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Bhushan Steel 3QFY2014 performance highlights and results update

February 17, 2014, Monday, 12:12 GMT | 07:12 EST | 16:42 IST | 19:12 SGT
Contributed by Angel Broking

For 3QFY2014, Bhushan Steel (Bhushan) reported disappointing results due to weaker-than-expected sales volumes. We recommend a Reduce rating on the stock due to its expensive valuation.

Net sales decline 3.6% yoy: During 3QFY2014, Bhushan’s net sales declined by 3.6% yoy to Rs.2,318cr mainly on account of both lower volumes and lower realisations. Flat products’ volumes decreased by 12.0% yoy to 422,658 tonne, whereas long sales volumes declined by 2.0% yoy to 74,009 tonne in 3QFY2014. The average gross realizations also decreased by 5.0% yoy to Rs.47,081/tonne. Higher interest and depreciation leads to loss at bottom-line: The EBITDA/tonne stood at Rs.12,114 in 3QFY2014 compared to Rs.13,994 in 3QFY2013 and Rs.15,100 in 2QFY2014. The company’s depreciation expense increased 16.8% yoy to Rs.242cr while the interest expenses increased 47.5% yoy to Rs.432cr on account of increased capacity. Consequently, the company reported a net loss of Rs.55cr compared to a profit of Rs.221cr in 3QFY2013.

Outlook and valuation: Bhushan has nearly doubled its steel capacity over the past five years. However, given the weak demand in the domestic market, we believe its volume growth is likely to be affected over the coming two years. Moreover, given the iron ore supply constraints in Odisha, the company may face issues in procuring increased volumes of iron ore. Also, at the current market price, the stock is trading at 11.5x FY2014E and 8.3x FY2015E EV/EBITDA, ie at a significant premium over its peers. Hence, valuing the stock at 8.0x FY2015 EV/EBITDA, we derive a target price of Rs.399 and recommend a Reduce rating on the stock.