Bhushan Steel

Investors can consider holding on to their holdings in Bhushan Steel. The stock trades at 13.6 times on the basis of the trailing 12-month earnings at Rs 1,592.

The company is a secondary steel producer, selling cold-rolled steel to various sectors. Peers such as Uttam Galva trade at similar multiples. Bhushan Steel's trump card is its transition into a fully integrated steel producer, which is under way in phases through a five-mtpa plant in Orissa.

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Bhushan Steel produce one million tonnes of value added cold rolled steel at Khopoli, Maharasthra and Sahihabad, UP. Cold rolled steel is used in the production of automobiles and consumer durable products.

The company is building a new integrated steel facility at Meramandali, Orissa in a phased manner. The faclility currently produces 0.3 million tonnes of billets and 0.6 million tonnes of sponge iron, both of which are intermediaries in steel production.

By the end of the current fiscal, 1.9 million tonnes of hot rolled coiled which will be for captive consumption and external sales is slated to come into production.

Once completed by 2013, the facility is expected to produce around 5 million tonnes of steel products per annum.

A tie-up with the Japanese conglomerate, Sumitomo, to produce and market automotive grade steel should bolster Bhushan Steel's products' standing by meeting the ‘quality' requirements of several automobile companies.

Its track record indicates that the company should be able to pull off the ambitious expansion programme which, when completed, will account for 6-8 per cent of the expected Indian production by 2014.

PROSPECTS

Other projects lined up include a steel plant in West Bengal, in which Sumitomo is expected to take a stake; however, the holding structure of this venture remains unclear. Bhushan Steel's current roster of clients include Yamaha, Tata Motors, Maruti, Whirlpool, Samsung and LG.

Automotive steel is one of the most lucrative segments in the steel business, by virtue of the amount of processing required to produce it and the fact that few Indian producers have the complete know-how to produce the various grades of steel required by the industry.

The encouraging signs of recent growth and aggressive entry of several global automobile majors indicate good potential and opens ups the possibility of adding a few more marquee names to Bhushan's client list.

While there may be more players competing in the market, the market pie which Bhushan Steel sells to is also likely to get larger. Consumer durables already see the major global players warring for market share and several sub-segments grow between 10-40 pe rcent.

As a secondary value-add steel producer, Bhushan Steel's current upside is limited by the spread between the cost of hot-rolled coils — the raw material — and the processed cold-rolled coils they sell.

Flat steel products, whose prices had remained soft over the last few months, saw their prices hiked in December by most major steel producers.

Prices are expected to remain steady and rise through 2010 as the global demand scenario improves. Bhushan Steel, like most other secondary players, has shown the ability to pass on raw material cost increases to the end-user.

However, with the proven integrated model it is moving towards, Bhushan is looking to secure its supply of hot-rolled coils and the raw materials that go into making it. A 420 MW power plant and tie-ups for coking coal and technical assistance are some of the moves to try and ensure the move is smooth.

Margins will improve significantly on securing raw material linkages. Considering that the foray into integrated steel production is a new territory, Bhushan Steel, as an investment over the next three-four years, depends on how this foray pans out operationally and financially.

THE NUMBERS

Bhushan Steel's gross sales have grown at a compounded annual rate of around 20 per cent since FY-06 and net profits by around 40 per cent. This in spite of heavy borrowing for expanding their cold-rolling facilities and the Orissa plant which has taken leverage to 3.6 :1. FY-09's EBIT, however, covered interest costs more than five times over. Their operating margins have hovered around the 20 percent mark which is significantly better than peers such as Uttam Galva. The first half of FY-10 saw gross sales slip by over 8 per cent on weaker realisations, as raw material costs corrected steeply.

But operating profits and net profits grew by over 4 per cent and 31 per cent respectively with the latter being helped by considerably lower interest and depreciation expenses.

The current price provides little room for error for the conservative investor. The company has significant leverage and any moves to ease it through equity raising will be at the expense of the shareholder.

That said, the upside through sales and profit growth with new capacities, coupled with the healthy demand from Indian markets, should serve the company well.

via BL