BHUSHAN STEEL-- Strong quarter :: Edelweiss

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BHUSHAN STEEL
Strong quarter


􀂃 Realisations and volumes surprise positively
Bhushan Steel (BSL) reported net sales of INR 17.2 bn in Q2FY11, up 32% Y-o-Y
and 25% Q-o-Q, against our estimate of INR 13.5 bn. Higher sales volume, at
~413kt (up 22% Q-o-Q and 34% Y-o-Y; our estimate ~337kt), coupled with
higher–than-expected realizations were primary drivers of net sales. Average
blended realization stood at INR 41.6k/t (up 9% Y-o-Y, down 6% Q-o-Q), 4.3%
higher than our estimate. The domestic market was primarily responsible for the
stellar volume growth with a ~40% rise, both Q-o-Q and Y-o-Y, at ~350kt.


􀂃 Proportion of captive HR coil integration increases to 45%
Our calculation indicates that BSL increased the proportion of captive HR to 45%
in Q2FY11 from 15% in Q1FY11, thereby imparting visibility to further
integration in the coming quarters. EBITDA, at INR ~4.9 bn, was in line with our
estimate and rose 43% Y-o-Y and 20% Q-o-Q. However, EBITDA/t, at USD
255/t, was lower than our estimate of USD 325/t due to higher–than-estimated
costs, primarily on the iron ore and coking coal front. Net profit, at INR 2.6 bn
(up 27% Y-o-Y and 26% Q-o-Q), was higher than our estimate of INR 2.3 bn on
back of lower capital charges.

􀂃 Outlook and valuations: Healthy outlook; maintain ‘BUY’
BSL has started benefiting from the backward integration in metallics, slabs and
HR coil. Backward integration levels are expected to further increase from the
current, thereby improving operating metrics. We remain optimistic on BSL’s
long term structural volume growth story coupled with its focus on remaining a
low cost manufacturer. We largely retain our estimates and maintain our ‘BUY’
recommendation on the stock. On relative return basis, we rate the stock as
‘Sector Outperformer’.