Metals

India I Equities Results update

Change in Estimates  Target  Reco 

7 February 2011

Bhushan Steel Rating: Buy

Target Price: `516
Transformation continues; maintain Buy Share Price: `398

Bhushan Steel’s (BSL) 3QFY11 performance was robust, with

~38% yoy growth in operating profit and 23% yoy growth in net
profit, on the back of improving utilization from its new hot
rolled coil (HRC) plant. Maintain Buy.
 Higher volume and realization boost revenue. BSL reported
~36% yoy revenue growth to `19.4bn for 3QFY11, largely on
account of 30% yoy growth in blended sales volume and 4% yoy
growth in blended realization. Sales volume stood at 0.46m tons in
3QFY11 compared with 0.36m tons in 3QFY10. Volume was up
13.2% qoq. Key data BHUS IN/BSSL.BO
52-week high/low `545/`252
 Higher utilization of HRC plant boosts EBITDA, which grew Sensex/Nifty 18008/5396
~38% yoy to `5.4bn. Despite raw-material cost pressure, 3-m average volume US$8.8m
EBITDA margin remained stable yoy, at 27.7%, in the quarter on Market cap `85bn/US$1.9bn
account of benefits of the HRC plant. EBITDA/ton expanded Shares outstanding 212m
US$14/ton yoy to US$256/ton. Free float 30.8%
Promoters 69.2%
 Net profit up 23% yoy to `2.8bn, owing to higher volume and FII 3.1%
benefits of the HRC plant. Net profit, however, grew slower than DII 1.2%
EBITDA due to higher interest costs, which grew ~75% yoy. Public 26.5%

 Change in estimate. We marginally trim our earnings estimate by

3.6% for FY11, but largely maintain our estimates for FY12.
 Valuation and risks. At current market price of `398/share, the
stock trades at FY12e PE of 6.9x and EV/EBITDA of 4.8x. We
believe that expansion coupled with backward integration would
result in significant expansion in earnings going forward. Maintain
Buy. Key risks: Delay in expansion and higher leverage.

Quarterly results (Standalone) Financials – Standalone

Year end 31 Mar 3QFY10 3QFY11 % yoy 9MFY10 9MFY11 % yoy Year end 31 Mar FY11e FY12e
Sales (`m) 14,290 19,427 35.9 40,322 50,343 24.9 Sales (`m) 71,296 76,710
EBITDA (`m) 3,903 5,376 37.7 10,300 14,347 39.3 Net profit (`m) 9,810 12,170
EBITDA margin (%) 27.3 27.7 36bps 25.5 28.5 295bps EPS (`) 46.2 57.3
Interest ((`m) 585 1,020 74.4 1,615 2,813 74.2 Growth (%) 16.0 24.1
Depreciation (`m) 578 570 -1.3 1,674 1,636 -2.3 PE (x) 8.6 6.9
Other income (`m) 256 100 -61.1 648 272 -58.0 PBV (x) 1.7 1.4
PBT (`m) 2,997 3,885 29.7 7,660 10,170 32.8 EV/EBITDA (x) 10.2 4.8
Tax (`m) 722 1,082 49.9 1,775 2,720 53.3 RoE (%) 21.9 21.9
Tax rate (%) 24.1 27.8 375bps 23.2 26.7 357bps RoCE (%) 10.4 11.9
PAT (`m) 2,275 2,804 23.2 5,885 7,451 26.6 Net gearing (%) 246.8 212.3
Source: Company Source: Anand Rathi Research

Anand Rathi Financial Services, its affiliates and subsidiaries, do and seek to do business with companies covered in its research reports. Thus, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making
their investment decision. Disclosures and analyst certifications are located in Appendix 1.

Anand Rathi Research India Equities

7 February 2011 Bhushan Steel – Transformation continues; maintain Buy

Quick Glance – Financials and Valuations

Fig 1 – Income statement (`m) Fig 4 – PE Band
Year end 31 Mar FY09 FY10 FY11e FY12e FY13e
Net sales 49,575 56,404 71,296 76,710 106,956
610
Sales growth (%) 17.9 13.8 26.4 7.6 39.4 10x
- Op. expenses 39,282 41,876 51,426 48,218 70,158
510
EBITDA 10,293 14,527 19,870 28,493 36,798 8x
EBITDA margins (%) 20.8 25.8 27.9 37.1 34.4 410
- Interest 2521 2100 4087 6297 7607 6x
- Depreciation 2344 2091 2772 5984 8480 310
+ Other income 181 1,178 428 460 642
4x
- Tax 1,395 3,056 3,628 4,501 5,765 210
PAT 4,213 8,458 9,810 12,170 15,587
PAT growth (%) (0.6) 100.8 16.0 24.1 28.1 110
Consolidated PAT 4,213 8,458 9,810 12,170 15,587
FDEPS (`/share) 19.8 39.8 46.2 57.3 73.4 10

Jan-07

Oct-07

Dec-10
May-09
Apr-06

Aug-08

Feb-10
CEPS (`/share) 30.9 49.7 59.2 85.5 113.3
DPS (`/share) 0.5 0.5 0.5 0.5 0.5
Source: Company, Anand Rathi Research Source: Bloomberg, Anand Rathi Research

Fig 2 – Balance sheet (`m) Fig 5 – EV/EBITDA Band

Year to 31 Mar FY09 FY10 FY11e FY12e FY13e
Share capital 425 425 425 425 425
1,410
Reserves & surplus 19,917 39,125 48,811 60,857 76,320 14x
Shareholders’ fund 20,342 39,550 49,236 61,282 76,745 1,210
Debt 80,662 114,041 127,731 139,931 152,131
1,010 12x
Deferred Tax Lia. 2,463 3,295 3,295 3,295 3,295
Capital employed 107,472 157,253 180,629 204,875 232,538
810
10x
Fixed assets 18,860 20,793 73,568 99,847 136,304 610
Investments 1,077 3,700 3,700 3,700 3,700 8x
Working capital 12,290 20,464 17,393 17,404 20,723 410

Cash 1,244 1,202 5,309 9,028 15,352

210
Capital deployed 107,472 157,253 180,629 204,875 232,538
No. of shares (m) 212 212 212 212 212 10
May-09

Feb-10

Dec-10
Apr-06

Jan-07

Oct-07

Aug-08

Net Debt/Equity (%) 390 283 247 212 177

W C turn (days) 35 35 35 35 35
Source: Company, Anand Rathi Research Source: Bloomberg, Anand Rathi Research

Fig 3 – Cash flow statement (`m) Fig 6 – Bhushan Steel vs. BSE Metals
Year end 31 Mar FY09 FY10 FY11e FY12e FY13e
Consolidated PAT 4,213 8,458 9,810 12,170 15,587
550
+ Depreciation 2,344 2,091 2,772 5,984 8,480
Bhushan Steel
Cash profit 6,557 10,549 12,582 18,155 24,068 500
- Incr/(Decr) in WC 4,683 9,529 (3,071) 11 3,319
Operating cash flow 1,874 1,020 15,653 18,143 20,749 450

- Capex 17,702 29,013 25,113 26,500 26,500 400

Free cash flow (15,828) (27,993) (9,459) (8,357) (5,751)
- Dividend 84 110 124 124 124 350
+ Equity raised 4,004 7,001 - - -
300
+ Debt raised 19,560 30,624 13,690 12,200 12,200
BSE Metal
- Investments 491 2,590 - - - 250
- Misc Items 6,193 6,974 - - -
200
Net cash flow 967 (42) 4,107 3,719 6,325
Feb-10
Feb-10
Mar-10

May-10
Jan-10

Apr-10
Apr-10

Jun-10
Jun-10
Jul-10
Aug-10
Sep-10
Sep-10
Oct-10
Nov-10
Nov-10
Dec-10
Jan-11

+ Opening cash 276 1,244 1,202 5,309 9,028

Closing cash 1,244 1,202 5,309 9,028 15,352
Source: Company, Anand Rathi Research Source: Bloomberg

Anand Rathi Research 2

7 February 2011 Bhushan Steel – Transformation continues; maintain Buy

Change in estimates
Revise estimates
Despite the strong performance during the quarter, we marginally cut our
earnings estimate by 3.6% for FY11, as we factor in higher raw material costs.
However, we largely maintain our estimates for FY12.

Fig 7 – Change in estimates

FY11e FY12e
`m Previous Revised % change Previous Revised % change
Net Sales 68,573 71,296 4.0 77,175 76,710 (0.6)
EBITDA 21,881 19,870 (9.2) 28,247 28,493 0.9
Net Profit 10,175 9,810 (3.6) 12,218 12,170 (0.4)
Source: Anand Rathi Research

Outlook and valuation; maintain Buy

BSL would benefit from the volume growth arising from its new HRC
plant at Orissa. The backward integration into HRC would help improve
margin. We expect earnings to see CAGR of 22.6% through FY10-13e.
At current market price of `398/share, BSL trades at FY12e
EV/EBIDTA of 4.8x (adjusted for capital work in progress-CWIP) and
FY12e PE of 6.9x. We maintain Buy on the stock with a target price of
`516.
Risks
 Higher-than-expected iron ore and coking coal costs may impact
BSL’s earnings due to its low level of backward integration.
 Slower-than-expected recovery in the Indian markets may put
pressure on demand drivers and, consequently, impact steel
demand and prices.
 Any delay in capacity additions would affect our estimates.
 High leverage would be a concern, if steel prices correct
significantly.

Anand Rathi Research 3

7 February 2011 Bhushan Steel – Transformation continues; maintain Buy

Financials
Fig 8 – Income statement (`m)
Year-end 31 Mar FY09 FY10 FY11e FY12e FY13e
Net Sales 49,575 56,404 71,296 76,710 106,956
Change (%) 17.9 13.8 26.4 7.6 39.4
Expenditure 39,282 41,876 51,426 48,218 70,158
% of sales 79.2 74.2 72.1 62.9 65.6
EBITDA 10,293 14,527 19,870 28,493 36,798
Change (%) 23.2 41.1 36.8 43.4 29.1
% of Net Sales 20.8 25.8 27.9 37.1 34.4
Depreciation 2,344 2,091 2,772 5,984 8,480
EBIT 8,129 13,614 17,526 22,969 28,959
Interest & Fin. Charges 2,521 2,100 4,087 6,297 7,607
Other income 181 1,178 428 460 642
PBT 5,608 11,514 13,438 16,672 21,352
Taxes 1,395 3,056 3,628 4,501 5,765
Effective Rate (%) 24.9 26.5 27.0 27.0 27.0
Rep. PAT (after. EO) 4,213 8,458 9,810 12,170 15,587
Change (%) (0.6) 100.8 16.0 24.1 28.1
Adj. PAT 4,213 8,458 9,810 12,170 15,587
Change (%) (0.6) 100.8 16.0 24.1 28.1
% of Net Sales 8.5 15.0 13.8 15.9 14.6
Source: Company, Anand Rathi Research

Fig 9 – Balance sheet (`m)

Year-end 31 Mar FY09 FY10 FY11e FY12e FY13e
Share Capital 425 425 425 425 425
Net Worth 24,346 39,917 49,602 61,649 77,112
Minorities interests - - - - -
Loans 80,662 114,041 127,731 139,931 152,131
Deferred Tax Liability 2,463 3,295 3,295 3,295 3,295
Capital Employed 107,472 157,253 180,629 204,875 232,538

Gross Fixed Assets 32,819 36,859 92,406 124,669 169,607

Less: Depreciation 13,959 16,066 18,838 24,822 33,302
Net Fixed Assets 18,860 20,793 73,568 99,847 136,304
Capital WIP 74,001 111,093 80,659 74,895 56,458
Investments 1,077 3,700 3,700 3,700 3,700
Curr. Assets, L & Adv. 27,498 37,702 38,754 40,197 55,737
Inventories 12,304 19,627 15,015 12,063 17,504
Sundry Debtors 6,198 7,339 8,896 9,572 13,346
Cash and Bank Balances 1,244 1,202 5,309 9,028 15,352
Loans and Advances 7,691 9,534 9,534 9,534 9,534
Other current assets 61 0 0 0 0
Current Liab. & Prov. 13,964 16,036 16,052 13,765 19,661
Current Liabilities 13,687 15,671 15,690 13,403 19,299
Provisions 277 365 362 362 362
Net Current Assets 13,534 21,666 22,702 26,432 36,075
Capital Deployed 107,472 157,253 180,629 204,875 232,538
Source: Company, Anand Rathi Research

Anand Rathi Research 4

7 February 2011 Bhushan Steel – Transformation continues; maintain Buy

Fig 10 – Cash flow statement (`m)

Year end 31 Mar FY09 FY10 FY11e FY12e FY13e
Consolidated PAT 4,213 8,458 9,810 12,170 15,587
+ Depreciation 2,344 2,091 2,772 5,984 8,480
Cash profit 6,557 10,549 12,582 18,155 24,068
- Incr/(Decr) in WC 4,683 9,529 (3,071) 11 3,319
Operating cash flow 1,874 1,020 15,653 18,143 20,749
- Capex 17,702 29,013 25,113 26,500 26,500
Free cash flow (15,828) (27,993) (9,459) (8,357) (5,751)
- Dividend 84 110 124 124 124
+ Equity raised 4,004 7,001 - - -
+ Debt raised 19,560 30,624 13,690 12,200 12,200
- Investments 491 2,590 - - -
- Misc Items 6,193 6,974 - - -
Net cash flow 967 (42) 4,107 3,719 6,325
+ Opening cash 276 1,244 1,202 5,309 9,028
Closing cash 1,244 1,202 5,309 9,028 15,352
Source: Company, Anand Rathi Research

Fig 11 – Ratio @ `398

Year-end 31 Mar FY09 FY10 FY11e FY12e FY13e
Per share Ratios (`)
Basic EPS 19.8 39.8 46.2 57.3 73.4
Fully diluted EPS 19.8 39.8 46.2 57.3 73.4
Book Value 96 188 234 290 363
Cash earnings per share 30.9 49.7 59.2 85.5 113.3
Dividend per share 0.5 0.5 0.5 0.5 0.5
Valuation (x)
P/E (Fully Diluted) 20.1 10.0 8.6 6.9 5.4
P/BV 4.2 2.1 1.7 1.4 1.1
EV/EBITDA 15.8 13.3 10.2 4.8 4.4
EV/Sales 3.3 3.4 2.9 1.8 1.5
M-cap/Sales 1.7 1.5 1.2 1.1 0.8
Profitability Ratios (%)
RoCE (%) 8.9 10.3 10.4 11.9 13.2
RoE (%) 23.0 28.1 21.9 21.9 22.5
Turnover Ratios
Asset turnover ratio (x) 0.5 0.4 0.4 0.4 0.5
Working capital cycle (days) 35 35 35 35 35
Inventory (days) 129 129 129 129 129
Debtors (days) 46 46 46 46 46
Creditors (days) 139 139 139 139 139
Leverage Ratio
Debt-equity (x) 3.9 2.8 2.5 2.1 1.8
Interest coverage ratio (x) 3.2 6.5 4.3 3.6 3.8
Margin Ratios (%)
EBITDA Margin 20.8 25.8 27.9 37.1 34.4
PBIT Margin 16.4 24.1 24.6 29.9 27.1
PBT Margin 11.3 20.4 18.8 21.7 20.0
PAT Margin 8.5 15.0 13.8 15.9 14.6
Source: Company, Anand Rathi Research

Anand Rathi Research 5

Appendix 1
Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the
compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research
analyst(s) in this report.

Important Disclosures on subject companies

Rating and Target Price History (as of 7 February 2010)
Date Rating TP (`) Share
600
Bhushan Price (`)
500 1 11-Jan-11 Buy 516 424

400
1
300

200

100

Jul-10

Oct-10

Jan-11
Jul-08

Oct-08

Jul-09

Oct-09
Jan-08

Jan-09

Jan-10
Apr-08

Apr-09

Apr-10

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking
revenues.
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described
in the Ratings Table below.

Ratings Guide
Buy Hold Sell
Large Caps (>US$1bn) >20% 5-20% <5%
Mid/Small Caps (<US$1bn) >30% 10-30% <10%

Anand Rathi Research Ratings Distribution (as of 6 December 10)

Buy Hold Sell
Anand Rathi Research stock coverage (138) 69% 17% 14%
% who are investment banking clients 5% 4% 0%

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