Motilal Oswal Maintains Neutral on Bhushan Steel

Bhushan Steel (BHUS IN; Mkt Cap USD1.7b, CMP Rs364, Neutral)

Bhushan Steel's PAT for 3QFY11 grew 34% YoY to Rs2.8b (v/s our estimate of Rs2.85b). Margin continues to be impressive at US$255/ton. Hot strip production is ramping up at a steady pace, though the plant is still under trial production. Full capacity utilization will take a few more months. Capacity utilization in 3QFY11 was 51% and is currently ~55%.

Net sales increased 13% QoQ to Rs19.4b, mainly driven by a corresponding increase in volumes, contributed largely by HRC and billets. Production of HRC grew 9% QoQ to 241,181 tons, while third-party sales increased 90% QoQ to 93,639 tons. Bhushan Steel still continues to buy HRC for its Khopoli plant and sells its own production to customers in proximity. Sales exceeded production, leading to de-stocking. Realization remained flat QoQ.

The company's total debt has reached Rs140b as at the end of 3QFY11. It undertook capex of Rs35b in 9MFY11, largely towards phase-3 expansion to 5mtpa capacity. The capacity expansion is likely to be commissioned by June 2012.

HSM ramp-up and pipe mill to drive volumes; phase-3 expansion by October 2012

Bhushan Steel has delivered superior margins due to focus on value addition and strict control over cost. Ongoing expansion to 5mtpa will add further to steel volumes in FY13.

The company is also setting up a 0.5mtpa ERW pipe mill at Khopoli by 1QFY12. Higher HRC production and corresponding higher value added products will drive volume growth and margin expansion.

The stock is trading at 5.5x FY12E EPS and an EV of 6.4x EBITDA. We value the stock at Rs598 (2x FY12E BV). Maintain Neutral.

Source : Equity Bulls

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