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September 8, 2010
Management Meet Note
We met management of Ispat Industries. Key takeaways of our meeting are as follows: Joint venture with Stemcor to set up a coke oven plant: Ispat has entered into a JV (Amba River Coke) with Stemcor for setting up a 1mn tonne coke oven plant at a cost of Rs1,124cr. Ispat holds 26% equity stake & the balance is held by Stemcor. The project will be funded through debt-equity ratio of 2:1 and is yet achieve the financial closure. Ispat’s equity contribution will be Rs100cr (Rs50cr will be through land and infrastructure support and balance Rs50cr through cash infusion). Once commissioned, the plant will cater to 100% coke requirement of the company. 110MW power plant to lead to cost savings: Ispat under its subsidiary, Ispat Energy, is setting up 110MW captive power plant (CPP) comprising of two units of 55MW each. The plant will primarily use gases from coke oven and blast furnace. Land for the project has been acquired and the civil work has also started. Total cost of the project is expected to be Rs491cr and the company expects savings of Rs1,300cr post commissioning of the power plant. Captive raw material holds the key for future performance: Ispat has already secured the prospecting license for developing iron ore mines in Maharashtra. The management expects to start mining in FY2012 and targets iron ore production of 2mn tonnes. The company in a JV with Essar Steel, Mukund, Kalyani Steel and Ind Synergy has also been allotted Behrabad (North) coking coal block in Madhya Pradesh. The mine has reserves of 170mn tonnes, with Ispat’s share being 76mn tonnes. Outlook and Valuation: At the CMP, the stock is trading at P/BV of 1.4x and EV/EBITDA of 7.8x FY2010. We believe that future stock performance would be dependent upon improvement in raw material integration and successful commissioning of the power and coke oven plants.
CMP Target Price
Stock Info Sector Market Cap (Rs cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (Rs) BSE Sensex Nifty Reuters Code Bloomberg Code Steel 2,488 1.4 25/16 5392856 10 18,667 5,608 ISPT.BO NDEN@IN
Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 41.1 11.9 2.5 44.5
Abs. (%) Sensex Ispat
3m 12.3 22.6
1yr 15.8 (14.1)
3yr 19.7 8.0
Key Financials (Consolidated)
Y/E March (Rs cr) Net Sales % chg Net Profit % chg EPS (Rs) EBITDA (%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research
FY2007 7,473 48.8 (10) (0.8) 20.4 0.8 8.3 1.4 6.9
FY2008 8,323 11.4 31 14.6 0.9 0.0 5.4 1.2 7.9
FY2009 8,264 (0.7) (690) (6.3) 5.3 1.2 1.2 22.4
FY2010E 7,783 (5.8) (253) (3.4) 16.1 1.4 6.8 1.2 7.8 Paresh Jain
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Please refer to important disclosures at the end of this report
200/tonne. whereas coal-based plants manufacture only long products. The current cost of production for sponge iron. The main advantage of using natural gas in sponge iron plants is that the product quality is superior and the plant can produce both long and flat products.500/tonne and from the Kirandul complex is Rs7. The average annual interest rate for the debt was 9. The blended cost of natural gas is ~Rs10/scm. Maintenance costs are low as gas-based plants undertake 10-15 days of annual maintenance shutdown as compared to coal-based plants. Ispat also has a contract with GIIC Bahrain for supply of pellets.739cr.335cr. pig iron and hot rolled coils is Rs17.5/unit.000/tonne. the company purchases power at Rs5. Rs22. Currently. which is expected to reduce post the commissioning of the 110MW power plant. PMT and ONGC.000 and Rs29.91%. Ispat sources gas from Reliance. 2010 2 . Management indicated annual debt repayment of Rs723cr and Rs755cr in FY2011 and FY2012. respectively. Total debt at the end of 4QFY2010 was Rs6. The landed cost of iron ore from Bacheli complex is Rs8.Ispat Industries | Management Meet Note Other key takeaways Ispat buys iron ore fines and lump ore from NMDC and imports pellets from GIIC Bahrain. which undergo quarterly shutdown. with the balance being rupee loan. September 8.500. respectively. with prices being fixed on a quarterly basis. This included foreign currency loan of Rs2.
ie. 2010 3 . energy consumption is lower at ~240 units/tonne compared to the conventional EAF requirement of ~550 units/tonne of steel.225 0. The management plans to increase the capacity to 1. hot rolled coils.Capacity details Facilities Sponge iron plant (expansion of sponge iron) Sinter plant Blast furnace Conarc furnace Hot strip mill Source: Company Capacity (mn tonnes) 1.5km long conveyor belt. hot rolled coils) are located at Dolvi (Maharashtra).400 acres.3 Kalmeshwar complex Hot rolled coils from Dolvi are transported to the Kalmeshwar complex via road/rail. colour coated sheets.330 0. which was commissioned in 1994 and is the world's largest single module gas-based plant using Midrex technology. which is connected to the steel plant by a 1. the charge mix is 55:35:10 of hot metal:DRI:scrap. galvanised sheets and cold rolled coils at its steel plants.Ispat Industries | Management Meet Note Company Profile Incorporated in 1984. Feasibility studies are being undertaken to increase the hot strip mill capacity from 3. 80-85kms away from Mumbai and are spread across 1.Capacity details Facilities Cold rolling mill Galvanising line Galvalume line Colour-coating line Pipe and tube mill Source: Company Capacity (mn tonnes) 0. galvanised.2mn tonnes.0 4. Exhibit 2: Kalmeshwar . located at Dolvi and Kalmeshwar in Maharashtra. pig iron.6mn tonne sponge iron plant.8mn tonnes. Management indicated it would outsource the surplus capacity for commercial purposes. sponge iron. Ispat Industries produces sponge iron. Exhibit 1: Dolvi . Maharashtra).6 2. The technology provides flexibility in terms of raw material feed. Also.8 2.060 0. The company’s upstream facilities (sponge iron. The complex manufactures downstream products like cold rolled coils. Germany. September 8.3mn tonnes to 4. The jetty has a cargo handling capacity of 12mn tonne with 3-4mn tonne being surplus capacity.2 3. Dolvi complex The complex has a 1. galvalume. cold rolled coils) are located at Kalmeshwar (Nagpur. Generally. pig iron. hot metal or scrap. The downstream facilities (galvanized sheets.056 Ispat produces steel using the twin shell conarc furnace technology developed by SMS Siemag.100 0. Ispat owns a jetty at the Dharmatar port. pipes and tubes.
0 5. South India (6%).0 2. consumer durables. Angel Research Exhibit 5: Product-wise sales volume breakup 100 95 Exhibit 6: Value-added product accounts for 25% 30 25 20 (%) (%) FY08 FY09 PPGI Pig Iron FY10 Sponge iron 90 85 80 HRC CRC GP/GC/Galvalume 15 10 5 0 FY08 FY09 FY10 Source: Company.0 5.0 12. total sales in West India stood at 77% followed by North India (12%).0 76. In FY2010. etc. ship-building. construction.0 16. Angel Research Source: Company.0 3. Exhibit 3: Geographic revenue mix (FY2010) 6. The company has entered into quarterly pricing contracts with the automotive and OEM customers. In FY2010.0 40. Angel Research September 8.0 12.Ispat Industries | Management Meet Note Ispat enjoys close proximity to its customers as 71% of its domestic sales are within Maharashtra. where it avails deferred VAT credit.0 12.0 0.8 4. 2010 4 .0 3. Angel Research Source: Company. while for others it has a monthly pricing mechanism. The top-ten customers of HRC contributed ~35% to total sales in FY2010.2% of the revenue mix.0 West India North India South India East India Exports CR Retail LPG API KLM P&C Auto Others Retail P&T Source: Company. cold rolled (CR) products accounted for 40% of the company’s domestic sales whereas auto sales accounted for 12%. The company caters to the major steel-end user markets in the vicinity including automobiles. exports (5%) and East India accounted for 0.2 Exhibit 4: Domestic sales breakup sector wise 3.
770 4.111.264 (0.249 187.829 4.117 8.4 624 897 (412.232 2.876 197 435 (64.742 2.783 236 8.3) 5.9 3 0 3 13 (10) (10) (0.019 (3.201 198 1.398 615 7.0 20.026) (336) (690) 0 (690) (6.100 205 7.4 7.227 414 (1.9) 8.363 890 7.0) 6.440 1.521 435.3) (6.Ispat Industries | Management Meet Note Profit & Loss Statement (Consolidated) Y/E March (Rs cr) Gross sales Less: Excise duty Net Sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation EBIT % chg (% of Net Sales) Interest charges Other Income (% of PBT) Recurring PBT % chg Extraordinary Inc/(Expense) PBT Tax PAT (reported) Less: Minority interest (MI) PAT after MI (reported) (% of Net Sales) Basic EPS (Rs) Fully Diluted EPS (Rs) FY2007 8.8 5.6) 12.706 2.264 8.3) FY2010 8.8) (0.4) (3.026 2 (400) 130 (270) (17) (253) (253) (3.3 647 (212) (2.730.048 162 1.756 2.6 638 580 (35.8) FY2008 9.177 913 8.218 (19.108 640 573.473 7.321 216 1.0 1.0 1.9) 14.4 FY2009 9.0 1.952 3.1 625 624 (394.1 112 4.2 16.473 48.4) 7.026) 0 (1.3 0 112 81 31 31 0.4) September 8.6) 1.7) 7.323 8. 2010 5 .323 11.105 4.
273 (275) 1.294 8.225 10.784 FY2007 FY2008 FY2009 FY2010E Note: Cash and Bank balance includes fixed deposits September 8.897 582 13 2.216 547 2 2.373 582 13 2.701 2.133) 950 8.512 330 481 1.124 13.273 (528) 1.294 605 2.449 13.899 0 7.Ispat Industries | Management Meet Note Balance Sheet (Consolidated) Y/E March (Rs cr) SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Share Warrants Total Loans Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc.670 8.449 2.180 332 624 11.754 82 727 1.316 11.178 3.567 4.289 652 2.997 97 7.552 93 511 1.962 9. Depreciation Net Block Capital Work-in-Progress Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Net deferred tax asset Total Assets 13.372 89 577 1.747 (993) 950 9.244 9.744 97 6.355 9.124 2.256 2.945 3.944 8.067 3.504 (1.739 (188) 547 10.784 2.256 13.667 5.823 475 2 2.948 2.706 3.941 8. 2010 6 .
026) 647 532 1.) in Fixed Assets Inc.) in Cash Opening Cash balances Closing Cash balances FY2007 3 624 (148) 943 (4) 1417 (285) (0) 7 (278) 0. Tax) Others Cash Flow from Financing Inc.584) (249) 252 3 FY2009 (1./ (Dec.Ispat Industries | Management Meet Note Cash Flow Statement (Consolidated) Y/E March (Rs cr) Profit before tax Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations Inc./(Dec. 2010 7 .202) 0 3 3 FY2010E (270) 625 147 0 17 518 (100) 0 (100) 0 (412) 0 0 (412) 7 82 89 September 8.217) (958) 181 71 252 FY2008 112 638 329 468 (3) 1544 (199) 0 (10) (209) 13 (877) 0 (720) (1./ (Dec.149 (3) 1299 (144) (10) 57 (97) 97 (479) 0 (820) (1.) in Investments Other income Cash Flow from Investing Issue of Equity Inc.1 259 0 (1./(Dec.) in loans Dividend Paid (Incl.
2 22.5 1.7 14.8 93.4 5.4 1.3 4.7 (6.7 1.0 0.5 3.0 14.4 3.9 0.7 0.6 50 30 56 88 0.7 4.4 1.9 0.8 2.9 16.6 7.3 2.7 5.6 0.6 55 25 80 46 8.8 1.2 1.3) (6.9 1.2 7. 2010 8 .3 (3.9 (0.2 12.7 13.7 7.8 3.1 FY2007 FY2008 FY2009 FY2010E September 8.8 0.0 6.6 53 27 53 59 0.3 9.5 67.4) 3.1 5.9 6.9 3.6 16.9 0.6 61 25 75 60 0.0 6.4 6.4) (3.5 23.0 0.8 1.8 0.4) 16.1 5.3 0.3) (0.5 5.3 2.Ispat Industries | Management Meet Note Key Ratios Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total Assets Per Share Data (Rs) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis EBIT margin Tax retention ratio (%) Asset turnover (x) RoIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory (days) Receivables (days) Payables (days) Working capital cycle (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage 2.8) 5.0 24.2 0.6 0.8 7.2 7.6 14.8) (0.0 27.9 1.7 0.2 5.
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