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MONNET ISPAT 2QFY11: Volumes decline due to shutdown; Sponge iron realization up but not margins; Valuations rich
- Monnet Ispat’s (MISP IN, Mkt Cap US$723m, CMP Rs624, Buy) 2QFY11 adjusted PAT declined 10% QoQ to Rs656m (+2% YoY) due to lower sponge iron and power volumes. Company had undertaken planned maintenance shutdown for older sponge iron kilns during the quarter which impacted volumes.
- Net sales declined 14% QoQ to Rs3.61b (-15% YoY).
- Sponge iron volumes declined 7% QoQ to 157,026 tons (+11% YoY); the decline was due to shutdown of old kilns. Revenue from sponge iron remained flat QoQ at Rs2.5b (+48% YoY) as higher realization (up 8% to Rs16,059/ton) offset lower volumes.
- Revenues from steel products fell 79% QoQ to Rs116m as company produced less steel due to lower margins. Sales volumes declined 73% QoQ to 5,164 tons. Average realization also declined 22% QoQ to Rs22,538/ton.
- Revenues from the power segment declined 21% QoQ at Rs855m on lower realization and lower sales. Power realization decreased 12% QoQ to Rs4.31/unit (+3% YoY), while company sold 198MU of excess power in 2Q (down 10% QoQ). (The company generates power from waste heat; so, shutdown of kilns affected power generation as well.)
- EBITDA declined 14% QoQ to Rs1.05b. Margins remained flat at 29% sequentially mainly due to higher sponge iron realization. Iron ore costs increased 13% QoQ to Rs5,039/ton (up 57% YoY).
- Interest costs were lower sequentially to Rs119m due to higher interest income (Rs19m) on fixed deposits.
- Other income includes Rs49m of forex gains on outstanding FCCB.
- Monnet produced 209,460 tons of coal from captive mine, which was 11% lower YoY due to good monsoon season this year.
80MW CPP on track; 27% CAGR in earnings over next few years; valuations rich
- Monnet is setting up 1.5mtpa integrated steel project at Raigarh with estimated project cost of Rs25b. The project includes 0.6mtpa of blast furnace, EAF, 0.75mtpa plate mill and structural mill, 1.2mtpa pellet plant, 0.4mtpa coke oven and 80MW CPP. The commissioning schedule of 80MW CPP is on track to be completed by March 2011. Installation of key equipments has started, while majority of civil work is completed.
- It is also setting up setting up 1,050MW power plant at Angul (near its coal block). Financial closure for this Rs50b capex has been already achieved, while 675 acres of land (out of 930 required) have been acquired. Land acquisition for ash pond and township is under progress. Company has spent Rs6b on this project till date, which seems to be on a lower side. Stage II forest clearance for its coal mines at Angul are still awaited.
- Earnings are expected to clock 27% CAGR over FY10-14E. We value the stock at Rs523 based on 6.5x FY12 EV/EBITDA and Rs19.25b for its equity stake of 87.5% in Monnet power (1,050MW project).
- Stock is trading at rich valuations with FY12 P/E of 10x and EV/EBITDA of 10.7x.
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