Share Market Update on Bhushan Steel for 1QFY2012 with a Neutral recommendation.
Strong top-line growth: During 1QFY2012, Bhushan Steel’s
(BSL) net sales grew by 62.6% yoy to `2,232cr mainly on account of higher
volumes of flat products. Flat products sales volumes grew by 80.2% yoy to
388,790 tonnes, while long product sales volumes grew by 7.6% yoy to 100,664
tonnes in 1QFY2012. Long product average realisation increased by 18.2% yoy to `42,915/tonne,
while flat product average realisation decreased by 3.2% yoy to `49,294/tonne.
Depreciation and interest costs mute net profit growth: During 1QFY2012, EBITDA
increased by 62.1% yoy to `661cr, representing EBITDA margin of 29.6%, compared
to 29.7% in 1QFY2011. EBITDA/tonne increased to `13,505 (US$300) in 1QFY2012,
compared to `13,186 (US$293) in 1QFY2011. Depreciation expense increased by
182.4% yoy to `151cr due to increased capacity, while interest expense
increased by 173.8% yoy to `216cr because of higher debt. A sharp increase in
depreciation and interest costs resulted in net profit growth of only 2.0% yoy
(despite 62.1% growth in EBITDA) to `210cr.
Outlook and valuation: At the CMP, the stock is trading at 8.1x FY2012E and 7.1x FY2013E
EV/EBITDA, a significant premium over its peers. Although we expect sales
volume growth of 24.8% over FY2011–15E, we believe it is too early to play the
volume growth story of BSL as strong volume growth is expected only post
FY2013. Further, although BSL uses a combination of BF-EAF technology to
produce steel, rising prices of iron ore and coal will affect its margins.
Moreover, BSL’s debt-equity ratio remains high. Further, we believe the
increase in the stock price in the past three months fairly discounts the
growth prospects of BSL. Hence, we
maintain our Neutral view on the stock.
