Bhushan Steel: Emerging primary steel producer -Motilal Oswal

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Bhushan Steel- Emerging primary steel producer
Bhushan Steel (Bhushan) is a leading cold-rolled product manufacturer in India, with a
rich product mix. Its plants are strategically located near customers and ports. Valueadded
products such as cold-rolled color coated sheets, galva and galume dominate
its revenue mix (77% in FY10). To integrate backward, Bhushan has set up a 2.2mtpa
integrated steel plant, India's only successful greenfield steel project in the last decade.
The plant is in the mineral rich state of Orissa and is being expanded further to 5mtpa
by FY13. Its captive iron ore and coal mines will start production over the next 2-3
years.
Crude steel production to grow at 32% CAGR
 The Orissa plant started production of steel in 2006 in a small way, with initial
capacity of 300ktpa (phase-1). Though its 1.9mtpa HRC plant started production
in April 2010 (phase-2) and has already achieved capacity utilization of 60%,
commercial production is likely to be announced in March 2011. HRC production
is expected to grow at a CAGR of 38% to 1.62m tons over FY11-13.
 Phase-III expansion to 5mtpa is expected to be commissioned by 1QFY13; the
company has already spent Rs42b out of the total project cost of Rs100b. We
expect crude steel production to grow at 32% CAGR to 2.1m tons over FY11-13.
 Bhushan is setting up a 0.5mtpa ERW pipe mill (4"-25") at Khopoli at a capex of
Rs12b. Work on the mill is on track for commissioning by June 2011. This will
increase value addition.
Iron ore and coking coal prices to push up cost of production
At present, Bhushan sources iron ore from the mineral rich area of Barbil, Orissa.
~80% of its iron ore requirement is met through Orissa Mining Corporation mines
(~180km away from Angul) and it sources 70-85% of its coal through linkage provided
by Mahanandi Coalfields. Iron ore prices have been hardening for the last few months.
Prices of e-auction coal have also increased by ~25%. While steel prices have
increased, so have costs.
Raw material integration over 2-3 years
 Though Bhushan has already been allotted captive mines for key raw materials,
development of these mines has been slow. The thermal coal mine at Orissa is at
the stage of land acquisition. The company expects to get land possession in the
next six months.
 Bhushan has acquired 60% stake in Bowen Energy, Australia for US$15m with
the intention of ensuring long-term supply of coking coal. Bowen holds licenses to
explore four major coal blocks in the Bowen basin. The mine portfolio consists of
two open cast thermal mines (West Rollestone and Tarong Projects), one
underground coking coal mine (Black Water South Project) and one underground
coking, PCI, thermal coal mine (East Middlemount). The first stage of exploration
is completed and it will take 3-4 years to commence production from these mines.


Leveraged play on strong volume growth
 Debt increased from Rs110b as of March 2010 to Rs140b as of December 2010.
Annual capex of Rs25b will keep absolute debt rising till FY12. Debt-equity ratio,
however, will decline from 2.8x in FY10 to 1.5x by FY13 due to improved internal
cash flows.
 Bhushan has delivered superior margins in the last few quarters due to focus on
value addition and strict control over costs. Volumes will continue to grow as HSM's
capacity utilization is improving every quarter. Ongoing expansion to 5mtpa will add
further to steel volumes in FY13. We expect earnings to grow at a CAGR of 22% over
FY10-13. The stock is trading at 6.6x FY12E EPS and an EV of 6.9x EBITDA. We
value the stock at Rs598 (2x FY12E BV). Maintain Neutral.