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Bhushan Steel 3QFY2012 performance highlights and results update

Contributed by Angel Broking

Flat products steel volumes and realization drives top-line growth: Bhushan Steel (BSL) net sales increased 23.9% yoy to Rs.2,407cr on account of increase in both realizations and sales volumes. Flat products sales volumes grew by 17.0% yoy to 429,883 tonnes and flat product average realization increased by 27.9% yoy to Rs.47,213/tonne.

Depreciation and interest costs dent net profit growth: EBITDA grew 34.7% yoy to Rs.724cr on account of increase in net sales and EBITDA margin expanded 241bp yoy to 30.1%. However, interest expenses grew 124.6% yoy to Rs.229cr and depreciation expenses grew 165.8% yoy to Rs.152cr which resulted in PAT declining by 1.3% yoy to Rs.277cr.

BSL aims to raise equity: BSL’s board has approved raising of Rs.700cr via rights issue. The company also aims to raise further equity of US$400-500mn to deleverage its balance sheet as and when equity market conditions improve. As of December 31, 2011, BSL had debt of Rs.20,000cr.

Expansion projects on track: BSL’s Phase III expansion in Odisha is running on track; it expects to complete the expansion project by October 2012. Outlook and valuation: We expect BSL to complete phase III expansion during 4QFY2012, the benefits of which will be witnessed during FY2014-15. However, we remain concerned over its high leverage levels. Further, at the CMP, the stock is trading at 9.3x FY2012E and 9.1x FY2013E EV/EBITDA, a significant premium over its peers. Hence, we recommend a Reduce rating on the stock with a target price of Rs.316 (valuing the stock at 8.8x FY2013 EV/EBITDA).