1.8 mn MTPA steel player
Table 4: Capacity time line

Capacity Power plant Blast furnace SMS1 SMS2 Bar mill Plate mill Sponge iron Capacity 80 MW 0.61 mn MTPA 0.75 mn MTPA 0.75 mn MTPA 0.65 mn MTPA 0.85 mn MTPA 0.22 mn MTPA CRISILs estimate on COD Q1FY13 Q2FY13 Q2FY13 Q4FY13 Q2FY13 Q4FY13 Q2FY14
Source: CRISIL Research
Monnet is expected to incur capital expenditure of ~Rs 36 bn over FY11-14 to complete the expansion. It will be funded though a mix of debt and internal accrual; the company has already tied up for its debt requirements. We expect the major part of the expansion to come on stream in FY13. The company has spent close to ~Rs 26 bn as of H1FY12.
Strategic expansion to provide value addition and hedge

The company is expanding its capacity to add value-added products to its portfolio. It is also adding a second route of steel manufacturing blast furnace, which will provide it with a hedge against raw material price fluctuations. The completion of the total capacity addition will enable the company to enjoy higher per tonne realisation of ~Rs 34,000 in FY14 and will provide cushion against raw material price volatility. Figure 1: Expanding across the value chain FY11 FY13 FY14
150MW 0.86mn mtpa
0.61mn mtpa
0.61mn mtpa
0.85mn mtpa
0.30mn mtpa
0.20mn mtpa
0.86mn mtpa
Power
1.80mn mtpa
0.85mn mtpa Steel Pig Iron
230MW Power
1.02mn mtpa Mettalics
1.80mn mtpa SMS Sponge Iron
0.85mn mtpa Steel Pig Iron
230MW Power
Mettalics
SMS Sponge Iron
Steel Pig Iron
Mettalics
SMS Sponge Iron
Forward integration to add more value-added products: Monnet is moving up the value
chain with the installation of 1.5 mn MTPA of value-added steel capacity (steel plate - 0.75 mn MTPA and steel bars 0.85 mn MTPA). The increasing contribution of higher value-added products will increase the blended realisation at 25% CAGR over FY11 to FY14.
Figure 2: Value-added products to contribute more

90% 80% 70%
Figure 3: Blended steel/tonne realisation to rise

(Rs per tonnne) 40,000 33,231 35,000 41.1% 30,000 23,911 25,000 17,237 14,055 31.3% 15,000 10,000 34,036
60% 50% 40% 30% 20% 10% 0% FY10 15.7% 12.8% FY12E Steel Bar 13.0% FY13E 19.9%
20,000 30.4%
7.6% FY11
7.0% FY14E
5,000 0 FY10 FY11 FY12E FY13E FY14E
Structural Steel
Steel plate
Source: CRISIL Research, World Steel Association
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Blast furnace to provide a hedge: The company is planning to use the blast furnace to
produce steel in addition to the currently operational sponge iron route. The primary difference in the two methods is the types of raw materials used - scrap and power are used in the sponge iron route and coke in the blast furnace route. The availability of both capacities will provide a hedge against direct and indirect impact of higher cost of manufacturing from any single route. For instance, a player with only sponge iron capacity is exposed to the dip in steel prices on account of a drop in coke prices a key raw material for the blast furnace. Reduction in coke prices will reduce the cost of producing steel from the blast furnace route and a lower cost will pull the price down. In this case, sponge iron players are left with the only option of selling steel at reduced prices, thus putting pressure on their profitability as their cost of steel manufacturing is unchanged. Also the company will enter into flat products using steel manufactured through the blast furnace route. The captive mine meets ~72-75% of coal requirement for the sponge iron plant.
Availability of both capacities will provide a hedge against higher cost of manufacturing from any single route
Linkage, backward integration support profitability

Monnet enjoyed higher EBITDA margins of 29% in FY11 and 30% in FY10 compared to 15%20% of other smaller players such as MSP Steel, Jai Balaji and Godavari Power. During the turbulent times faced by the industry in the past quarters, margins of non-integrated players have fallen significantly on account of high raw material prices. On the contrary, Monnets margins have been relatively steady thanks to its coal linkage, though it remains exposed to iron ore price fluctuations. Coal cost is ~45-50% of the total cost of production of sponge iron.
Figure 4: Highly volatile margins of non-linked players

40% 35% 30% 25% 20% 15% 10% 5% 0% -5% Q3FY11 MSP Godawari Power Q4FY11 Q1FY12 Jai Balaji Tata Sponge Q2FY12 Q3FY12 Bhushan Steel Monnet
Captive coal mine to reduce per

Coal mine: Monnet operates the Milupara mine - the largest underground coal block in India. It has steel grade coal reserves of ~86 MT and annual production capacity of 1 MT. Its requirement for the sponge iron plant is largely met by coal produced from the mine. During FY11, close to 72-75% of coal demand for the sponge iron plant was met with coal from the Milupara mine. The coal from this mine costs ~Rs 1,400-1,500 per tonne compared to the market price of ~Rs 3,700 per tonne (Grade B) in FY11. This makes Monnet cost competitive compared to other players in the industry. The company is expected to save ~Rs 2,800 per
tonne cost of steel production by ~Rs 2,800 in FY12
tonne of steel production in FY12 with the help of its captive coal mine, which will support FY12 EBITDA margin by ~1080 bps.
Figure 5: Captive coal to support EBITDA margin

30% 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% FY12E EBITDA margin (Captive coal) FY13E FY14E EBITDA Margin (Market purchse) 17.2% 16.3% 20.6% 27.2% 24.5% 27.7%
Source: Company, CRISIL Research Power production using waste heat: The company, in-line with the industry practice, uses waste heat produced during the production of sponge iron to generate power. It produces ~30% of total power through the waste heat, which is extremely cost competitive. Monnet has an installed capacity of 150 MW and is in the process of increasing it to 230 MW by end-FY12. The company has further commissioned 12 MW under its 97% owned subsidiary, Rameshwaram Steel & Power Pvt Ltd, which sells power in the open market. The total power generation is more than the requirement in steel production which allows the company to sell surplus power in the open market. The cost of processing waste heat for use in the turbines is close to Rs 0.4-Rs 0.5 per KWh of power produced while it is sold for Rs 3.5 per KWh of power. However, the cost of power produced from coal (market purchase) is ~Rs3.2-Rs 3.5 per unit. We expect power sales to contribute 12%, 11% and 6% to the total sales in FY12, FY13 and FY14 respectively. The decrease in power contribution is on account of increased contribution from value-added steel products bars and plates. Considering huge power capacity additions in India in the near future with increasing fuel cost, CRISIL Research expects merchant rate to hover around Rs 3.7-3.9 per KWh in FY14.
Merchant sale of captive power helps increase EBITDA margins
Figure 6: Low-cost power expands margins

(Rs per KWh) 6.0 5.0 3.92 4.0 3.10 3.0 2.0 1.0 0.0 FY08 FY09 FY10 FY11E FY12E FY13E FY14E Sales price per KWh Cost of captive production per KWh 2.72 1.59 2.14 1.58 1.41 1.55 1.55 1.58 3.60 3.80 5.45 4.79
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But expansion exposes to raw material price risk

Monnets capacity expansion will increase its requirement of coal, iron ore and coking coal. So far, its captive coal mine caters to ~50% of total coal requirement (steel + power) but this is likely to decrease to ~45% with the commissioning of the 80 MW power plant. Further, after the addition of the blast furnace, the company will require coke along with the iron ore, which will increase Monnets exposure to market purchase of raw materials. Given a high percentage of raw material cost to overall costs and volatility in the prices of these raw materials, the profitability of the steel producer remains highly susceptible to price change. We expect Monnets margins to contract in FY13 on account of increased exposure to market purchases of raw material.
Figure 7: Raw material exposure (FY13E)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Coal Captive Iron Ore Market purchase Coke 46% 100% 100% 54%
Figure 8: EBITDA margins susceptibility

29% 27% 27.2% 25% 23% 23.2% 21% 19% 19.1% 17% 15% FY12E 10% increase in Iron ore 10% incrase in both FY13E FY14E 10% increase in coke Expected EBITDA margin 17.8% 21.9% 22.3% 23.2% 22.3% 24.5% 23.7% 27.2% 27.7%
Benefit to return with iron ore and coking coal mines

Monnet has been allocated mining assets, which will help it reduce exposure to fluctuation in market prices of iron ore and coking coal. It is also setting up a 1.2 mn MTPA pellet capacity. The company will use low-cost iron ore fines to produce pellets at a cost of Rs 3000-3500 per tonne. We expect EBITDA margin to improve by 300 bps in FY14 to 28.2% on account of part commissioning of the iron ore mine and the pellet capacity. Post FY14, when the mines (iron ore and coking coal) and pellet capacity become fully operational, Monnets profitability will improve significantly. Coal mine: Monnet plans to increase the extraction of coal to 1.5 mn MTPA at the Milupara mine, which will further support the sponge iron manufacturing unit. The company has also been allocated one more coal mine (steel grade) in Rajgamar, Chhattisgarh but the benefit of the mine is expected to flow post FY14. Iron ore mine: Monnet bought 97% stake in Rameshwaram Steel & Power, which owns an iron ore mine in Rajnath Gaon, Chhattisgarh. The mine is an underground one with 30 MT reserves (62-65% iron content). Post expansion (installation of the 0.61 mn MTPA blast furnace and expansion of sponge iron plant to 1.02 mn MTPA), the company will require close
to 2.2 mn MTPA of iron ore. The mine will have capacity of 0.8 mn MTPA, which if operational at 90% will produce .72 mn MTPA - 33% of the total expected requirement. Pellet and sinter plants: Monnet is setting up a 1.2 mn MTPA pellet plant and a 0.9 mn MTPA sinter plant by the end of FY13. We believe this will help the company reduce its exposure to iron ore purchases and further add to the profitability as it would reduce per tonne cost of iron ore by 15-20%. The pellet plant, running at 65% capacity utilisation, can meet ~34% of the total expected iron ore requirement post expansion. However, even after the commissioning of these plants, Monnet will have to purchase iron ore fines from the market exposing it to the price fluctuations of iron ore fines. Coking coal mine: With installation of the blast furnace, for the initial years Monnet will have to purchase coking coal from the market. But this exposure is covered in the long term as it has been allocated a coking coal mine in Madhya Pradesh with total reserves of 69.8 MT and Monnets share is 23.3 MT (approximate cost ~ Rs 5,000-6,000 per tonne).
Figure 9: Gross margin to improve

43% 41.7% 42% 41% 40% 39% 38% 37% 36% 35% 34% FY10 FY11 FY12E FY13E FY14E 37.7% 37.1% 40.1% 41.5%
Table 5: Captive mines contribution
FY10 Coal Iron ore Coke 49% 0% NA
FY11 50% 0% NA
FY12E 50% 0% NA
FY13E 46% 0% 0%
FY14E 54% 31% 0%
Iron ore includes mines as well as pellet plant
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Table 6: Status of allocated mines

Quality of Mine Milupara, Raigarh Rajnath, Chhattisgarh Rajgamar Urtan -North, Madhya Pradesh Mine type Underground coal mine Underground iron ore mine Underground coal mine Underground coking coal mine B to E grade coal NA Total reserves - 61.7, Monnet share - 49.9 Total reserves - 69.8, Monnet share - 23.3 FY15 mineral B to D grade coal 62-65% Fe 30 Reserves (mn MT) 86 Extraction Present - 1mn MTPA Expected - 1.5mn MTPA Expected - 0.8 mn MTPA FY15 Expected time-line of extraction Operational; by end-FY13 FY14 Status of development The company has initiated the the capacity to 1.5 mn MTPA Yet to commence land acquisition, forest clearance and mining lease Yet to commence land acquisition, forest clearance and mining lease Yet to commence land acquisition, forest clearance and mining lease
expansion expected process for approval to increase
Healthy growth in the domestic industry

CRISIL Research expects the international demand for steel to grow at a CAGR of 5-6% while domestic demand is expected to increase at a healthier pace of 7-9% over the next couple of years. CRISIL Research estimates domestic steel demand growth to first slow down to 5-7% in 2011-12 and then pick up from 2013-14 onwards driven by investments in infrastructure, oil and gas pipelines and healthy demand growth in automobiles. Demand is also expected to be supported by growth in segments like capital goods and consumer durables.
Domestic steel demand expected to grow at a CAGR of 7-9%
Figure 10: Global demand for steel on the rise...

(Million Tonnes) 1800 1600 1400 1200 1000 800 600 400 200 0 2008 2009 2010 2011E 2012P 2015P 1206 1312 1134 1372 1693 1434
Figure 11: ... so also domestic demand

(Million Tonnes) 100 90 80 70 60 50 40 30 20 10 0 FY10 FY11 FY12E FY13P FY16P 56.1 62.2 65.8 70.2 90.6
Source: CRISIL Research, World Steel Association
Demand for steel in India has been hit by persistent inflation, higher interest rates and their effect on end-user demand. With rising cost of finance and execution delays owing to environment clearances, many construction and infrastructure projects are not taking off as expected, translating to lower demand for steel as of now.
Prices to cool off due to rising supply
With higher capacity additions expected during FY12 to FY16, the demand-to-capacity ratio is expected to moderate. The crude steel capacity addition of 55-60 mn MTPA tonnes has been announced for the next five years. Considering the ongoing concerns such as land acquisition and delays in environmental and forest clearance, CRISIL Research expects domestic steel manufacturers to add only 40-45 mn MTPA capacity over FY12 to FY16. Most of these planned capacities are expected to be commissioned during FY14 to FY16. Incremental demand is expected to be 28-32 mn MTPA - relatively lower than the incremental supply, which will widen the demand-supply gap and put a downward pressure on steel prices.
Figure 12: Domestic demand and capacity

(Million Tonnes) 120 100 0.88 80 60 0.85 40 20 56 0 FY10 FY11 FY12E FY13P FY16P Demand/Capacity (RHS) 65 62 70 66 77 70 83 91 108 0.82 0.81 0.86 0.87 0.86 0.85 0.84 0.85 0.84 0.83 0.89 0.90 0.89
Finished steel demand
Finished steel Supply
Industry suffering cost pressure and waning demand

Domestic steel industry is facing cost side pressures on account of soaring raw material prices. Non-availability of coal and iron ore on account of mining ban and delay in environment clearance for new mines has lowered the supply of these minerals in the industry. During 9MFY12, steel demand has grown at only ~4% y-o-y. Over the past decade, margins of mining companies have increased whereas margins of iron producers have decreased, which shows the shift in bargaining power in favour of mining companies. Any progress on the long-awaited reforms land acquisition, decision on mining ban, coal availability - will improve the profitability of the steel industry.
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Monnets strategic investments - Orissa Sponge and Indonesia mine

Orissa Sponge
Monnet acquired 11.07% stake in Orissa Sponge through its associate Mount Everest Trading and Investment in FY09. To gain access to Mount Everests investment in Orissa Sponge, Monnet merged Mount Everest with itself in FY10 by issuing two shares of Monnet for every five shares held in Mount Everest. Later, Monnet bought ~15% shares from the promoters of Orissa Sponge, increasing its total stake to 26% in the company. The shares are lying in the escrow account as the company is required to make an open offer before claiming ownership. Monnet is reported to be competing with Bhushan Steel to acquire the controlling stake in Orissa Sponge. Orissa Sponge is a small integrated steel company with an installed capacity of - sponge iron 0.25 mn MTPA, power - 24MW and steel billet 0.10 mn MTPA. It also has two mining assets iron ore (~120 mn MT reserves with Fe grade of 62-65%) and coal (~120 mn MT reserves). Both are located close to the steel plant, which lowers the transportation cost.
100% raw material linkages make Orissa Sponge a low cost steel producer
Coal mine in Indonesia

Monnet has acquired a coal mine - having 65 mn tonnes of reserves in Indonesia at a cost of US$24 mn. The mine has a stripping ratio of 1:3.5 and has low-sulphur coal. The company has already demarcated the extraction area. The company is evaluating various options of coal usage import to India and a sale in the open market and setting up a coal based thermal power plant on the Indian coast. We have not incorporated this in our forecast because of lack of clarity on the timelines of mining and use of coal.
1,050 MW power plant a value changer

Monnet is entering the power generation space as an independent power producer (IPP) by setting up a 1,050 MW power plant in Angul, Orissa under its 87.5%-owned subsidiary Monnet Power. This will help it de-risk the cyclicality of the metal business. The plant will have two units of 525 MW each at a total cost of ~Rs 50 bn. The company will use coal from two coal mines allocated to it in Orissa, which are in proximity to the plant.
Capital tied up roped in Blackstone as investor

Monnet has achieved financial closure of the 1,050 MW power plant and plans to fund the estimated cost of Rs 50 bn with a debt-equity ratio of 3:1. The equity portion (~Rs 12.3 bn) will be funded by Monnet (Rs 6.05 bn), Blackstone (Rs 2.75 bn) and preferred equity (Rs 3.5 bn). Out of the committed capital of Rs 6.05 bn, Monnet has infused ~Rs 3.1 bn in the company as of March 2011. It sold a 12.5% stake to Blackstone in July 2010 for Rs 2.75 bn, valuing the subsidiary at Rs 22 bn. The company has also tied up for preferred equity with IFCI, IL&FS and IDFC at a cost of 13.5% per annum.
Blackstone has bought 12.5% stake for Rs 2.75 bn, valuing the company at Rs 22 bn
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Project execution on track
The project has received all statutory approvals and clearances. It is being executed in two units of 525 MW each. The management expects the first phase to go on line by July 2013 and the second phase by the end of September 2013. The company has given the order for BTG equipment to BHEL and the balance of plant (BOP) order has been given to Indure Pvt Ltd. During our site visit on February 17, 2012, we found that boiler foundation for the first phase has been completed and boiler drum has arrived at the site. The boiler lifting for the first unit is expected to be completed by February-end. The company is also planning to start work in two shifts to hasten the pace of construction. We expect delay in the commissioning by twothree months considering it is the first independent power producer project by the group and its size.
1,050 MW power plant with 100% coal linkage
Table 7: Activity-wise status of the power plant

Activity Land acquisition BTG (phase I) BTG (phase II) BOP Status 81% land acquired out of total land required for main plant area. Boiler foundation has been completed. Boiler lifting to be completed by February-end. Turbine foundation concreting is in progress. Eight out of 14 columns casting is complete. Boiler foundation is complete. Boiler drum manufacturing is in progress. Turbine foundation concreting is in progress. Chimney raft casting is complete. Civil work for all four cooling towers is in progress, it is in the advance stage for two cooling towers required in phase I Source: Company, CRISIL Research
Captive linkage makes it extremely cost competitive

The power project is expected to be a very profitable venture as the complete fuel requirement is expected to be met from its nearby-located captive coal mines. Once the plant is fully operational, it will require close to 5.3 mn MTPA of thermal grade coal. Monnet has been allocated two coal blocks in Orissa - Utkal B2, Angul and Mandakini, Talcher with combined reserves of ~182 mn MT. The mines will have a combined annual production of more than ~8.5 mn MT (Angul 3.5 mn MT and Mandakini 5 mn MT). Overall, we expect the cost of generation to be Rs 1.3-1.5 per KWh, making it extremely cost competitive. Utkal B2 coal mine: The Utkal B2 mine is in the advanced stage of completion and the company has acquired ~90% of the land. The company has received all the necessary approvals. It is seeking approval from the state government for the lease of mining surface post which extraction can be started. The company has built a resettlement and rehabilitation (R&R) colony to shift the land occupants. The very low stripping ratio of 1:0.85 and proximity (~5 km, the coal will be transported through a conveyor belt) to the power plant ensure very low raw material cost. As per the management, the cost of coal from Utkal B2 will be ~Rs 300350 per tonne compared to the market rate of Rs 1,500 per tonne. The company plans to outsource the mining operation. The management expects the mine to be operational in Q1FY13. The usage of mine has been changed to steel and power from earlier steel, however there is still an ambiguity over the usage mix between steel and power. The company has been following up with the ministry for the same.
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Mandakini coal mine: Monnet has been allocated Mandakini mine in collaboration with Tata Power and Jindal Photo. The company is in advance stage of getting Forest-I approval. The mine is at a distance of ~20 km from the plant and coal will be transferred through a conveyor belt. The management expects the mine to be operational in end-FY14. In case the other partners are unable to use the allocated coal for captive consumption, Monnet is entitled to use their share for its captive consumption. Jindal Photo is setting up a 1,800 MW power plant (to be commissioned in FY13) through its step-down subsidiary Jindal India Thermal Power Ltd (JITPL) in Angul, Orissa. Tata Power has not started any work on the power plant and therefore, would let the other two companies to use the TATAs share in the medium term.
Table 8: Details of coal mines to be used for power plant feed

Mine Mine type Reserves (mn MT)* Utkal B2, Orissa Open cast - E, F grade coal Mandakini, Orissa* Open cast - E, F grade coal *Monnets share Source: Company, CRISIL Research 96.9 5.0 0.5 1.5 2.0 3.3 5 <20 km 85.0 Capacity (mn MTPA) 3.5 Expected production (mn MTPA) FY14 3.1 FY15 3.5 FY16 3.5 FY17 3.5 FY18 3.5 Distance from plant <5 km Mining cost ~ Rs 350 per tonne ~ Rs 350 per tonne
Secured off-take for ~69% of saleable power

The company has signed power purchase agreements for the capacity of 570 MW. It has signed agreements with a) Orissa State Electricity Board for 250 MW at OERC power pricing formula (fixed RoE-based tariff calculation), and b) West Bengal SEB for 320 MW at Rs 3.2 per MWh. The company plans to merchant the rest of the available power 260MW.
Table 9: PPA details

Capacity (MW) Total installed capacity Auxiliary consumption Plant load factor Available for sale Orissa SEB West Bengal SEB Open Market Average realisation Source: Company, CRISIL Research 1050 7% 85% 830 250 320 260 Rs 1.8 per KWh Rs 3.2 per KWh Rs 3.5-4 per KWh Rs 2.9 per KWh Confirmed Confirmed Tariff rates (Rs/Kwh) Status
The company will get a blended rate of ~Rs 2.9 per KWh
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Mining delay a threat

The company has been allocated two coal blocks for the power plant. For Utkal B2, the company only requires the surface lease from the state government to start the coal extraction but resettlement of villagers living on the mining area is a key monitorable. Monnet has already received consent letters from the villages and started the construction of R&R colonies. It has also agreed to offer jobs to one male member (with age over 18 years) per family. For Mandakini, the company is seeking environmental approvals. Any delay on account of regulatory approval or people resettlement will jeopardise the power project timeline and also profitability of the company.
Peer comparison
EBITDA margin
In % Monnet JSPL MSP Steel Bhushan Steel Godawari Power TATA Sponge Jai Balaji FY07 27.69 35.08 21.39 20.97 16.93 10.19 13.36 FY08 21.90 34.37 19.05 24.98 16.85 9.91 18.86 FY09 24.56 30.76 15.91 29.74 10.64 4.89 9.63 FY10 30.26 33.19 17.70 37.6 15.02 6.15 12.22 FY11 28.79 36.4 21.02 39.24 18.52 6.89 14.5
PAT margin
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D/E
FY07 Monnet JSPL MSP Steel Bhushan Steel Godawari Power TATA Sponge Jai Balaji 1.76 1.41 1.40 2.67 1.35 0.93 2.74 FY08 1.01 1.03 1.57 3.52 0.75 0.35 4.23 FY09 1.10 0.92 1.61 3.31 0.77 0 5.23 FY10 0.90 1.24 2.06 2.86 0.82 0 1.76 FY11 1.28 1.39 2.20 2.81 1.15 0 1.9
Interest Coverage
FY07 Monnet JSPL MSP Steel Bhushan Steel Godawari Power TATA Sponge Jai Balaji 5.35 6.93 3.11 2.35 4.5 5.13 3.88 FY08 4.92 7.73 4.37 2.31 4.65 11.97 2.00 FY09 5.87 9.53 2.62 1.69 2.95 na 1.04 FY10 5.00 7.69 2.80 2.23 2.96 na 1.33 FY11 8.45 6.67 3.53 2.02 2.66 na 1.78
RoE
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Key risks
Exposed to fluctuation in iron ore and coke prices
Monnet procures iron ore from the open market, which exposes it to fluctuation in iron ore prices. Post installation of the blast furnace (0.61 mn MTPA) and expansion of the sponge iron plant (to 1.02 mn MTPA), Monnet will require close to 2.2 mn MTPA of iron ore and 0.32 mn MTPA of coke in FY14. The market purchase of these ores will constitute 60% of the total raw material cost in FY14. Increase in prices of these raw materials will severely affect the profitability of the company. A 10% increase in the prices of iron ore and coke will lead to ~280 bps contraction in the PAT margin. Further, the management has indicated that the company will focus on acquiring the raw material first before planning future capex.
Margins dependent on merchant power rate

The company has installed 150 MW power stations in its steel mills against a requirement of less than 40 MW. It sells the remaining power in the open market, which exposes it to the risk of decline in merchant rates in the future. CRISIL Research estimates high growth in supply will reduce the power deficit to 3.9% by 2015-16 from 8.5% in 2010-11, which pegs merchant rates in the Rs 3.8-4.4 per KWh range during FY12-16. The merchant rate in FY11 declined to ~Rs 3.6 from Rs ~5.2 in FY10.
Regulatory risk
The company has been allocated coal, iron ore and coke blocks but it is yet to receive the necessary approvals for most of them. Any delay in the clearance process of mining leases will negatively impact the companys future margins. Also, the draft mining bill mandates sharing of 26% of the profit from mining for development of the locals. In case the bill gets approved, it will adversely impact profitability of all the mining players including Monnet. Recently, the prime ministers office (PMO) directed Coal India to sign fuel supply agreements with power plants that have been commissioned up to December 31, 2011. As per the decision, Coal India will be penalised if the supply of coal is below 80%. This may reduce the steel industrys share in Coal Indias total coal output, which will hamper the profitability of the industry.
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Financial Outlook
Revenues to grow at three-year CAGR of 35%
Standalone revenues are expected to increase at a three-year CAGR of 35% to Rs 39 bn by FY14. The growth will be fuelled by capacity expansion and higher per unit realisation on account of increasing share of high value-added products. The company will start manufacturing steel through the pig iron route and commence the production of value-added products such as bars and plates.
Revenues likely to grow at a threeyear CAGR of 35% driven by capacity expansion and higher realisations
Figure 13: Expansion to drive revenue growth

(Rs mn) 45,000 40,000 35,000 30,000 25,000 30% 20,000 15,000 10,000 -5% 5,000 0 FY09 FY10 Revenue FY11 FY12E FY13E FY14E % change (RHS) 15,545 15,705 18,473 29,794 39,057 -10% 14,825 6% 18% 20% 34% 31% 61% 70% 60% 50% 40%
Figure 14: Increase in revenue per tonne

(Tonnes) 1,200,000 1,000,000 800,000 16,977 600,000 15,000 24,316 20,004 33,231 (Rs per tonne) 35,000 30,000 23,911 25,000 20,000
1,130,208
400,000
682,847
678,023
715,222
0%
200,000 0
837,966
10%
10,000 5,000 0
FY10
FY11
FY12E
FY13E
FY14E
Total tonnes sold
Revenue per tonne (RHS)
EBITDA margin to fall in short term, improve later

We expect Monnets EBITDA margin to decline to 27% in FY12 on account of increase in raw material cost. In FY13, it is expected to contract further by 210 bps to 25% on account of lower margins in the steel manufactured through the pig iron route as the company is exposed to the market for the purchase of iron ore and coking coal. The blast furnace is expected to get operational in FY13 but the iron ore mine and the pellet capacity are expected to get operational in FY14. However, post the commissioning of the iron ore mine and the pellet plant, we expect margin to improve by 311 bps to 28%. Post FY14, when the mine and the pellet capacity run on full capacity utilisation and coking coal mine also gets operational, we believe Monnets profitability will improve significantly.
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Figure 15: Margin expected to decline and then improve
(Rs mn) 12,000 10,000 8,000 6,000 15% 4,000 2,000 3,818 0 FY09 FY10 EBITDA FY11 FY12E FY13E FY14E 4,487 4,522 5,019 7,311 10,800 0% 10% 5% 30% 25% 35% 29% 27% 25% 25% 20% 28% 30%
EBITDA Margin (RHS)
PAT to grow at 14% CAGR; RoE to remain subdued

Monnets PAT is expected to grow at a three-year CAGR of 14% to Rs 4.2 bn in FY14. PAT growth is lower than EBITDA growth on account of increase in depreciation and interest expense due to capitalisation of WIP. The company is expected to post EPS of Rs 45.9, Rs 46.9 and Rs 65.3 in FY12, FY13 and FY14 respectively. The companys RoE is expected to remain at 15.0% in FY14 on account of lower asset turnover (underutilised capacity) and lower PAT margin (exposure to open market purchase of raw materials). However, we expect it will improve substantially once the capacity utilisation rate picks up and mines are operational.
Figure 16: PAT growth - expansion and mines

(Rs mn)
4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 FY09 FY10 FY11 FY12E FY13E FY14E 2,157 2,709 2,819 2,957 3,019 4,205 10.1 13.9 10.8 18.3 17.9 16.0 20 18 16 14 12 10 8 6 4 2 0
Figure 17: Improvement in RoE post FY13

20% 18% 16% 14% 12% 10% 8% 6% FY09 FY10 FY11 FY12E FY13E FY14E 15.1% 13.3% 12.2% 15.0% 18.8% 19.0%
Adjusted PAT
Adj PAT margin (RHS)
Debt equity ratio to increase to 1.4 in FY14

Post expansion, Monnets D/E ratio is expected to increase from 1.3 in FY11 to 1.4 in FY14. During FY13, when most of the capacity is expected to come on-stream, the interest cost will start flowing through the income statement. The interest coverage ratio is also expected to deteriorate to 2.2 in FY14. As per our discussion, we have learnt that management is keen to deleverage the balance sheet of the company.
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Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of management quality, apart from other key factors such as industry and business prospects, and financial performance.
Experienced management
Monnet has an experienced management headed by Mr Sandeep Jajodia, executive vice chairman and managing director. He has over 18 years of experience in diversified industries including steel, sugar and power. Under his management, Monnets sales grew at a five-year CAGR of 25% from Rs 5.3 bn in FY06 to Rs 15.7 bn in FY11.
Professional set-up and strong second line

Mr Sandeep Jajodia has adopted a professional approach towards managing Monnet. The company has inducted various professionals from the industry at the senior and mid management levels to prepare for the next level of growth. Mr Jajodia has built a strong team of professionals to back Monnets growth plans.
An experienced management
Mr K. K. Khanna, executive director projects: Mr Khanna has 40 years of experience and has held senior positions with Ispat Industries and SAIL Mr M. D. Mundra president projects: Mr Mundra has 33 years of experience in the power industry Mr K. L. Khurana, president power: Mr Khurana has 45 years of experience in the power industry and was previously with BHEL as executive director. Mr M. K. Sinha: Mr Sinha has 42 years of experience in the mining sector and was previously working as director (tech) with Coal India Mr Vinay Mittal, CEO Monnet Power Company Ltd: Monnet has recently Inducted Mr Mittal, as chief executive officer in the MPCL. He has worked with NTPC and TATA Power. He has vast experience of leading power projects in India. He was instrumental in the TATA Powers 4000 MW UMPP in Mundra.
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Corporate Governance
CRISILs fundamental grading methodology includes a broad assessment of corporate governance and management quality, apart from other key factors such as industry and business prospects, and financial performance. In this context, CRISIL Research analyses the shareholding structure, board composition, typical board processes, disclosure standards and related-party transactions. Any qualifications by regulators or auditors also serve as useful inputs while assessing a companys corporate governance. Overall, corporate governance at Monnet meets the regulatory requirement it has reasonably good board practices and an independent board.
Corporate governance practices meet the regulatory requirement
Board composition
The board consists of eight members, of whom six are independent directors, thereby meeting the requirements under Clause 49 of SEBIs listing guidelines. The board is chaired by an independent director, Mr Mohinder Gujral, who has 62 years of experience and was previously chairman of Railway Board and chairman of Coal India Ltd. The directors have a strong industry experience and are highly qualified. Given the background of directors, we believe the board is experienced. The independent directors on the board include:
Mr G C Mrig, who is experienced in cool mining and related activities and has retired as CMD of Bharat Coking Cool Ltd. He owns a coal washery. Mr. Gopal Tiwari, who is an Ex-Chairman of Chhattisgarh State Electricity Board, who has replaced Mr P L Nene on the board. He has also been inducted as an independent member of the Audit Committee.
Mr J P Lath, who has expertise in liasioning with the government departments for procuring registrations, licences and entering into MoUs with state governments. Mr C.P. Baid, who is former CEO of Sterlite Energy and former director of Sesa Goa. He was appointed as deputy managing director in 2010.
Boards processes
The companys quality of disclosure can be considered good judged by the level of information and details furnished in the annual report, websites and other publicly available data. The company has all the necessary committees audit, remuneration, nomination and investor grievance - in place to support corporate governance practices. The audit committee is chaired by an independent director, Mr Mohinder Gujral.
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Valuation
Grade: 5/5
We roll forward our model to FY14 and increase our fair value to Rs 660 per share
We have used the sum-of-the-parts (SOTP) method to value Monnet. The steel business is valued by the EV/EBITDA method, power business using discounted cash flow method and investments (Orissa Sponge, Indonesia coal mine and Rameshwaram steel) on the book value. We have rolled forward our model to FY14. The steel business has been valued at Rs 298 per share, power business at Rs 315 per share and investment in subsidiaries at Rs 47 per share. Consequently our fair value is Rs 660 per share and valuation grade is 5/5.
Steel business:
We have valued the steel business by the EV/EBITDA method and
assigned a multiple of 5.5 to the standalone FY14E EBITDA of Rs 10.8 bn.
Valuation of standalone steel business

Rs mn EBITDA x EV/EBITDA = EV - Net debt = Equity value / Number of shares = Value per share from steel business Source: CRISIL Research FY14E 10,800 5.5 59,400 40,276 19,124 64 298
Power business: In our initiating report, we estimated the power project to commence at
end-FY13, but the management has indicated a delay. We expect it to come on stream in H2FY14 and have factored in the delay in our valuation. We have valued Monnets 87.5% interest in the power subsidiary by the DCF method. Based on this method, we arrive at a total valuation of Rs 23.2 bn valuing Monnets 87.5% stake at Rs 20.3 bn. We have used cost of equity of 21% considering a project execution risk as it is Monnets first power project and ambiguity on the usage of coal from the mines between steel and power. This translates to a value of Rs 315 per share for Monnet.
Valuation of power business

(Rs mn) Installed capacity Sales (MWh) Tariff Revenue EBITDA EBITDA margins PAT FCFE NPV 87.5% share Number of shares Value per share Source: CRISIL Research -1,542 23,202 20,302 64 315 FY13E FY14E 525 1,283 2.75 3,529 2,272 64% -1,353 -692 FY15E 1050 5,560 2.78 15,443 11,827 77% 4,760 2656 FY16E 1050 7,271 2.81 20,397 16,070 79% 7,882 6450 . FY33E 1050 7,271 3.3 24,157 16,392 68% 8,676 11369
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One-year forward P/E band
(Rs) 800 700 600 500 400 300 200 100 0 10,000 0 40,000 30,000 20,000
One-year forward EV/EBITDA band

(Rs mn) 60,000 50,000
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Aug-06
Dec-11 Dec-11
Aug-07
Aug-08
Aug-09
Aug-11 Aug-11
Apr-12
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Aug-10
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
MIEL
6x
8x
10x
12x
14x
Apr-06
MIEL
4x
6x
8x
10x
Source: NSE, CRISIL Research
P/E premium / discount to NIFTY

0% -10% -20% -30% -40% -50% -60% -70% -80% -90%
P/E movement
(Times) 18 16 14 12 10 8 6 4 2 0 -1 std dev +1 std dev
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Aug-06
Aug-07
Aug-08
Aug-09
Aug-06
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Premium/Discount to NIFTY
Median premium/discount to NIFTY
1yr Fwd PE (x)
Median PE
22
Aug-10
Apr-12
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-06
Apr-07
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Peer comparison
Rs mn Monnet Ispat & Energy Ltd MSP Steel & Power Ltd Steel Authority Of India Bhushan Steel Ltd Jindal Steel & Power Ltd Jai Balaji JSW Steel Ltd Source: CRISIL Research Last price 470 31 95 397 504 42 752 Mkt Cap 30,240 1,789 392,400 84,243 471,110 2,698 167,751 EBITDA margin FY11 FY12E FY13E 28.8 21.0 17.8 29.2 49.4 16.2 20.3 27.2 16.7 13.2 29.6 41.3 4.8 16.7 24.5 19.0 16.1 29.5 40.7 13.6 18.1 RoE FY11 FY12E FY13E 15.1 21.2 14.1 20.6 30.6 8.0 13.5 13.3 11.2 9.4 15.2 24.5 (17.1) 7.1 12.2 24.6 10.1 13.8 22.3 2.9 10.1 P/B FY11 FY12E FY13E 1.4 0.7 1.9 1.2 2.6 1.3 1.3 1.3 0.7 1.0 1.2 2.6 0.3 1.0 1.2 0.5 0.9 1.1 2.1 0.3 0.9 EV/EBITDA FY11 FY12E FY13E 11.1 8.2 8.4 12.4 10.6 12.1 13.3 11.8 8.1 6.9 8.9 9.0 18.2 6.3 9.0 3.9 5.1 8.2 7.8 6.0 5.2
CRISIL IER reports released on Monnet Ispat & Energy Ltd

Fundamental Date 24-Feb-11 18-May-11 03-Aug-11 12-Dec-11 16-Apr-12 Nature of report Initiating coverage* Q4FY11 result update Q1FY12 result update Q2FY12 result update Detailed report grade 4/5 4/5 4/5 4/5 4/5 Fair value Rs 593 Rs 606 Rs 606 Rs 572 Rs 660 Valuation grade 3/5 4/5 4/5 5/5 5/5 CMP (on the date of report) Rs 554 Rs 500 Rs 489 Rs 374 Rs 470
* For detailed initiating coverage report please visit: www.ier.co.in CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.
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Company Overview
Incorporated in 1990, Delhi-based Monnet produces coal-based sponge iron and steel, and also generates power. Monnet is the second largest coal-based sponge iron producer in India after JSPL. It is listed on the NSE, BSE and Madhya Pradesh Stock Exchange.
Key milestones
Year 1990 1994 1996 2003 2005 2006 2007 2008 Milestones Incorporated as Monnet Ispat Ltd Commenced first manufacturing facility in Raipur (Chhattisgarh), with a capacity of 0.10 mn MTPA of sponge iron and 0.05 mn MTPA of mild steel Allotment of first coal mine in Milupara, Raigarh Consolidated the capacity of sponge iron and steel to 0.30 mn MTPA at the Raipur plant Increased the capacity of ferro alloys to 0.06 mn MTPA from 0.04 mn MTPA at the Raipur plant Changed its name to Monnet Ispat and Energy and set up another plant in Raigarh with 0.17 mn MTPA sponge iron capacity Installed 0.20 mn MTPA structured steel capacity. Increased the power generation capacity to 60 MW from 45 MW at the Raipur plant and sponge iron capacity to 0.39 mn MTPA at the Raigarh plant Set up a 90 MW power generation facility and increased sponge iron capacity to 0.50 mn MTPA at the Raigarh plant Source: Company, CRISIL Research
Details of Monnets current capacity

Monnet has two plants, one each in Raipur and Raigarh in Chhattisgarh.
Capacity and utilisation details

Plant-wise capacity break-up Product Sponge iron MS/SS products Structured steel Ferro alloys Power Raipur 0.30 mn MTPA 0.30 mn MTPA 0.20 mn MTPA 0.06 mn MTPA 60 MW Raigarh 0.50 mn MTPA 90 MW Total capacity (mn MTPA/MW) 0.8 0.3 0.2 0.06 150 FY10 Total production (mn MTPA/MW) 0.71 0.12 0.09 0 117 Capacity utilisation rate 88.8% 38.4% 46.0% 0.0% 77.7% FY11 Total production (mn MTPA/MW) 0.69 0.04 0.04 0 111 Capacity utilisation rate 86.5% 14.0% 19.6% 14.7% 73.8%
Source: Company, CRISIL Research Monnet owns the largest underground coal mine in the country in Raigarh (Chhattisgarh). It has total high grade coal (B to D) reserves of 86 mn MTPA, which is currently operational with an annual extraction of 1.0 mn MTPA--repeat.
Monnets production process

Monnet produces sponge iron through the direct reduced iron (DRI) process. It has also installed waste heat recovery units to produce power from waste heat, which is emitted during the production of sponge iron.
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Production flow chart

Coal (Captive + Purchased) Iron Ore (Purchased)
Rotary kiln
Sponge Irone
Waste heat Sale Power (Captive)
EAF Sale
Billets
Structured Steel
Sale
Sale
Product portfolio
Monnets current product portfolio includes coal-based sponge iron, steel, ferro alloys and power.
Product-wise contribution to total revenues

100% 90% 80% 70% 60% 50% 40% 69% 30% 20% 10% 0% FY07 Sponge Iron FY08 FY09 FY10 FY11 Power (MWh) Others MS / SS Products - Sponge iron Structural Steel 33% 38% 52% 53% 49% 18% 17% 26% 1% 1% 15% 17% 9% 16% 3% 9% 14% 2% 26% 4% 20% 8% 0%
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Monnets subsidiary details
Monnet has six subsidiary companies - four are incorporated in India and two (Monnet Overseas Ltd and Monnet Global Ltd) are incorporated in Jabel Ali Free Trade Zone Dubai, UAE.
Details of subsidiaries
Subsidiary Monnet Overseas Ltd Monnet Global Ltd Monnet Power Company Ltd Monnet Daniels Coal Washeries Pvt Ltd Ownership interest 100.00% 100.00% 87.50% 51.64% Operational activity Deals in overseas investments MGL is promoted to hold the overseas mining assets to provide raw materials to Monnet and MPCL. It has acquired a 80 mn MTPA coal mine in Indonesia MPCL is primarily into power generation and distribution. It is setting up a 1,050 MW power plant in Angul, Orissa The company has 3.5 mn MTPA capacity of coal washery near Ranchi in Jharkhand. Along with Punjab State Electricity Board, it is setting up a 4.2 mn MTPA coal washery in North Karanpura in Jharkhand Monnet Cement Ltd Rameshwaram Steel & Power Pvt Ltd Source: Company, CRISIL Research 99.95% 97.00% A cement producer aiming to set up a cement plant in Raipur with a capacity of 3 mn MTPA The company has sponge iron manufacturing. Acquisition of Rameshwaram has added 30 mn MTPA captive iron ore mine to the existing capacities
Monnet Power Company

Monnet Power Company Ltd (MPCL) was set up in 2006 by Monnet to generate and distribute power. It is setting up a 1,050 MW coal-based power plant in Angul, Orissa. Coal requirement for the plant will be met from captive mines in Utkal-B2, Angul and Mandakini, Talchar in Orissa. The orders for BTG Package and balance of plant have been placed with BHEL and Indure Pvt. Ltd, respectively. The financial closure of the project has already been achieved and the arrangements for evacuation and sale of ~87% of saleable power have also been concluded.
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Annexure: Standalone Financials

Income statement
(Rs m n) Operating income EBITDA EBITDA m argin Depreciation EBIT Interest Operating PBT Other income Exceptional inc/(exp) PBT Tax provision Minority interest PAT (Reported) Less: Exceptionals Adjusted PAT FY10 14,825 4,487 30.3% 717 3,770 754 3,016 297 (18) 3,295 604 2,691 (18) 2,709 FY11 15,705 4,522 28.8% 739 3,783 448 3,335 280 (7) 3,608 797 2,812 (7) 2,819 FY12E 18,473 5,019 27.2% 901 4,118 697 3,422 369 3,791 834 2,957 2,957 FY13E 29,794 7,311 24.5% 2,163 5,148 2,022 3,126 745 3,871 852 3,019 3,019 FY14E 39,057 10,800 27.7% 2,488 8,312 3,755 4,557 976 5,533 1,328 4,205 4,205
Balance Sheet
(Rs m n) Liabilities Equity share capital Reserves Minorities Net w orth Convertible debt Other debt Total debt Deferred tax liability (net) Total liabilities Assets Net fixed assets Capital WIP Total fixed assets Investments Current assets Inventory Sundry debtors Loans and advances Cash & bank balance Marketable securities Total current assets Total current liabilities Net current assets Intangibles/Misc. expenditure Total assets FY10 523 16,024 16,546 525 14,425 14,950 1,196 32,692 11,283 7,212 18,495 5,130 2,188 1,289 5,351 2,052 324 11,204 2,137 9,067 32,692 FY11 644 20,258 20,901 392 26,327 26,719 1,412 49,032 10,937 15,127 26,064 5,432 3,604 1,898 7,831 6,881 68 20,282 2,746 17,536 49,032 FY12E 644 22,838 23,482 33,219 33,219 1,488 58,189 32,036 5,127 37,164 5,432 4,302 2,024 8,158 4,115 68 18,668 3,074 15,593 58,189 FY13E 644 25,481 26,125 40,219 40,219 1,490 67,833 36,373 5,127 41,500 6,432 6,938 3,265 9,498 4,777 68 24,547 4,646 19,901 67,833 FY14E 644 29,310 29,954 43,219 43,219 1,634 74,806 40,384 5,127 45,512 7,432 9,096 4,280 11,351 2,874 68 27,669 5,806 21,863 74,806
Ratios
FY10 Grow th Operating income (%) EBITDA (%) Adj PAT (%) Adj EPS (%) Profitability EBITDA margin (%) Adj PAT Margin (%) RoE (%) RoCE (%) RoIC (%) Valuations Price-earnings (x) Price-book (x) EV/EBITDA (x) EV/Sales (x) Dividend payout ratio (%) Dividend yield (%) B/S ratios Inventory days Creditors days Debtor days Working capital days Gross asset turnover (x) Net asset turnover (x) Sales/operating assets (x) Current ratio (x) Debt-equity (x) Net debt/equity (x) Interest coverage (4.6) 17.5 25.6 15.2 FY11 5.9 0.8 4.0 (15.5) FY12E 17.6 11.0 4.9 4.9 FY13E 61.3 45.7 2.1 2.1 FY14E 31.1 47.7 39.3 39.3
30.3 18.3 19.0 13.3 16.6
28.8 17.9 15.1 9.6 11.9
27.2 16.0 13.3 7.9 9.8
24.5 10.1 12.2 8.4 11.3
27.7 10.8 15.0 11.9 15.1
Cash flow
(Rs m n) Pre-tax profit Total tax paid Depreciation Working capital changes Net cash from operations Cash from investm ents Capital expenditure Investments and others Net cash from investm ents Cash from financing Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) Others (incl extraordinaries) Net cash from financing Change in cash position Closing cash FY10 3,313 (547) 717 760 4,243 (4,846) (3,298) (8,144) 874 1,698 (334) 1,260 3,498 (403) 2,052 FY11 3,615 (580) 739 (3,897) (123) (8,308) (46) (8,354) 2,041 11,769 (399) (106) 13,305 4,829 6,881 FY12E 3,791 (758) 901 (823) 3,110 (12,000) (12,000) 6,500 (376) 6,124 (2,766) 4,115 FY13E 3,871 (850) 2,163 (3,646) 1,538 (6,500) (1,000) (7,500) 7,000 (376) 0 6,624 662 4,777 FY14E 5,533 (1,184) 2,488 (3,864) 2,973 (6,500) (1,000) (7,500) 3,000 (376) 2,624 (1,903) 2,874
9.1 1.5 8.3 2.5 10.6 1.2
10.7 1.4 11.1 3.2 12.3 1.1
10.2 1.3 11.8 3.2 10.9 1.1
10.0 1.2 9.0 2.2 10.7 1.1
7.2 1.0 6.5 1.8 7.7 1.1
81 62 30 174 1.1 1.3 0.9 5.2 0.9 0.8 5.0
122 75 41 201 1.1 1.4 0.7 7.4 1.3 0.9 8.4
120 69 38 217 0.7 0.9 0.6 6.1 1.4 1.2 5.9
116 61 38 162 0.7 0.9 0.8 5.3 1.5 1.4 2.5
121 61 38 159 0.8 1.0 0.9 4.8 1.4 1.3 2.2
Quarterly financials
(Rs m n) Net Sales Change (q-o-q) EBITDA Change (q-o-q) EBITDA margin PAT Adj PAT Change (q-o-q) Adj PAT m argin Adj EPS Q3FY11 3,471 -4% 1,109 6% 32.0% 702 702 7% 20.2% 13.4 Q4FY11 4,456 28% 1,286 16% 28.9% 766 766 9% 17.2% 11.9 Q1FY12 4,272 -4% 1,163 -10% 27.2% 732 732 -4% 17.1% 11.4 Q2FY12 4,586 7% 1,195 3% 26.1% 769 769 5% 16.8% 12.0 Q3FY12 4,810 5% 1,252 5% 26.0% 731 731 -5% 15.2% 11.4
Per share
Adj EPS (Rs) CEPS Book value Dividend (Rs) Actual o/s shares (mn) FY10 51.8 65.5 316.5 5.0 52.3 FY11 43.8 55.3 324.9 5.4 64.3 FY12E 45.9 59.9 364.9 5.0 64.4 FY13E 46.9 80.5 405.9 5.0 64.4 FY14E 65.3 104.0 465.4 5.0 64.4
27
Focus Charts
Capacity expansion across the value chain... ... to drive revenue growth...
(Rs mn) 45,000 40,000
0.61mn mtpa
61%
70% 60% 50%
35,000
0.85mn mtpa
30,000 25,000
34%
31% 18% 14,825 6% -5%
40% 30%
20,000 15,000 10,000

1.02mn mtpa Mettalics 1.80mn mtpa SMS Sponge Iron 0.85mn mtpa Steel Pig Iron 230MW Power
20% 10% 0% 15,705 18,473 FY12E 29,794 FY13E 39,057 -10% FY14E
5,000 0
15,545 FY09 FY10 Revenue
FY11
% change (RHS)
... and per tonne realisation

(Rs per tonnne) 40,000 33,231 35,000 30,000 23,911 25,000 20,000 14,055 15,000 10,000 17,237 34,036
Margins to dip in short term but improve later...

(Rs mn) 12,000 10,000 8,000 6,000 15% 4,000 2,000 3,818 0 FY09 4,487 FY10 4,522 FY11 5,019 FY12E 7,311 FY13E 10,800 0% FY14E 10% 5% 25% 30% 35% 29% 27% 25% 28% 30% 25% 20%
5,000 0 FY10 FY11 FY12E FY13E FY14E
EBITDA
EBITDA Margin (RHS)
.. with increase in captive raw materials
RoE to start improving post FY13

20% 18% 16% 15.1% 13.3% 12.2% 15.0% 18.8% 19.0%
FY10 Coal Iron ore Coke 49% 0% NA
FY11 50% 0% NA
FY12E 50% 0% NA
FY13E 46% 0% 0%
FY14E 54% 31% 0%
14% 12% 10% 8% 6% FY09 FY10 FY11
FY12E
FY13E
FY14E
28
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YEARS

Monnet Ispat & Apollo Hospitals Energy Ltd Enterprise Ltd

Enhancing investment decisions

Explanation of CRISIL Fundamental and Valuation (CFV) matrix

CRISIL Fundamental Grade

CRISIL Valuation Grade

About CRISIL Limited

About CRISIL Research

Monnet Ispat & Energy Ltd

April 16, 2012 Fair Value CMP CFV MATRIX

KEY STOCK STATISTICS

KEY FORECAST (STANDALONE)

0% Mar-11 Promoter Jun-11 FII Sep-11 DII Dec-11 Others

PERFORMANCE VIS--VIS MARKET

Revenue contribution (FY12/FY13/FY14) Product / service offering

69% / 21% / 12%

19% / 68% / 82%

Coal-based sponge iron

Power generated through coal and waste heat

Manufacturing facility: Raipur and Raigarh, Chhattisgarh

-25% (captive consumption to lead to decline in sponge iron sales)

-9% (captive consumption to lead to decline in power)

Demand drivers Key competitors Key risks

Source: Company, CRISIL Research

Monnet Ispat & Energy Ltd

Table 2: Capacity of sponge iron players

Source: Prowess, CRISIL Research

Table 3: Utilisation rates of sponge iron players

Source: Prowess, CRISIL Research

... Expanding capacity to fuel next level of growth

Table 4: Capacity time line

Source: CRISIL Research

Strategic expansion to provide value addition and hedge

150MW 0.86mn mtpa

0.85mn mtpa Steel Pig Iron

1.02mn mtpa Mettalics

1.80mn mtpa SMS Sponge Iron

0.85mn mtpa Steel Pig Iron

SMS Sponge Iron

Steel Pig Iron

SMS Sponge Iron

Source: Company, CRISIL Research

Figure 2: Value-added products to contribute more

Figure 3: Blended steel/tonne realisation to rise

5,000 0 FY10 FY11 FY12E FY13E FY14E

Source: CRISIL Research, World Steel Association

Source: CRISIL Research

Monnet Ispat & Energy Ltd

Linkage, backward integration support profitability

Figure 4: Highly volatile margins of non-linked players

Source: CRISIL Research

Captive coal mine to reduce per

tonne cost of steel production by ~Rs 2,800 in FY12

Figure 5: Captive coal to support EBITDA margin

Merchant sale of captive power helps increase EBITDA margins

Figure 6: Low-cost power expands margins

Source: Company, CRISIL Research

Monnet Ispat & Energy Ltd

But expansion exposes to raw material price risk

Figure 7: Raw material exposure (FY13E)

Figure 8: EBITDA margins susceptibility

Source: Company, CRISIL Research