We have visited 2.51MTPA integrated steel plant of Electrosteel
Steels Ltd (“ESL”), which is an associate company of Electrosteel
Castings Ltd (“ECL”) in Bokaro, Jharkhand. The total cost of
project stands at INR 95.6 bn out of this INR 90.0 bn has been
incurred till date. 95% of total capacity is near completion stage,
few of the major capacities have already commenced production
such as 350m3 Blast Furnace, 1.2 MT Sinter Plant, 1.0 MT Coke
Oven Battery are running smoothly. The total capacity will be
focused on long product, as company expects the demand to
continue higher than flat product. The product mix includes wire
rod, TMT bars, ductile iron (DI) pipes, billets and pig iron. On
the mining side ESL has signed a contract with its parent
company ECL to supply coking coal and Iron Ore at cost plus
20% margin basis. The coking coal mine has already started
producing and has produced 150000 ton, in FY2012. Company
expects coking coal mine to take another 12 months to start
production in full swing, whereas on iron ore front ECL is
awaiting Forest stage-II clearance. Company expects the
production to start from the iron ore mine within three to six
months of signing a mining lease after it gets all necessary
clearances. Although the company is hopeful to start production
from March 2013, we believe it is currently challenging to
estimate the timelines for completion of clearance formalities.
Key Highlights
Full Integration to give benefit at every stage: ESL’s 2.51
MTPA steel plant is fully integrated i.e. starting from raw
material to finished good. On backward integration side ESL
has signed a 20 years contract with its parent company for
supplying both Coking coal and Iron ore at cost plus 20%
margin basis whereas on power side, Company is setting up
a captive 120 MW WHRB which would fulfill 75% of total
requirement. We believe this iron ore; coking coal and power
constitutes approximately 65% of total raw material cost. On
forward integration side company has set up wire rod, TMT
bar and DI pipe plant. We believe this both backward and
forward integration will catch profitability at every stage and
increase the margin. Company expects comfortably to
achieve an EBITDA/ton of INR 13000/ton after all capacities
on stream.
Lowest CAPEX per ton: ESL has adopted Chinese technology and has imported approximately 95% of
equipments including labor from China (mainly from Shandong Province Metallurgical Engineering (SDM)
which is an associated design company of Laiwu Steel & Jinan Steel, who produce about 20 MTPA steel in
China). The total capex cost of 2.51 MTPA capacity stands at INR 95.6bn, translates to INR 3809 capex per
tonne as compared to global benchmark of 4,500-5,000/tonne for a greenfield steel plant. Although we
understand & appreciate the lower capex per tonne, however, the benefits of lower capex will be known once
all the facilities are synchronized and the plant is fully operational.
Assured off take agreement with Stemcor: To secure the business in upcoming competitive international
market, ESL has entered into a tie-up with Stemcor MESA DMCC (“Stemcor”), which is an international player
and has been in the business of international trade and marketing of steel for over 5 decades. Company has
executed long term contractual arrangements with Stemcor, which will revised after every three years with
35% of assured off take agreement on total production, for that ESL is going to pay $3 per ton to Stemcor as
commission.
Mining key area to watch: ESL has signed a 20 years contract with its parent company ECL to supply both
Coking coal and Iron ore at cost plus 20% margin basis. Coking coal mine is mainly underground mine located
at Parbatpur, Jharkhand (Jharia Coal Field Belt) has 231 mn MT of reserve with a capacity to produce 2MTPA
and is currently producing small quantities (150,000 tonne in FY2012) company expected to start the
production in full swing will take another 12 month. The total capex requirement for development of coking
coal mine is INR 9.5bn (already spent INR 6.5 bn).
Company’s Iron ore mine is open cast mine located in Kodolibad, Jharkhand (near Chiria Mine) has 91.2 mn
MT of reserve. ECL has received stage–I clearance and awaiting a Forest stage-II clearance and expected to
receive it in next three month. Based on this company expects to start the production in next six month by
mach 2013, of signing a mining lease. We believe it is currently very difficult to to estimate the timelines for
completion of clearance formalities based on current mining scenario.
Outlook & Valuation: Looking at the current scenario in Indian steel sector, company who has full integration
along with all necessary approval from regulatory side will outperform the market on long term perspective.
We believe that ESL comes in to this category where it has all type of integration along all necessary approval
which will add benefit in investor pocket long term perspective. With starting of commercial production of its
first 350m3 blast furnaces, the stock has appreciated by 75% in just 1.5 month, while company expect its second
1050 m3 blast furnace is expected to start by Dec 2012, Rolling mill by Nov 2012. We expect the stock price
performance of ESL is likely to be determined by timely ramp-up of remaining facilities at its plant and
efficiency of the plant. Further, receipt of stage-II clearance, signing of mining lease and production from its
iron ore mine would be significant milestones for ESL. At CMP of INR 8.3 per share stock is trading at P/BV at
0.9x on FY12 earnings. Not Rated
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