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1QFY2012 Result Update | Steel

August 4, 2011

Monnet Ispat
Performance highlights

ACCUMULATE
CMP Target Price
% chg (yoy)
1.6 (4.1) (163)bp 0.6

`486 `549
12 Months

Particulars (` cr) Net sales EBITDA EBITDA margin (%) Net profit

1QFY12
427 116 27.2 73

1QFY11
420 121 28.8 73

4QFY11
446 129 28.9 77

% chg (qoq)
(4.1) (9.6) (164)bp (4.5)

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

Steel 3,127 0.4 682/449 32763 10 17,693 5,332 MNET.BO MISP@IN

Source: Company, Angel Research

Flat top-line performance: For 1QFY2012, Monnet Ispat (MIL) reported net sales growth of 1.6% yoy to `427cr, mainly driven by a 33.6% increase in sponge iron realisation to `19,776/tonne, almost offset by the decline in sales volumes of sponge iron and power. The companys sponge iron sales volume declined by 11.2% yoy to 150,578 tonnes and power sales volume declined by 20.5% yoy to 175mn units. Net realisation of structural steel increased by 10.0% yoy to `31,693/tonne, while power realisation dipped by 29.4% yoy to `3.4/unit. EBITDA declines by 4.1% yoy: On account of lower realisation on power sales, EBITDA declined by 4.1% to `116cr. Other income increased to `11cr compared to `2cr in 1QFY2011. Hence, net profit grew by 0.6% yoy to `73cr in 1QFY2012. Utkal B2 mine received forest stage-II clearance: MIL has received stage-II of forest clearance for its Utkal Mine. The company expects to start production soon after the mining lease is executed by December 2011. Outlook and valuation: MIL is on the verge of a massive expansion in its steel business. The 80MW power capacity expansion is expected to drive MILs earnings momentum in the near term. However, long-term stock performance will be determined by the timely expansion of the 1.5mtpa steel plant and unlocking of value in Monnet Power, which is implementing the 1,050MW power project. Most of these projects would be backed by captive resources. Hence, we recommend Accumulate on the stock with a target price of `549. Key financials (Standalone)
Y/E March (` cr) Net sales % chg Adj. net profit % chg EPS (`) EBITDA margin (%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 49.4 4.4 32.1 14.1

Abs. (%) Sensex MIL

3m (4.5) (6.1)

1yr (2.3) 7.6

3yr 20.7 (6.0)

FY2010

FY2011E

FY2012E

FY2013E

1,481 (4.4) 288 24.1 46.2 31.3 10.5 1.6 18.2 13.0 2.6 8.3

1,574 6.3 285 (0.9) 45.8 29.6 10.6 1.4 15.2 9.3 3.2 10.7

1,973 25.4 286 0.2 45.9 28.0 10.6 1.3 12.9 8.1 2.9 10.3

2,960 50.0 405 41.8 60.4 29.5 8.0 1.1 16.1 10.5 2.2 7.5 Bhavesh Chauhan
Tel: 022- 39357800 Ext: 6821 bhaveshu.chauhan@angelbroking.com

Please refer to important disclosures at the end of this report

Monnet Ispat | 1QFY2012 Result Update

Exhibit 1: 1QFY2012 performance (Standalone)


Y/E March (` cr) Net sales Raw material % of net sales Power & fuel % of net sales Staff cost % of net sales Other expenditure % of net sales Total expenditure % of net sales Operating profit OPM (%) Other operating income EBITDA EBITDA margin (%) Interest Depreciation Other income Exceptional items Profit before tax % of net sales Tax % of PBT Net profit
Source: Company, Angel Research

1QFY12 427 248 58.0 13 3.1 21 5.0 28 6.6 311 72.8 116 27.2 116 27.2 13 19 11 96 22.4 23 23.5 73

1QFY11 420 232 55.3 11 2.6 20 4.7 36 8.6 299 71.2 121 28.8 121 28.8 14 18 2 91 21.6 18 19.9 73

yoy (%) 1.6 6.7 21.5 9.9 (22.1) 3.9 (4.1) (4.1) (8.2) 2.4 454.5 5.4 24.8 0.6

FY2011 1,555 862 55.4 44 2.9 76 4.9 121 7.8 1,102 70.9 453 29.1 453 29.1 45 74 27 361 23.2 75 20.8 282

FY2010 1,463 779 53.3 36 2.5 73 5.0 137 9.3 1,025 70.1 438 29.9 438 29.9 63 72 22 325 22.2 58 17.7 266

yoy (%) 6.3 10.6 22.3 4.0 (11.8) 7.6 3.5 3.5 (29.2) 3.4 21.8 11.1 30.6 5.8

Flat 1QFY2012 top-line performance


MILs net sales grew by 1.6% yoy to `427cr mainly driven by the 33.6% increase in sponge iron realisation to `19,776/tonne, almost offset by lower sales volumes of sponge iron and power. MILs sponge iron production declined by 5.5% yoy to 165,857 tonnes, while its power production declined by 17.9% yoy to 209mn units on account of the planned maintenance shut down. The companys sponge iron sales volumes declined by 11.2% yoy to 150,578 tonnes and power sales volumes declined by 20.5% yoy to 175mn units. Net realisation of structural steel increased by 10.0% yoy to `31,693/tonne, while power realisation dipped by 29.4% yoy to `3.4/unit during the quarter.

August 4, 2011

Monnet Ispat | 1QFY2012 Result Update

Exhibit 2: Quarterly production volume


(tonnes) Sponge iron Steel (basic) Steel (structural) Ferro alloy Power (mn units) 1QFY11 19,645 21,411 1,322 255 2QFY11 797 2,088 215 3QFY11 1,610 461 2,600 228 4QFY11 1QFY12 yoy (%) qoq (%) (5.5) (2.9) (11.2) 64.3 (17.9) (12.9) (7.9) 0.1 (16.3) (23.1) 20,701 18,989 2,596 272 19,075 19,005 2,173 209 175,527 162,851 163,357 190,360 165,857

Source: Company, Angel Research

Exhibit 3: Quarterly sales volume


(tonnes) Sponge iron Steel (basic) Steel (structural) Ferro alloy Power (mn units) 1QFY11 218 18,796 939 221 2QFY11 499 4,665 2,100 198 3QFY11 82 544 1,796 210 4QFY11 16,756 2,604 235 1QFY12 yoy (%) qoq (%) (11.2) (9.1) 64.3 (20.5) (3.0) 2.0 (40.8) (25.4) 17,086 1,542 175 169,597 157,026 148,242 155,196 150,578

Source: Company, Angel Research

Exhibit 4: Quarterly average realisation


(`/tonne) Sponge iron Steel (basic) Steel (structural) Ferro alloy Power (`/unit) 1QFY11 14,807 29,330 28,814 56,047 4.9 2QFY11 16,059 23,836 22,399 52,747 4.3 3QFY11 17,831 28,694 9,443 56,829 3.4 4QFY11 19,617 31,357 54,729 3.1 1QFY12 yoy (%) 19,776 31,693 52,270 3.4 33.6 10.0 (6.7) (29.4) qoq (%) 0.8 1.1 (4.5) 10.5

Source: Company, Angel Research

EBITDA declines by 4.1% yoy


The companys EBITDA declined by 4.1% to `116cr mainly due to lower realisation on power sales, partially offset by higher realisation on sponge iron. Other income increased to `11cr, compared to `2cr in 1QFY2011. Consequently, net profit increased by 0.6% yoy to `73cr in 1QFY2012.

Utkal B2 mine receives forest stage-II clearance


MIL has received stage-II of forest clearance for its Utkal mine (reserves of 117mn tonnes). The company expects to start production soon after the mining lease is executed by December 2011.

August 4, 2011

Monnet Ispat | 1QFY2012 Result Update

Exhibit 5: EBITDA margin trend


140 120 100 33 32 31 30 29 28 27 26 25 24 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
EBITDA (LHS) EBITDA margin (RHS)

Exhibit 6: Net profit trend


80 76 72 68 64 60 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 Net Profit (LHS) Net margin (RHS) 25 20 15 10 5 0

(`cr)

(`cr)

(%)

80 60 40 20 0

Source: Company, Angel Research

Source: Company, Angel Research

August 4, 2011

(%)

Monnet Ispat | 1QFY2012 Result Update

Investment rationale
Expanding power capacity by 80MW: MIL is expanding its power capacity by 80MW at Raigarh. The power plant, which is based on coal and midlings, is expected to be operational during August 2011. Steel expansion of 1.5mn tonnes: MIL is setting up a 1.5mn steel plant through the BF-EAF route. Total capex for the project is pegged at `3,000cr. The plant is expected to begin progressive commissioning in late FY2012. However, full benefits of these facilities would be witnessed in FY2014. Significant value unlocking lies ahead in Monnet Power: MIL is setting up a 1,050MW (2x525) power plant through Monnet Power. The plant is being set up at a cost of `5,000cr, with equity contribution of `1,200cr and the balance being funded through debt. MIL recently diluted a 12.5% stake to Blackstone for a consideration of `275cr, thus valuing the total equity stake at `2,200cr. We expect the plant to be operational in FY2014.

August 4, 2011

Monnet Ispat | 1QFY2012 Result Update

Outlook and valuation


MIL is on the verge of a massive expansion in its steel business. The 80MW power capacity expansion is expected to drive MILs earnings momentum in the near term. However, long-term stock performance will be determined by the timely expansion of the 1.5mtpa steel plant and unlocking of value in Monnet Power, which is implementing the 1,050MW power project. Although MIL has reported slight delays in the commencement of these projects, most of these projects would be backed by captive resources. Hence, we recommend Accumulate on the stock with a target price of `549, valuing the steel business at 6.0x FY2013E EV/EBITDA and investment in Monnet Power at 2.0x P/BV.

Exhibit 7: SOTP valuation


Steel business Stake in Monnet Power Target price (`)
Source: Company, Angel Research

6.0x FY2013E EV/EBITDA 2.0x P/BV

277 272 549

We have increased our sales and net profit estimates to account for higher prices of sponge iron during FY2012 and FY2013.

Exhibit 8: Revision of estimates


(` cr) Net sales EBITDA EBITDA margin (%) PBT Net income Net margin (%)
Source: Bloomberg, Angel Research

Earlier estimates FY12E


1,860 518 27.8 340 261 13.9

Revised estimates FY12E


1,973 552 28.0 365 286 14.5

Upgrade/(downgrade) (%) FY12E


6.1 6.7 18bp 7.4 9.4 59bp

FY13E
2,673 823 30.8 460 359 14.2

FY13E
2,960 872 29.5 518 405 13.7

FY13E
10.7 6.0 (133)bp 12.6 12.7 (48)bp

Exhibit 9: EPS Angel forecast vs. consensus


Year (`) FY2012E FY2013E Angel forecast
45.9 60.4

Bloomberg consensus
53.0 63.5

Variation (%)
(13.4) (4.8)

Source: Bloomberg, Angel Research

August 4, 2011

Monnet Ispat | 1QFY2012 Result Update

Exhibit 10: EV/EBITDA band


9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
Dec-05 Apr-02 Aug-09 Mar-03 Feb-04 Oct-07 Nov-06 Sep-08 Jul-10
Jul-10
Jul-10

(`cr)

2x
Source: Bloomberg, Angel Research

Jan-05

5x

8x

11x

14x

Exhibit 11: P/E band


1,000 900 800 700 600 500 400 300 200 100 0

(`)

Feb-04

Nov-06

Oct-07

Sep-08

Jan-05

Dec-05

Mar-03

5x
Source: Bloomberg, Angel Research

10x

15x

20x

Exhibit 12: P/BV band


1,200 1,000 800
(`)

600 400 200 0


Feb-04 Nov-06 Oct-07 Sep-08 Jan-05 Dec-05 Mar-03 Aug-09 Apr-02 Jun-11

1.0x
Source: Bloomberg, Angel Research

1.5x

2.0x

2.5x

August 4, 2011

Aug-09

Apr-02

Jun-11

Jun-11

Monnet Ispat | 1QFY2012 Result Update

Exhibit 13: Recommendation summary


Companies Bhushan Steel Godawari Power Sarda Energy Prakash Ind. Monnet Ispat CMP (`) Target price (`) Reco. Mcap Upside (` cr) P/E (x) P/BV (x) EV/EBITDA (x) RoE (%) RoCE (%) (%) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

380 155 196 64 486

- Neutral 225 259 96 Buy Buy Buy

8,049 491 701 855 3,127

45 33 52 13

9.3 3.7 8.4 2.8 10.6

9.2 2.8 7.1 2.3 8.0

1.4 0.6 0.9 0.4 1.3

1.2 0.5 0.8 0.3 1.1

8.1 3.9 6.3 3.1 10.3

7.2 2.9 4.5 2.8 7.5

16.1 17.6 12.0 16.9 12.9

14.0 19.4 12.8 17.4 16.1

8.6 13.8 8.7 14.5 8.1

7.9 17.0 9.5 14.7 10.5

549 Accum.

Source: Company, Angel Research

August 4, 2011

Monnet Ispat | 1QFY2012 Result Update

Profit & loss statement (Standalone)


Y/E March (` 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) Share in profit of asso. Recurring PBT % chg Extra. Inc/(Expense) PBT (reported) Tax (% of PBT) PAT (reported) Add: Earnings of asso. Less: Minority interest Extra. Expense/(Inc.) PAT after MI (reported) ADJ. PAT % chg (% of Net sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2008 1,319 160 1,159 1,159 81.7 907 679 135 41 52 252 44.6 21.7 44 207 47.0 17.9 16 30 13.4 221 32.9 221 54 24.4 166 166 166 23.3 14.3 43.0 29.4 13.4 FY2009 1,711 162 1,549 1,549 33.6 1,174 911 136 61 66 375 48.7 24.2 65 309 49.1 20.0 71 48 16.6 286 29.7 16 271 55 20.3 216 216 232 39.4 15.0 47.4 45.4 54.6 FY2010 1,567 86 1,481 1,481 (4.4) 1,017 735 146 73 62 464 23.8 31.3 72 392 26.8 26.5 74 32 9.1 350 22.1 184 331 60 18.2 269 269 288 24.1 19.4 56.1 46.2 1.7 FY2011 1,696 122 1,574 1,574 6.3 1,108 862 44 74 129 465 0.3 29.6 73 392 (0.1) 24.9 50 22 6.2 365 4.3 365 80 21.8 285 285 285 (0.9) 18.1 48.8 45.8 (0.9) FY2012E FY2013E

2,128 155 1,973 1,973 25.4 1,420 1,055 124 84 158 552 18.7 28.0 91 461 17.6 23.4 121 25 6.8 365 0.2 365 80 21.8 286 286 286 0.2 14.5 45.9 45.9 0.2

3,193 233 2,960 2,960 50.0 2,088 1,537 189 126 237 872 57.9 29.5 131 741 60.7 25.0 251 27 5.2 1.0 518 41.8 518 113.0 21.8 405 405 405 41.8 13.7 65.0 60.4 31.7

August 4, 2011

Monnet Ispat | 1QFY2012 Result Update

Balance sheet (Standalone)


Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders funds Share warrants Minority interest Total loans Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net Block Capital work-in-progress Goodwill Investments Current assets Cash Loans & advances Other Current liabilities Net current assets Mis. exp. not written off Total assets 1,212 175 1,037 266 138 1,035 371 338 327 199 836 2,278 1,366 240 1,127 310 216 1,222 246 683 294 232 991 83 2,725 1,439 311 1,128 721 545 1,143 205 590 348 268 874 18 3,288 1,789 384 1,405 1,371 745 1,851 847 590 414 289 1,562 18 5,101 48 1,020 1,068 21 1,098 91 2,278 48 1,238 1,286 1,325 114 2,725 54 1,592 1,646 27 1,495 120 3,288 62 2,025 2,087 2,895 120 5,101 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E

62 2,274 2,336 3,895 120 6,351 3,389 476 2,914 571 945 2,223 1,138 590 495 321 1,902 18 6,351

62 2,642 2,704 4,895 120 7,719 4,689 607 4,082 271 1,145 2,602 1,283 590 729 400 2,202 18 7,719

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Monnet Ispat | 1QFY2012 Result Update

Cash flow statement (Standalone)


Y/E March (` cr) Profit before tax Depreciation Change in working capital Less: Other income Direct taxes paid Cash flow from operations (Inc.)/ Dec. in fixed assets (Inc.)/ Dec. in investments (Inc.)/ Dec. in loans and adv. Other income Cash flow from investing Issue of equity Inc./(Dec.) in loans Dividend paid Others Cash flow from financing Inc./(Dec.) in cash Opening cash bal. Closing cash bal. 23 (359) 380 94 475 81 290 371 6 (270) 40 133 28 69 75 (125) 371 246 15 (799) 151 216 28 58 281 (40) 246 205 (1,200) 165 1,400 36 1,529 642 205 847 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E 221 44 (246) (23) 30 (34) (289) (94) 271 65 (280) 45 31 70 (199) (77) 331 72 78 61 64 478 (485) (330) 365 73 (46) 80 313 (1,000) (200)

365 91 (49) 80 327 (800) (200) (1,000) 1,000 36 964 291 847 1,138

518 131 (154) 113 382 (1,000) (200) (1,200) 1,000 36 964 145 1,138 1,283

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Monnet Ispat | 1QFY2012 Result Update

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 (`) 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) Operating RoE Returns (%) RoCE (Pre-tax) Angel RoIC (pre-tax) RoE Turnover ratios (x) Asset turnover (gross block) Inventory (days) Receivables (days) Payables (days) WC cycle (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest coverage FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E

16.5 11.1 2.1 1.0 2.6 11.8 1.3 43.0 29.4 43.9 5.0 226.8 17.9 75.6 0.7 9.6 1.2 0.6 14.5 10.6 15.8 20.0 1.1 145 33 43 58 0.6 2.5 12.7

10.7 7.8 1.8 1.0 2.1 8.8 1.2 47.4 45.4 61.9 5.0 268.2 20.0 79.7 0.7 11.2 4.6 0.8 16.3 12.4 16.2 18.2 1.2 80 26 50 49 0.8 2.6 4.4

10.5 7.4 1.6 1.0 2.6 8.3 1.2 56.1 46.2 65.9 5.0 307.1 26.5 81.8 0.5 11.5 4.3 0.7 16.7 13.0 17.3 18.2 1.1 112 32 60 49 0.7 2.6 5.3

10.6 8.4 1.4 1.0 3.2 10.7 1.0 48.8 45.8 57.6 5.0 335.3 24.9 78.2 0.4 8.4 1.8 0.9 14.5 9.3 14.9 15.2 1.0 112 32 60 58 0.9 4.2 7.9

10.6 8.0 1.3 1.0 2.9 10.3 0.9 45.9 45.9 60.5 5.0 375.3 23.4 78.2 0.4 7.6 2.8 1.1 13.1 8.1 12.3 12.9 0.8 112 32 60 55 1.1 4.8 3.8

8.0 5.6 1.1 1.0 2.2 7.5 0.8 65.0 60.4 86.1 5.0 434.5 25.0 78.2 0.5 9.9 4.5 1.3 17.1 10.5 13.7 16.1 0.7 112 32 60 49 1.3 4.0 3.0

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Monnet Ispat | 1QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Monnet Ispat No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

August 4, 2011

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