Research

27 Nov 2007

Emkay

Bhushan Steel
Downgrade to SELL– earnings not reflective of stock performance

SELL
Price Rs1575 Target Price 944

Sensex – 19,247

We downgrade Bhushan Steel Limited (BSL) from HOLD to SELL with a target price of Rs.944 (8x FY09 FDEPS of Rs118). After a massive run up of 45% in a single day, we believe the stock has now fully priced in FY10 earnings where we have FDEPS estimate of Rs171. At FY10, the stock is currently trading at 9.2x, trading at a premium of 26% to integrated steel companies like Tata Steel on FY09 and FY10 basis. Tata Steel is currently trading at 7.3x FY09 and 7.7x FY10 FDEPS estimates. Since initiation, the stock has moved 2.68x, generating a return of 168% in around 7 months. We believe yesterday’s run up of BSL captures the entire valuation for FY10. Although, the company has significant expansion plans going forward, however, the current run up in the stock leaves little headroom for upside. We downgrade BSL to SELL with target price of Rs944.

Stock has run up significantly ahead of actual performance
In a week’s time, the stock has run up by 52% in absolute terms and 54% relative to BSE Sensex. On fytd basis, the stock has run up by 212% from April 1, 2007 on absolute basis and 158% relative to BSE Sensex. Price Performance

Bhushan Steel vs BSE Sensex vs BSE Metals Index
(%) Absolute Rel. to Sensex
Source: Capitaline

1M 58 54

3M 139 110

6M 137 103

12M 355 315

400% 350% 300% 250% 200%

Stock Details
Sector Metals & Mining Reuters BSSL.BO Bloomberg BHUS@IN Equity Capital (Rs mn) 425 Face Value (Rs ) 10 52 Week H/L (Rs ) 1625/318 Market Cap (Rs bn) 66.9 Daily Avg Vol (No of shares) 192265 Daily Avg Turnover (US$ mn) 2.1

150% 100% 50% 0% 1W 1M 3M 6M 12M FYTD

Relative to BSE Metals Index
Source: Capitaline

Relative to BSE Sensex

Absolute Performance

Shareholding Pattern (%)
(30th Sep.’07)
Promoters FII/NRI Institutions Private Corp. Public 64.2 2.5 1.2 24.9 7.2

Expansion plans and capex – Phase –III announced
The expansion project of 1.8mtpa is on track for commissioning by June 2008. The company has announced the third phase of capex at its Orissa integrated steel complex. The third phase will involve a total outlay of Rs39bn funded by debt equity in the ratio of 70:30. Equity contribution will be funded through internal accruals.

Capacity expansion in the third phase:
n n n

Vishal Chandak vishal.chandak@emkayshare.com +91 22 6612 1251

Hot strip mill will be expanded from current target of 1.9mtpa to 3.9mtpa Total steel making capacity will be expanded from 2.2mtpa to 4.5mtpa Sinter plant – 1.67mtpa Blast Furnace – 2.5mtpa Slab Caster – 2mtpa

Chirag Khasgiwala chirag.khasgiwala@emkayshare.com +91 22 6612 1254

n n

C-6, Ground Floor, Paragon Center Pandurang Budhkar Marg, Worli, Mumbai – 400 013. India

Earnings downgrade

B HUSHAN S TEEL L T D. Investment in Bhushan Energy

Earnings Downgrade

Bhushan Energy is likely to set up a 2,000MW IPP in addition to 300MW (2 x 150MW) power plant. The 2 x 150MW power plant will be set up in Orissa of which 150MW will cater to the requirement of Bhus han Steel and balance 150MW will be operational as merchant power plant. The company expects the plant to be operational by Oct 2008. The total outlay for the 300MW has been pegged at Rs10bn of which equity component will be 20% (Rs2bn) Bhushan Steel will bring in 13% of the total equity requirement and balance will be funded by the promoters. The company has already placed orders for the Turbine (Siemens) Boiler (ISGEC) and other key equipments. Further, the company proposes to set up a 2,000MW IPP in Chhattisgarh under Bhushan Energy, where Bhushan Energy has been allocated a 500mt coal mine at Chindipada. The coal mine is open cast and contains power grade coal.

Valuations
At CMP of Rs1575, the stock is trading at 13.3x FY09 FDEPS estimate of Rs118 and 9.2x FY10 FDEPS estimate of Rs171. On EV/EBITDA, the stock is currently trading at 10.1x FY09 and 5.7x FY10 estimates. We believe the stock now factors FY10 earnings and gives little headroom for further appreciation. We downgrade the stock to SELL.

Emkay Research

November 27, 2007

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B HUSHAN S TEEL L T D. Quarterly Financials
Net Sales Expenditure Raw Material Cost Exch gain realization incl in other income Change in stock Net Raw material cost Gross profit Gross margin Employee Cost Other Expenses Total operating exp EBITDA Ebitda margin Depreciation & amortization EBIT EBIT margin Interest Other income PBT Provision for tax ETR (%) Current tax Deferred tax liability Adj. PAT Adj. Net margin Equity capital Reported EPS
All figs in Rs mn except per share data and percentage

Earnings Downgrade

2QFY08 10,681 7,528 -2 369 7,894 2,787 26.1% 117 691 808 1,979 18.5% 454 1525 14.3% 312 132 1346 312 23% 156 156 1034 9.7% 425 24.35

2QFY07 9,947 7,949 0 -340 7,609 2,338 23.5% 70 764 834 1,504 15.1% 506 998 10.0% 194 49 853 157 18% 98 59 696 7.0% 413 16.86

(%) yoy 7% -5% -209% 4% 19% 259bp s 67% -10% -3% 32% 341bp s -10% 53% 425bp s 61% 172% 58% 99% 478bps 59% 166% 49% 269bp s 3% 44%

1QFY08 9,380 7,585 -255 -786 6,545 2,836 30.2% 110 927 1,038 1,798 19.2% 452 1346 14.4% 145 37 1239 257 21% 143 115 981 10.5% 425 23.11

(%) qoq 14% -1% -147% 21% -2% 414bps 6% -25% -22% 10% -64bps 0% 13% -7bps 115% 256% 9% 21% 238bp s 9% 36% 5% -78bps 0% 5.4%

Common size ratios
2QFY08 Net Sales Raw material cost Change in stock Net Raw material cost Personal expenses Other expenses EBITDA Depreciation Interest expense Other income PAT 100% 70% 3% 74% 1% 6% 19% 4% 3% 1.2% 10% 2QFY07 100% 80% -3% 76% 1% 8% 15% 5% 2% 0% 7% (%) yoy -944 bps 687 bps -259 bps 39 bps -121 bps 341 bps -84 bps 97 bps 75 bps 269 bps 1QFY08 100% 81% -8% 70% 1% 10% 19% 5% 2% 0% 10% (%) qoq -1,039 bps 1,183 bps 414 bps -8 bps -342 bps -64 bps -57 bps 138 bps 84 bps -78 bps

Emkay Research

November 27, 2007

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B HUSHAN S TEEL L T D. Financials Income Statement
FY06 Gross Sales Less: Excise Net Sales Other Income Total Income Raw Mat Consumption % to Net Sales Power & Fuel Staff Cost Other Expenses As a % to Net Sales Total Exp EBITDA EBITDA (%) Depreciation EBIT Interest Misc. W/offs and E/O PBT Tax ETR (%) A PAT Pref. Div. Net Inc to Eq. holders 30.7 (2.8) 27.9 0.1 28.1 21.3 76.1 1.3 0.4 1.1 3.8 24.0 4.1 14.6 1.7 2.4 0.8 0.0 1.6 0.1 3.3 1.5 1.5 FY07 42.0 (3.6) 38.4 0.3 38.7 28.3 73.7 1.4 0.3 2.1 5.5 32.1 6.6 17.2 2.1 4.5 0.8 0.0 3.7 0.6 15.9 3.1 3.1 FY08E 48.8 (3.4) 45.4 0.1 45.5 32.4 71.4 1.4 0.3 2.5 5.4 36.7 8.8 19.4 3.0 5.8 1.6 0.0 4.2 0.6 14.9 3.6 3.6 FY09E 50.4 (3.4) 47.0 0.1 47.0 31.0 66.0 1.6 0.4 2.4 5.1 35.4 11.7 24.8 3.3 8.4 2.2 0.0 6.2 0.9 15.4 5.2 5.2

Earnings Downgrade

Rs bn
FY10E 54.2 (3.7) 50.5 0.1 50.6 23.0 45.4 2.7 0.7 4.9 9.7 31.3 19.3 38.2 5.5 13.8 4.1 0.0 9.7 1.3 13.9 8.3 8.3

Balance Sheet
FY06 Equity Capital Reserves & Surplus Networth Total Debts Preference Shares Net deferred lia. Capital Employed Gross Block Less Depreciation CWIP Net Fixed Assets Investments Inventory Debtors Cash and Bank Loans & Advances Other Current Assets Total Cur. Assets Current Liabilities Provisions Total Cur. Lia. & Prov. Net Current Assets Misc. Assets Total Assets 0.42 8.5 8.9 20.4 0.0 0.7 30.0 18.0 (7.8) 13.0 23.2 0.2 4.7 4.0 0.8 2.4 0.0 12.0 4.7 0.7 5.4 6.6 30.0 FY07E 0.42 11.7 12.1 31.9 0.0 1.2 45.2 26.0 (9.8) 18.5 34.6 0.2 7.0 5.3 1.5 2.9 0.0 16.7 5.5 0.7 6.2 10.4 45.2 FY08E 0.44 16.2 16.6 41.4 0.0 1.4 59.4 45.0 (12.9) 14.5 46.6 0.2 8.4 6.5 1.3 3.4 0.0 19.6 6.3 0.7 7.0 12.6 59.4 FY09E 0.44 21.1 21.6 48.9 0.0 1.6 72.1 60.0 (16.1) 12.0 55.8 0.2 9.7 7.4 1.8 3.9 0.0 22.9 6.1 0.7 6.8 16.1 72.1

Rs bn
FY10E 0.49 29.5 30.0 43.9 0.0 1.9 75.7 70.0 (21.7) 0.0 48.3 0.2 9.2 8.8 10.7 4.4 0.0 33.1 5.3 0.7 5.9 27.2 75.7

Cash Flow Statement
FY06E PBT Depreciation Net Chg in WC Others CFO Capex Net Investments made Others Investing Activities CFI Change in Share capital Change in Debts Div. & Div Tax Others CFF Total Cash Generated Cash Opening Balance Cash Closing Balance 1.6 1.7 (0.2) (0.1) 3.0 (10.5) (0.0) 0.0 (10.5) 1.7 8.0 (0.1) 0.0 9.6 2.1 0.2 0.8 FY07E 3.7 2.1 (2.7) (0.0) 3.1 (13.5) 0.0 0.0 (13.5) 0.2 11.0 (0.1) 0.0 11.1 0.7 0.8 1.5 FY08E 4.2 3.0 (1.9) (0.5) 4.9 (15.0) 0.0 0.0 (15.0) 1.1 9.0 (0.2) 0.0 9.9 (0.2) 1.5 1.3 FY09E 6.2 3.3 (2.5) (0.7) 6.3 (12.5) 0.0 0.0 (12.5) 0.0 7.0 (0.3) 0.0 6.7 0.5 1.3 1.8

Rs bn
FY10E 9.7 5.5 (2.2) (1.1) 11.9 2.0 0.0 0.0 2.0 0.3 (5.0) (0.3) 0.0 (4.9) 8.9 1.8 10.7

Ratios
FY06 EBITDA mgn (core) (%) EBIT margin (%) NPM (%) Adj ROCE (%) Adj ROE (%) ROIC (%) Adj EPS Cash EPS Book Value DPS Payout (%) Net Debt to Equity (x) PE (x) P/BV (x) EV/Sales (x) EV/EBITDA (x) Div Yield (%) 14.2 8.7 5.7 10.5 19.0 12.7 37.7 78.3 218.3 2.5 6.7 2.2 4.9 7.2 1.0 6.8 0.2 FY07E 16.4 11.7 8.2 11.3 29.7 13.8 74.6 124.4 289.1 3.0 4.0 2.5 6.9 5.4 1.4 8.3 0.2 FY08E 19.3 12.8 7.9 10.6 24.9 12.2 81.0 149.4 376.3 4.0 4.9 2.4 19.4 4.2 2.4 12.5 0.3 FY09E 24.7 17.8 11.1 12.0 27.3 13.1 118.2 192.5 488.8 5.00 4.2 2.2 13.3 3.2 2.5 10.1 0.3 FY10E 38.1 27.3 16.5 17.8 32.3 19.8 171.5 285.2 617.3 5.00 2.9 1.1 9.2 2.6 2.2 5.7 0.3

Emkay Research

November 27, 2007

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B HUSHAN S TEEL L T D.

Earnings Downgrade

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Emkay Research

November 27, 2007

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