Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bhushan Steel (BSSL.BO)
Neutral Equity Research
On an “upstream” trajectory, growth priced in; initiate with Neutral
Investment view
We initiate coverage of Bhushan Steel (BSSL) with a Neutral rating and
12-month FY12E P/B-based target price of Rs454. While we like Bhushan
Steel’s long-term structural growth outlook driven by backward
integration through Orissa expansion, strong volume growth, and
improving EBITDA profile, we believe that the ROE profile would remain
muted in the medium term, as higher operating profits would be offset by
higher interest payments and depreciation. High leverage (net/debt to
equity of 2.9X) and lack of raw material integration would continue to be
an overhang on the stock, in an inflationary environment, in our view.
Core drivers of growth
1. Strong volume growth: With the Orissa expansion, we expect BSSL to
register 24% FY10-FY13E volume CAGR, highest within our India coverage.
2. With backward integration, we expect a structural improvement in
margins, as it reduces its dependence on externally sourced HRC—we
expect EBITDA/ton to improve from US$211 in FY10 to US$285 by FY12E.
Risks to the investment case
Upside risks: faster-than-expected capacity ramp-up; downside risks: high
leverage in a rising interest environment and volatile raw material prices.
Valuation
In our view, the strong growth outlook is priced in—currently trading at
mid-cycle EV/EBITDA, at 50% premium to peers, commensurate to higher
margins. On book-based multiples, the stock is trading at FY12E P/B of
1.3X (above mid-cycle) with lower-than-mid-cycle returns (FY12E ROE:
21% vs. 5-year historical average of 25%).
Industry context
We prefer Tata Steel (TISC.BO; Buy, on CL)—trading at 4.5X FY12E
EVEBITDA, 23% disc to mid-cycle of 6.2X and 27% disc to peers.
INVESTMENT LIST MEMBERSHIP
Neutral
Strong growth outlook priced in; initiate with Neutral
We initiate on Bhushan Steel, with a Neutral rating and 12-month P/B-based target price
of 454. While we like Bhushan Steel’s long-term structural growth outlook driven by
strong volume growth, backward integration, and improving EBITDA profile, we believe
that the return profile would remain muted in the near-to-medium term, as higher
operating profits would be offset by higher interest payments and depreciation. Moreover,
the highly levered balance sheet (FY11E net/debt to equity of 2.9X) and lack of raw
material integration would continue to be an overhang on the stock, in an inflationary
environment, in our view.
We believe the strong growth fundamentals of the company are priced in. The stock is
trading at 1.3X FY12E PB (above mid-cycle), despite lower-than-mid-cycle returns (FY12E
ROE of 21% vs. mid-cycle ROE of 25%). For Bhushan Steel, P/B has more than 80%
correlation to ROE cycle. On earnings-based multiples, the stock is trading at mid-cycle
EV/EBITDA, at a 50% premium to peers, commensurate to higher margins. We believe the
improving cash return profile of the company is priced in with FY12E EV/GCI close to
+1SD above historical mean.
Rolling “upstream”, 24% FY10-FY13E volume CAGR
Bhushan Steel, a leading producer (converter) of downstream flat steel products, is going
through a structural transformation, as it forays into primary steel making with the Orissa
expansion project (4.7 mn-ton integrated steel plant in Dhenkanal, Orissa).
With the completion of phase III (scheduled for October 2012; phase II completed in March
2010), Bhushan Steel will have primary steel making capacity of 5.3 mn tons, vs. 0.3 mn
tons in FY10. Subsequently, its dependence on externally sourced HRC would reduce,
leading to significant improvement in margins. We expect production of HRC to ramp up
gradually from 0.9 mn tons in FY11E to 2.5 mn tons by FY14E, leading to substantial
volume growth at 24% FY10-FY13E CAGR, highest within our India steel coverage.
Subsequently, share of upstream products (HRC/billets) will increase from 19% in FY10 to
45% in FY13E.
Dominant downstream business; 66% exposure to OEM segment
Bhushan Steel is a leading downstream steel player in India with a current downstream
(cold-rolled) capacity of 1.2 mn tons, and more than 65% of sales exposure to the OEM
segment. BSSL has 1.2 mtpa cold rolling capacity at Khopoli and Sahibabad plants, with
500 ktpa of galvanizing and 176 ktpa of colour-coating capacity.
As our India auto analyst expects the auto industry to grow at 15% CAGR in FY10-FY13E,
we believe the market leaders in the automotive sector will have an inherent advantage
both in terms of products and services offered. Bhushan Steel is a dominant player in the
Indian automotive segment with a 20% market share and is second only to Tata Steel in
both cold-rolled and galvanized coil/plates which are currently sold at a 15% (US$120-
US$130/ton) premium to the HRC price vs. incremental cost of US$40-50/ton. EBITDA
margin for auto-grade steel could be as high as 55%-60% vs. 30%-35% for long steel, in
our view.
We believe Bhushan Steel (auto exposure = 48% of revenue) is well-positioned vs. peers
to leverage its auto-grade experience, as auto-grade steel customers are very sticky and
the barriers to entry are highest in this segment, given the low margin for error and
customization. Based on our channel checks, Bhushan Steel’s auto-grade value added
products are sold on average at a 10% premium to its competitors.
The company has also entered into a technical assistance arrangement with Sumitomo
Metal, Japan, with the core area of focus being automotive steel production.
Bhushan Steel’s strong downstream franchise is reflected in its higher realizations vs.
peers, and stable/resilient margins across the cycle.
Structural margin expansion, expect 41% EBITDA FY10-13E CAGR
In our view, Bhushan Steel is on a strong growth trajectory (41% FY10-FY13E EBITDA
CAGR), led by backward integration and robust volume growth.
With upstream integration, we expect a structural expansion in BSSL’s margins, as it
reduces its dependence on externally sourced steel. As a downstream converter, BSSL
was not able to capture the upside in margins, in a tight steel pricing environment, in
spite of higher realizations. In our view, captive production of HRC would lead to EBITDA
savings of Rs20 bn in FY11E-FY12E, leading to improvement in margins. In FY10, external
purchases of HRC were 50% of the revenues, which would be reduced to 10% by FY12E.
Moreover, BSSL would sell surplus HRC in the market, which will further add to the
margins.
We expect EBITDA margins to improve from US$211/ton in FY10 to US$285/ton by FY12E.
While the fixed-margin business model of secondary producers protected them on the
downside in a falling steel price scenario, integration across the value chain becomes
imperative to leverage in a rising steel price environment. As an upstream producer,
Bhushan Steel would be more levered to steel prices – a 1% change in steel prices would
increase FY12E EPS by 5.0%.
Risk #1: Highly leveraged balance sheet
While we expect Bhushan Steel to grow at a strong pace in the next 3-4 years, a key
concern continues to be its high leverage. BSSL has a FY11E net debt to equity of 2.9X,
which is significantly higher than its Indian peers.
Bhushan Steel, funded its entire growth plans in the past 5 years through debt and
internal accruals, with no equity injection. As such, the company had to lever up its
balance sheet significantly. In a rising interest rate environment, a highly levered balance
sheet does remain an overhang.
As the internal accruals of BSSL increase, with ramp up of new capacity, we expect net
debt to equity to decline gradually from 2.9X to 2.4X by FY13E. However, we expect the
company to remain free cash flow negative till FY13E at least, based on announced capex
plans.
Based on our analysis, the company would be able to service its interest payments, with
interest cover of 2.0X/2.7X in FY12E and FY13E.
The promoters of Bhushan Group are in litigation with a family member for resolving the
shareholding structure. Pending the decision of the Company Law Board, we think
Bhushan Steel may not be able to raise equity in the medium term.\
Risk #2: Lack of raw material integration, captive mines to provide
upside by FY14E-FY15E
While Bhushan Steel has been allotted iron ore mines (70 mn tons reserve), thermal coal
and coking coal mines in India and has strategic investments in Bowen Energy (Australian
exploration company), we don’t expect the operations to start before FY14E. Till then,
Bhushan Steel would be sourcing raw materials from the market, making it more
vulnerable to rising raw material prices.
Bhushan Steel also holds a 75% stake in Bowen Energy, Australia, where it has the right
to explore 4 major coal mines, which are all currently in early stages of exploration
High growth would not translate into high returns till FY13E
While we expect EBITDA to grow at a 41% FY10-FY13E CAGR, higher interest costs and
depreciation on capitalized projects, will weigh down profits till the company is in the
expansion phase. We expect the ROE profile of the company to remain muted till FY13E,
with FY12E ROE of 21% vs. 5- yr midcycle of 25%.
Risk-reward balanced; growth priced in; initiate with Neutral
We initiate on Bhushan Steel with a Neutral rating and 12-month target price of Rs454
based on target P/B of 1.5X. Our price target is based on P/B-ROE framework, backed by
EV/EBITDA and Directors’ Cut methodology (EV/Gross Cash invested).
While we like Bhushan Steel’s long-term structural growth outlook driven by strong
volume growth, backward integration, and improving EBITDA profile, we believe that the
current valuations already reflect the robust fundamentals. In the past 12 months, the
stock is up 24%, outperforming Indian steel stocks under our coverage by 30%.
The stock is trading at 1.3X FY12E P/B (above mid-cycle), despite lower-thanmid-
cycle returns (FY12E ROE of 21% vs. mid cycle ROE of 25%). For Bhushan
Steel, P/B has more than 80% correlation to the ROE cycle. In our view, the ROE
profile of the company will remain muted in the medium term, as higher
operating profits would be offset by higher interest payments and depreciation.
On earnings-based multiples, the stock is trading at mid-cycle EV/EBITDA of
8.8X, at a 50% premium to peers, commensurate to higher margins.
In order to neutralize the impact of leverage, we looked at EV/Gross cash investment,
which focuses on cash rather than earnings and tries to remove most of the distortions
caused by different accounting techniques. Further, it captures the major financial
elements of a company’s performance.
On EV-GCI framework, the stock appears expensive compared with Asian steel
peers, with FY12E EV/GCI close to +1SD above historical mean, in line with its
improving cash profile.
Company profile
Bhushan Steel Limited, formerly known as Bhushan Steel & Strips Ltd, has been one of
the largest secondary steel producers in India. With the Orissa expansion project, the
company is transforming from a steel converter to a primary steel producer, with capacity
of 5.3 mn tons by FY13. With the commissioning of the phase I and II (blast furnace and
HRC mill) at Orissa in March 2010, FY11 was the first year of primary steel making. BSSL
is currently implementing Phase-III of its upstream expansion, which is scheduled to
come onstream in October 2012. Bhushan Steel also enjoys the distinction of being the
only company in India, which has been successful in setting up a greenfield project in the
past decade. Bhushan Steel has a 29.64% stake in Bhushan Energy Limited, which has
installed a 300 MW power plant at Meramandali, with an additional 185MW power plant
under implementation.
Financial Advisory Disclosure
Goldman Sachs is acting as financial adviser to Anglo American Plc in relation to its
conditional agreement with a consortium, of which POSCO is one of the members, to sell
its interests in five undeveloped coal assets in Australia.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bhushan Steel (BSSL.BO)
Neutral Equity Research
On an “upstream” trajectory, growth priced in; initiate with Neutral
Investment view
We initiate coverage of Bhushan Steel (BSSL) with a Neutral rating and
12-month FY12E P/B-based target price of Rs454. While we like Bhushan
Steel’s long-term structural growth outlook driven by backward
integration through Orissa expansion, strong volume growth, and
improving EBITDA profile, we believe that the ROE profile would remain
muted in the medium term, as higher operating profits would be offset by
higher interest payments and depreciation. High leverage (net/debt to
equity of 2.9X) and lack of raw material integration would continue to be
an overhang on the stock, in an inflationary environment, in our view.
Core drivers of growth
1. Strong volume growth: With the Orissa expansion, we expect BSSL to
register 24% FY10-FY13E volume CAGR, highest within our India coverage.
2. With backward integration, we expect a structural improvement in
margins, as it reduces its dependence on externally sourced HRC—we
expect EBITDA/ton to improve from US$211 in FY10 to US$285 by FY12E.
Risks to the investment case
Upside risks: faster-than-expected capacity ramp-up; downside risks: high
leverage in a rising interest environment and volatile raw material prices.
Valuation
In our view, the strong growth outlook is priced in—currently trading at
mid-cycle EV/EBITDA, at 50% premium to peers, commensurate to higher
margins. On book-based multiples, the stock is trading at FY12E P/B of
1.3X (above mid-cycle) with lower-than-mid-cycle returns (FY12E ROE:
21% vs. 5-year historical average of 25%).
Industry context
We prefer Tata Steel (TISC.BO; Buy, on CL)—trading at 4.5X FY12E
EVEBITDA, 23% disc to mid-cycle of 6.2X and 27% disc to peers.
INVESTMENT LIST MEMBERSHIP
Neutral
Strong growth outlook priced in; initiate with Neutral
We initiate on Bhushan Steel, with a Neutral rating and 12-month P/B-based target price
of 454. While we like Bhushan Steel’s long-term structural growth outlook driven by
strong volume growth, backward integration, and improving EBITDA profile, we believe
that the return profile would remain muted in the near-to-medium term, as higher
operating profits would be offset by higher interest payments and depreciation. Moreover,
the highly levered balance sheet (FY11E net/debt to equity of 2.9X) and lack of raw
material integration would continue to be an overhang on the stock, in an inflationary
environment, in our view.
We believe the strong growth fundamentals of the company are priced in. The stock is
trading at 1.3X FY12E PB (above mid-cycle), despite lower-than-mid-cycle returns (FY12E
ROE of 21% vs. mid-cycle ROE of 25%). For Bhushan Steel, P/B has more than 80%
correlation to ROE cycle. On earnings-based multiples, the stock is trading at mid-cycle
EV/EBITDA, at a 50% premium to peers, commensurate to higher margins. We believe the
improving cash return profile of the company is priced in with FY12E EV/GCI close to
+1SD above historical mean.
Rolling “upstream”, 24% FY10-FY13E volume CAGR
Bhushan Steel, a leading producer (converter) of downstream flat steel products, is going
through a structural transformation, as it forays into primary steel making with the Orissa
expansion project (4.7 mn-ton integrated steel plant in Dhenkanal, Orissa).
With the completion of phase III (scheduled for October 2012; phase II completed in March
2010), Bhushan Steel will have primary steel making capacity of 5.3 mn tons, vs. 0.3 mn
tons in FY10. Subsequently, its dependence on externally sourced HRC would reduce,
leading to significant improvement in margins. We expect production of HRC to ramp up
gradually from 0.9 mn tons in FY11E to 2.5 mn tons by FY14E, leading to substantial
volume growth at 24% FY10-FY13E CAGR, highest within our India steel coverage.
Subsequently, share of upstream products (HRC/billets) will increase from 19% in FY10 to
45% in FY13E.
Dominant downstream business; 66% exposure to OEM segment
Bhushan Steel is a leading downstream steel player in India with a current downstream
(cold-rolled) capacity of 1.2 mn tons, and more than 65% of sales exposure to the OEM
segment. BSSL has 1.2 mtpa cold rolling capacity at Khopoli and Sahibabad plants, with
500 ktpa of galvanizing and 176 ktpa of colour-coating capacity.
As our India auto analyst expects the auto industry to grow at 15% CAGR in FY10-FY13E,
we believe the market leaders in the automotive sector will have an inherent advantage
both in terms of products and services offered. Bhushan Steel is a dominant player in the
Indian automotive segment with a 20% market share and is second only to Tata Steel in
both cold-rolled and galvanized coil/plates which are currently sold at a 15% (US$120-
US$130/ton) premium to the HRC price vs. incremental cost of US$40-50/ton. EBITDA
margin for auto-grade steel could be as high as 55%-60% vs. 30%-35% for long steel, in
our view.
We believe Bhushan Steel (auto exposure = 48% of revenue) is well-positioned vs. peers
to leverage its auto-grade experience, as auto-grade steel customers are very sticky and
the barriers to entry are highest in this segment, given the low margin for error and
customization. Based on our channel checks, Bhushan Steel’s auto-grade value added
products are sold on average at a 10% premium to its competitors.
The company has also entered into a technical assistance arrangement with Sumitomo
Metal, Japan, with the core area of focus being automotive steel production.
Bhushan Steel’s strong downstream franchise is reflected in its higher realizations vs.
peers, and stable/resilient margins across the cycle.
Structural margin expansion, expect 41% EBITDA FY10-13E CAGR
In our view, Bhushan Steel is on a strong growth trajectory (41% FY10-FY13E EBITDA
CAGR), led by backward integration and robust volume growth.
With upstream integration, we expect a structural expansion in BSSL’s margins, as it
reduces its dependence on externally sourced steel. As a downstream converter, BSSL
was not able to capture the upside in margins, in a tight steel pricing environment, in
spite of higher realizations. In our view, captive production of HRC would lead to EBITDA
savings of Rs20 bn in FY11E-FY12E, leading to improvement in margins. In FY10, external
purchases of HRC were 50% of the revenues, which would be reduced to 10% by FY12E.
Moreover, BSSL would sell surplus HRC in the market, which will further add to the
margins.
We expect EBITDA margins to improve from US$211/ton in FY10 to US$285/ton by FY12E.
While the fixed-margin business model of secondary producers protected them on the
downside in a falling steel price scenario, integration across the value chain becomes
imperative to leverage in a rising steel price environment. As an upstream producer,
Bhushan Steel would be more levered to steel prices – a 1% change in steel prices would
increase FY12E EPS by 5.0%.
Risk #1: Highly leveraged balance sheet
While we expect Bhushan Steel to grow at a strong pace in the next 3-4 years, a key
concern continues to be its high leverage. BSSL has a FY11E net debt to equity of 2.9X,
which is significantly higher than its Indian peers.
Bhushan Steel, funded its entire growth plans in the past 5 years through debt and
internal accruals, with no equity injection. As such, the company had to lever up its
balance sheet significantly. In a rising interest rate environment, a highly levered balance
sheet does remain an overhang.
As the internal accruals of BSSL increase, with ramp up of new capacity, we expect net
debt to equity to decline gradually from 2.9X to 2.4X by FY13E. However, we expect the
company to remain free cash flow negative till FY13E at least, based on announced capex
plans.
Based on our analysis, the company would be able to service its interest payments, with
interest cover of 2.0X/2.7X in FY12E and FY13E.
The promoters of Bhushan Group are in litigation with a family member for resolving the
shareholding structure. Pending the decision of the Company Law Board, we think
Bhushan Steel may not be able to raise equity in the medium term.\
Risk #2: Lack of raw material integration, captive mines to provide
upside by FY14E-FY15E
While Bhushan Steel has been allotted iron ore mines (70 mn tons reserve), thermal coal
and coking coal mines in India and has strategic investments in Bowen Energy (Australian
exploration company), we don’t expect the operations to start before FY14E. Till then,
Bhushan Steel would be sourcing raw materials from the market, making it more
vulnerable to rising raw material prices.
Bhushan Steel also holds a 75% stake in Bowen Energy, Australia, where it has the right
to explore 4 major coal mines, which are all currently in early stages of exploration
High growth would not translate into high returns till FY13E
While we expect EBITDA to grow at a 41% FY10-FY13E CAGR, higher interest costs and
depreciation on capitalized projects, will weigh down profits till the company is in the
expansion phase. We expect the ROE profile of the company to remain muted till FY13E,
with FY12E ROE of 21% vs. 5- yr midcycle of 25%.
Risk-reward balanced; growth priced in; initiate with Neutral
We initiate on Bhushan Steel with a Neutral rating and 12-month target price of Rs454
based on target P/B of 1.5X. Our price target is based on P/B-ROE framework, backed by
EV/EBITDA and Directors’ Cut methodology (EV/Gross Cash invested).
While we like Bhushan Steel’s long-term structural growth outlook driven by strong
volume growth, backward integration, and improving EBITDA profile, we believe that the
current valuations already reflect the robust fundamentals. In the past 12 months, the
stock is up 24%, outperforming Indian steel stocks under our coverage by 30%.
The stock is trading at 1.3X FY12E P/B (above mid-cycle), despite lower-thanmid-
cycle returns (FY12E ROE of 21% vs. mid cycle ROE of 25%). For Bhushan
Steel, P/B has more than 80% correlation to the ROE cycle. In our view, the ROE
profile of the company will remain muted in the medium term, as higher
operating profits would be offset by higher interest payments and depreciation.
On earnings-based multiples, the stock is trading at mid-cycle EV/EBITDA of
8.8X, at a 50% premium to peers, commensurate to higher margins.
In order to neutralize the impact of leverage, we looked at EV/Gross cash investment,
which focuses on cash rather than earnings and tries to remove most of the distortions
caused by different accounting techniques. Further, it captures the major financial
elements of a company’s performance.
On EV-GCI framework, the stock appears expensive compared with Asian steel
peers, with FY12E EV/GCI close to +1SD above historical mean, in line with its
improving cash profile.
Company profile
Bhushan Steel Limited, formerly known as Bhushan Steel & Strips Ltd, has been one of
the largest secondary steel producers in India. With the Orissa expansion project, the
company is transforming from a steel converter to a primary steel producer, with capacity
of 5.3 mn tons by FY13. With the commissioning of the phase I and II (blast furnace and
HRC mill) at Orissa in March 2010, FY11 was the first year of primary steel making. BSSL
is currently implementing Phase-III of its upstream expansion, which is scheduled to
come onstream in October 2012. Bhushan Steel also enjoys the distinction of being the
only company in India, which has been successful in setting up a greenfield project in the
past decade. Bhushan Steel has a 29.64% stake in Bhushan Energy Limited, which has
installed a 300 MW power plant at Meramandali, with an additional 185MW power plant
under implementation.
Financial Advisory Disclosure
Goldman Sachs is acting as financial adviser to Anglo American Plc in relation to its
conditional agreement with a consortium, of which POSCO is one of the members, to sell
its interests in five undeveloped coal assets in Australia.
No comments:
Post a Comment