Monnet Ispat: ::Motilal Oswal

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 Monnet Ispat (MISP) posted adjusted PAT of INR769m (up 5% QoQ and 25% YoY), higher than our estimate of
INR658m.
 Net sales grew 7% QoQ (27% YoY) to INR4.6b. Sponge iron revenue grew 13% QoQ (33% YoY) to INR3.4b, driven
by higher prices and higher volumes.
 Sponge iron production and prices boosted profit. Steel EBITDA of INR1b contributed 85% to total EBITDA.
 Performance of the power segment was dragged by poor rates. Power rates declined 15% QoQ to INR2.9/kwh.
 Utkal Coal Block has received all the permissions and MISP expects to sign the mining lease soon. We expect the
coal block to start production along with the 1,050MW power plant commissioning schedule of March 2013.
 1.5mtpa steel project - the forward integration cum expansion of sponge iron capacities - too is likely to be
commissioned in phases during FY13.
 Net debt increased by INR7.3b to INR27.6b in 1HFY12 and capex during the period was ~INR8.3b.
 The stock trades at 8x FY13E EPS and at an EV of 9.2x FY13E EBITDA. Maintain Neutral.
80MW CPP in trail stage; expects to sign mining lease for Utkal-B2 in
2HFY12; maintain Neutral
 All the equipment and auxiliary systems at 80MW CPP have been installed and are
under trial production. Commercial power generation is now expected to start in
3QFY12 after receiving formal connectivity approval. At present, teething issues are
being addressed.
 1.5mtpa integrated steel project, although delayed, is progressing as per revised schedule.
A 0.61mtpa blast furnace and 0.9mtpa sinter plant are expected to get commissioned
in February 2012 while 1.6mtpa steel melting shop will get commissioned by May
2012. Monnet expects to spend ~INR12b in FY12 and in FY13. Entire project debt
has been tied up, and it has already invested INR6b of equity.
 The implementation of 1,050MW pithead power project at Angul, Orissa is progressing
at a steady pace to get commissioned by March 2013 in two phases. The progress on
the mines associated with the project is also well-synchronized with the power plant.
Financial closure for INR50b capex has already been achieved, and ~85% of land has
been acquired. BTG package order was placed with BHEL in June 2009. PPA has
been signed with PTC for 400MW, and with the state for 300MW. Balance 32%
power will be sold in the merchant market. This project is expected to have high
profitability due to low cost structure.
 Monnet has rich portfolio of coal allotted for its power generation business. It has
recently received environment clearance for two of its coal mines - Utkal B2 and
Mandakini Block in Orissa. Its expects to sign mining lease for Utkal B2 in 2HFY12
and production can be started immediately, as it is an open cast mine.
 We value the stock at INR524 based on 6.5x FY13E core business EBITDA, INR19b
for its equity stake of 87.5% in Monnet Power (1,050MW project) and INR5b for
Orissa Sponge. The stock is trading at expensive valuations of 8x FY13E EPS and an
EV of 9.2x FY13E EBITDA. There remain project execution risks and stock looks
fully valued on near to mid-term earnings growth. Maintain Neutral.




Company description
Monnet Ispat (MISP) operates a 0.86mtpa sponge iron plant,
a 0.3mtpa steel plant, and a 150MW captive power plant in
the mineral-rich state of Chhattisgarh. Its 0.5mtpa sponge
iron and 90MW captive power plant is strategically located
close to its coal mines in Raigarh. Though it has a small
steelmaking capacity in Raipur, MISP generates most of
its earnings from the production of sponge iron and sales of
surplus power from its captive power plant. It sells 90-
100MW of surplus power on a merchant basis. Its sponge
iron margins are superior due to the benefit of captive coal
mines.
Key investment arguments
 Monnet is setting up a 1.5mtpa integrated steel project
at Raigarh, with a capex of INR30b, which includes a
0.61mtpa blast furnace, a 2mtpa pellet plant and a
0.4mtpa coke oven plant. The first phase, comprising
80MW CPP, is likely to be commissioned by end-
3QFY12.
 The company is also venturing into power generation
by setting up a 1,050MW power project near its coal
block in Orissa. It has achieved financial closure for
INR50b capex and has acquired most of the land.
 Monnet ordered a BTG package from BHEL in June
2009 and expects the project to be commissioned by
March 2013.
Key investment risks
 An unexpected fall in steel prices would adversely
impact earnings.
Recent developments
 Utkal coal block has received all the permissions and
Monnet expects to sign the mining lease very soon.
Valuation and view
 Stock is trading at FY13E P/E of 8x FY13 and EV/
EBTIDA of 9.2x. Maintain Neutral.
Sector view
 The steel pricing environment has weakened across
regions due to expected demand slowdown, led by
continued uncertainty in developed nations, high inflation
and resultant softening in economic growth in developing
countries. Chinese steel prices started falling as steel
demand growth slowed due to reduction in new projects.
As a result, steel and its raw material prices are also
expected to fall over the next few months. Apparent
world steel use is expected to increase 6.5% to 1,398mt
in 2011 as per WSA. Indian steel demand growth is
expected to slow to 4.3% in 2011 and 7.9% in 2012.