Bhushan Steel, IndusInd Bank, Bank of Baroda

Bhushan Steel, IndusInd Bank, Bank of Baroda

Bhushan Steel

Bhushan Steel

Bhushan Steel

Investors can consider picking up shares in steel producer, Bhushan Steel, which trades at Rs 1,570 or 9.4 times the trailing 12 months earnings. The company's aggressive expansion into integrated steel production is likely to lead to better margins and pricing power. This coupled with robust demand for cold-rolled steel variants from the automotive and consumer durables sector make for good odds on this bet paying off over the next two-three years. The company's multiple is at a discount to the steel sector, which trades at 15-16 times earnings.

THE STORY

Bhushan Steel imports hot-rolled steel coils from Tata Steel, SAIL, among other sources. They then re-roll these coils into cold-rolled coils, used mainly by the automotive and consumer durables segment.

The cold-rolled coils are further processed with various coatings, included galvanising (zinc coating), colour coating and so forth. With raw material costs being volatile and the consumers price-sensitive, intermediate players such as Bhushan Steel are left vulnerable to the steel price and consumption cycle. Downturns or spikes in one or both could leave them either with healthy margins or cringing from being squeezed for the last penny.

A move to ease this pressure is Bhushan Steel's transition into a steel producer with captive iron ore and coal mines. The company is in the process of setting up a five-million tonne per annum plant in Orissa to produce hot-rolled coils, a vital input. This would neatly complement their re-rolling facilities in Khopoli, Maharasthra and Sahibabad, UP, by ensuring timely raw material supply. This means incurring a higher fixed cost on operating mines and a steel plant even during downturns in the steel cycle. But integrated producers have less to fear from both the swings in the cycle and oligopoly-ridden raw material setup within the steel sector, than standalone producers.

THE NUMBERS

The company's net sales have grown at 17 per cent annually between FY-05 and FY-09 and net profits at 29 per cent during the same period. Estimated FY-10 sales are likely to be up by 7-8 per cent while net profits may close to double compared to FY-09. The company is quite high on leverage which stood at 3.6:1 at the end of FY-09.

However, the company has seen some relief on debt, evident from the fact that interest cover improved from 3.22 times to 5.75 times for the first nine months of FY-10. Operating margins have been on the rise and peaked at 22 per cent for the first nine months of FY-10, double the average between FY-05 and FY-09. This is largely due to a favourable raw material cost scenario and buoyant demand from users. There is significant scope for upside in margins considering the company's foray into producing HR coils.

WHY THEM?

Bhushan Steel now processes over 600,000 tonnes of HRC into cold-rolled steel, with a capacity to process just over a million tonnes. It also produces rods, strips and billets. When the second phase of the Orissa plant becomes operational shortly (test runs are underway), it will produce just under two million tonnes of hot-rolled coils which should comfortably meet the in-house requirements.

Add to this mines, a captive power plant and another three-million tonnes of steel production that should become operational by FY-14, and the company appears well-positioned to capitalise on the expected growth in automobiles and consumer durables.

Another trump card is the fact that the land for the Orissa project has been secured, something which several major names are having immense trouble with in the mining belt.

Moves such as a technical tie-up with Sumitomo of Japan to produce auto-grade steel (a sought after competence) and the acquisition of the Australia-based Bowen Energy (high-quality coke) for raw material security are likely to aid margins in the long run. Also on the cards is a steel plant in West Bengal or Karnataka with Sumitomo holding a sizeable stake.

Concerns

Automobiles and consumer durables, Bhushan's key users, proved quite resilient during the recent slowdown. Automobile sales have grown 30-40 per cent in the past 11 months. Same is the case with several consumer durable segments such as refrigerators and air conditioners.

The consumer durables IIP in Apr 2009-Feb 2010 period grew by 25 per cent over a year ago; this compares to a modest 4 per cent growth over the previous year. Both demographics and macro-indicators indicate a healthy doubling or tripling of automobiles and consumer durables over the next five years; however, the growth is likely to be lumpy.

Bhushan's phased transition into a fully integrated steel producer, if successful, holds the promise of pushing up operating profit margins north of 25 per cent if the price cycle remains firm.

But until the mines are operationalised, Bhushan will have to purchase iron ore and coking coal from volatile spot markets, where current forecasts are beginning to take extreme hues with prices expected to plunge if turbulence in Europe and a slowing Chinese economy pan out.

In such a scenario, India is expected to see steel prices plunge. Alternatively, if governments continue to play the white knight to fragile economies, mining majors may continue to wield pricing power. Steel players will then reap the benefits of volume-driven growth with profits on a leash.

via BL

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.

Business

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

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