3QFY2012 Result Update | Steel

February 17, 2012

Monnet Ispat
Performance highlights

BUY
CMP Target Price
% chg (yoy)
38.6 12.9 (592)bp 4.1

`490 `663
12 Months

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

3QFY12
481 125 26.0 73

3QFY11
347 111 32.0 70

2QFY12
459 119 26.1 77

% chg (qoq)
4.9 4.8 (2)bp (5.1)

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 3,152 0.6 583/305 20,282 10 18,289 5,564 MNET.BO MISP@IN

Source: Company, Angel Research

Robust top-line performance: Monnet Ispats (MIL) net sales grew strongly by 38.6% yoy to `481cr during 3QFY2012. Growth was mainly driven by the 17.8% yoy increase in sponge iron realization to `21,004/tonne. The companys sponge iron sales volumes grew by 8.3% yoy to 160,521 tonnes, while power sales volumes declined by 18.1% yoy to 172mn units. Net realization on power sales grew by 2.3% yoy and 18.5% qoq to `3.5/unit during the quarter. EBITDA increases 12.9% yoy: Raw-material costs as a percentage of sales increased to 59.9% in 3QFY2012 compared to 51.5% in 3QFY2011. Hence, EBITDA increased by only 12.9% yoy to `125cr, while EBITDA margin contracted by 592bp yoy to 26.0%. Interest expenses increased by 250.7% yoy to `19cr and other income increased by 65.6% yoy to `11cr. Consequently, net profit grew by only 4.1% yoy to `73cr. Progress on captive coal blocks satisfactory: MIL had received stage-II forest clearance for its Utkal mine during 2QFY2012. The company aims to sign the mining lease for Utkal coal block during 4QFY2012 since it has received all approvals. The company also targets to sign mining lease for Mandakini coal block by 2HFY2013. The company reiterated that both these coal blocks would be ready for production before commercial operations from the power plant. Outlook and valuation: MIL is on the verge of a massive expansion in its steel business. The 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 there could be some delays in the commencement of these projects, most of these projects would be backed by captive resources, thus ensuring robust profitability. Hence, we recommend Buy on the stock with a target price of `663. 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 4.3 34.8 11.4

Abs. (%) Sensex MIL

3m 11.1 26.7

1yr (1.2) (10.5)

3yr 102.4 (1.2)

FY2010

FY2011

FY2012E

FY2013E

1,481 (4.4) 288 24.1 44.7 31.3 11.0 1.6 18.2 13.0 2.3 7.4

1,574 6.3 285 (0.9) 44.3 29.6 11.1 1.5 15.1 9.6 2.9 9.9

1,860 18.2 304 6.7 47.2 26.2 10.4 1.3 13.7 7.4 2.7 10.5

2,974 59.9 467 53.5 69.7 30.7 7.0 1.1 18.2 11.6 1.9 6.3

Bhavesh Chauhan
Tel: 022- 39357800 Ext: 6821 bhaveshu.chauhan@angelbroking.com

Please refer to important disclosures at the end of this report

Monnet Ispat | 3QFY2012 Result Update

Exhibit 1: 3QFY2012 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

3QFY12 481 288 59.9 15 3.0 23 4.9 30 6.2 356 74.0 125 26.0 125 26.0 19 19 11 98 20.4 25 25.5 73

3QFY11 347 179 51.5 10 3.0 17 4.9 30 8.6 236 68.0 111 32.0 111 32.0 5 19 6 93 26.8 23 24.7 70

yoy (%) 38.6 60.9 39.7 39.0 (0.4) 50.6 12.9 12.9 250.7 0.8 65.6 5.3 9.0 4.1

2QFY12 459 274 59.8 14 3.1 21 4.5 30 6.6 339 73.9 119 26.1 119 26.1 12 19 7 96 20.9 19 19.7 77

qoq (%) 4.9 5.1 4.6 12.6 (1.5) 4.9 4.8 4.8 61.8 2.0 61.7 2.4 32.6 (5.1)

Robust 3QFY2012 top-line performance

MILs net sales grew strongly by 38.6% yoy to `481cr for 3QFY2012. Growth was mainly driven by the 17.8% yoy increase in sponge iron realization to `21,004/tonne. The companys sponge iron sales volumes grew by 8.3% yoy to 160,521 tonnes, while power sales volumes declined by 18.1% yoy to 172mn units. Net realization on power sales grew by 2.3% yoy and 18.5% qoq to `3.5/unit during the quarter.

Exhibit 2: Quarterly production volume

(tonnes) Sponge iron Steel (basic) Steel (structural) Ferro alloy Power (mn units) 3QFY11 1,610 461 2,600 228 4QFY11 20,701 18,989 2,596 272 1QFY12 19,075 19,005 2,173 209 2QFY12 3QFY12 yoy (%) qoq (%) 18.9 4.1 6.1 (2.9) 15.3 (22.1) 19,855 19,010 1,966 238 21,058 1,208.1 18,465 3,909.3 2,267 185 (12.8) (18.6) 163,357 190,360 165,857 186,557 194,171

Source: Company, Angel Research

February 17, 2012

Monnet Ispat | 3QFY2012 Result Update

Exhibit 3: Quarterly sales volume

(tonnes) Sponge iron Steel (basic) Steel (structural) Ferro alloy Power (mn units) 3QFY11 82 544 1,796 210 4QFY11 16,756 2,604 235 1QFY12 17,086 1,542 175 2QFY12 664 17,255 2,049 176 3QFY12 yoy (%) qoq (%) 8.3 0.4 303.6 15.1 (0.7) (2.0) 148,242 155,196 150,578 159,906 160,521

2,680 3,171.9 19,862 3,548.9 2,034 172 13.3 (18.1)

Source: Company, Angel Research

Exhibit 4: Quarterly average realization

(`/tonne) Sponge iron Steel (basic) Steel (structural) Ferro alloy Power (`/unit) 3QFY11 17,831 28,694 9,443 56,829 3.4 4QFY11 19,617 31,357 54,729 3.1 1QFY12 19,776 31,693 52,270 3.4 2QFY12 21,002 25,904 32,176 63,397 2.9 3QFY12 yoy (%) qoq (%) 21,004 30,741 33,197 39,503 3.5 17.8 7.1 251.6 (30.5) 2.3 0.0 18.7 3.2 (37.7) 18.5

Source: Company, Angel Research

EBITDA grew by 12.9% yoy

Raw-material costs as a percentage of sales increased to 59.9% in 3QFY2012 compared to 51.5% in 3QFY2011. Average iron ore cost increased by 35.5% yoy and 1.1% qoq to `6,272/tonne in 3QFY2012. Hence, EBITDA increased by only 12.9% yoy to `125cr, while EBITDA margin contracted by 592bp yoy to 26.0%. Interest expenses increased by 250.7% yoy to `19cr and other income increased by 65.6% yoy to `11cr. Consequently, net profit grew by only 4.1% yoy to `73cr.

Exhibit 5: EBITDA margin trend

140 120 100 35 30 25

Exhibit 6: Net profit trend

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

(`cr)

(`cr)

(%)

80 60 40 20 0 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 EBITDA (LHS) EBITDA margin (RHS)

20 15 10 5 0

64 60 56

Source: Company, Angel Research

Source: Company, Angel Research

Progress on coal blocks satisfactory

MIL had received stage-II forest clearance for its Utkal mine (reserves of 117mn tonnes) during 2QFY2012. The company aims to sign the mining lease for Utkal coal block during FY2012 since it has received all approvals. The company also targets to sign mining lease for Mandakini coal block by 2HFY2013. The company reiterated that both the coal blocks would be ready for production before the completion of the power plant.

February 17, 2012

(%)

68

Monnet Ispat | 3QFY2012 Result Update

Investment rationale
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 `3,600cr. Various plants including sinter plant, oxygen furnace, steel melting shop and plate mill are expected to begin progressive commissioning in mid-FY2013. 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 has 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 1HFY2014. With captive coal blocks backing this project, we expect robust profitability from the power business. MIL also aims to raise its capacity further by 660MW. However, the company is yet to achieve financial closure for the same. Indonesian coal mine could provide further upsides: MIL had acquired two coal assets in Indonesia during CY2011, which has potential reserves of 65mn tonnes. MIL is currently in the process of developing this mine.

February 17, 2012

Monnet Ispat | 3QFY2012 Result Update

Outlook and valuation

MIL is on the verge of a massive expansion in its steel business. The 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 there could be some delays in the commencement of these projects, most of these projects would be backed by captive resources, thus ensuring robust profitability. Hence, we recommend Buy on the stock with a target price of `663, 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

376 287 663

Exhibit 8: Revision of estimates

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

Earlier estimates FY12E

1,973 519 26.3 389 304 15.4

Revised estimates FY12E

1,860 487 26.2 389 304 16.3

Upgrade/(downgrade) (%) FY12E

(5.7) (6.3) (17)bp (0.1) (0.1) 91bp

FY13E
2,960 872 29.5 544 425 14.4

FY13E
2,974 914 30.7 597 467 15.7

FY13E
0.5 4.8 128bp 9.8 9.8 133bp

Exhibit 9: EPS Angel forecast vs. consensus

Year (`) FY2012E FY2013E
Source: Bloomberg, Angel Research

Angel forecast
47.2 69.7

Bloomberg consensus
49.5 59.9

Variation (%)
(4.6) 16.3

February 17, 2012

Monnet Ispat | 3QFY2012 Result Update

Exhibit 10: EV/EBITDA band

14,000 12,000 10,000 8,000

(`cr)

6,000 4,000 2,000

Dec-05 Dec-07 Dec-09 Aug-06 Aug-08 Aug-10 Dec-11 Apr-05 Apr-07 Apr-09 Apr-11

2x

5x

8x

11x

14x

Source: Bloomberg, Angel Research

Exhibit 11: P/E band

1,600 1,400 1,200 1,000
(`)

800 600 400 200 0

Aug-05 Dec-07 Mar-06 Oct-06 Feb-09 Apr-10 Jul-08 May-07 Nov-10 Sep-09 Jun-11 Jan-05 Jan-12
Dec-11

5x

10x

15x

20x

Source: Bloomberg, Angel Research

Exhibit 12: P/BV band

900 800 700 600 500 400 300 200 100
Dec-05 Dec-07 Dec-09 Apr-05 Apr-07 Apr-09 Aug-06 Aug-08 Aug-10 Apr-11

(`)

0.5x

1.0x

1.5x

2.0x

Source: Bloomberg, Angel Research

February 17, 2012

Monnet Ispat | 3QFY2012 Result Update

Exhibit 13: Recommendation summary

Companies Tata Steel JSW Steel SAIL 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

478 855 112 490

558

Buy

46,423

17 35

11.7 19.1 11.7 10.4

8.4 11.8 10.1 7.0

1.0 1.2 1.1 1.3

0.9 1.1 1.0 1.1

7.5 6.4 10.2 10.5

5.3 5.5 8.2 6.3

18.8 6.7 10.0 13.7

10.9 10.1 10.6 18.2

7.0 9.0 7.1 7.4

9.4 10.8 8.4 11.6

- Neutral 19,068 - Neutral 46,157 663 Buy 3,152

Source: Company, Angel Research

February 17, 2012

Monnet Ispat | 3QFY2012 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 53.8 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 55.0 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 60.4 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 79.6 21.8 285 285 285 (0.9) 18.1 48.8 45.8 (0.9) FY2012E FY2013E

2,007 147 1,860 1,860 18.2 1,374 1,025 119 79 151 487 4.6 26.2 75 411 4.9 22.1 57 35 8.9 389 6.7 389 85 21.8 304 304 304 6.7 16.3 47.2 47.2 6.7

3,208 234 2,974 2,974 59.9 2,060 1,506 190 126 238 914 87.9 30.7 118 797 93.7 26.8 238 38 6.4 1.0 597 53.5 597 130 21.8 467 467 467 53.5 15.7 72.5 69.7 47.5

February 17, 2012

Monnet Ispat | 3QFY2012 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 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 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

64 2,026 2,090 2,672 141 4,903 1,477 383 1,094 1,513 550 2,092 688 853 550 345 1,747 4,903

64 2,292 2,357 3,672 141 6,170 3,077 459 2,618 713 550 2,670 1,183 853 633 381 2,289 6,170

64 2,721 2,786 4,672 141 7,599 4,377 576 3,800 413 550 3,323 1,510 853 959 487 2,836 7,599

February 17, 2012

Monnet Ispat | 3QFY2012 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. FY2008 FY2009 FY2010 221 44 (246) (23) 30 (34) (289) (94) 23 (359) 380 94 475 81 290 371 271 65 (280) 45 31 70 (199) (77) 6 (270) 40 133 28 69 75 (125) 371 246 331 72 78 61 64 478 (485) (330) 15 (799) 151 216 28 58 281 (40) 246 205 FY2011 FY2012E FY2013E

362 74 (348) (27) 86 (25) (831) (5) 22 (814) 10 1,177 (135.3) 1,322 483 205 688

389 75 (47) 85 332 1,000 38 962 495 688 1,183

597 118 (220) 130 365 1,000 38 962 327 1,183 1,510

(800) (1,000)

(800) (1,000)

February 17, 2012

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Monnet Ispat | 3QFY2012 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 FY2011 FY2012E FY2013E

16.7 11.2 2.2 1.0 2.5 11.7 1.3 43.0 29.4 43.9 5.0 226.8 17.9 75.6 0.7 9.6 1.2 0.5 14.2 10.6 15.8 20.0 1.1 145 33 43 58 0.5 2.3 12.7

10.8 7.9 1.8 1.0 2.1 8.6 1.2 47.4 45.4 61.9 5.0 268.2 20.0 79.7 0.7 11.2 4.6 0.7 15.7 12.4 16.2 18.2 1.2 80 26 50 49 0.7 2.3 4.4

11.0 7.4 1.6 1.0 2.3 7.4 1.0 56.1 44.7 65.9 5.0 307.1 26.5 81.8 0.5 11.5 4.3 0.4 14.8 13.0 17.3 18.2 1.1 112 32 60 49 0.4 1.6 5.3

11.1 8.8 1.5 1.0 2.9 9.9 0.9 48.0 44.3 55.7 5.0 324.8 24.9 78.2 0.4 8.4 1.9 0.7 12.9 9.6 15.5 15.1 1.1 146 44 81 68 0.7 3.1 7.9

10.4 8.3 1.3 1.0 2.7 10.5 0.8 47.2 47.2 59.0 5.0 366.1 22.1 78.2 0.4 7.0 1.4 0.8 11.6 7.4 11.8 13.7 0.8 146 44 81 75 0.8 4.0 7.2

7.0 5.4 1.1 1.0 1.9 6.3 0.8 72.5 69.7 90.8 5.0 432.8 26.8 78.2 0.5 11.2 4.5 0.9 17.6 11.6 16.0 18.2 0.8 146 44 81 63 0.9 2.9 3.4

February 17, 2012

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Monnet Ispat | 3QFY2012 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%)

February 17, 2012

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