Bhushan Steel Initiation Coverage Buy Recommendation Target Rs1,979

Initiating Coverage | Steel
May 28, 2010

Bhushan Steel BUY
CMP Rs1,396
Bullish on the Margin curve Target Price Rs1,979
Bhushan Steel (BSL), India’s leading value-added steel producer, has extended its Investment Period 12 Months
presence in the steel value chain with the commissioning of its 1.9mn tonnes HR
Stock Info
steel capacity. We expect BSL to register 26.2% CAGR in volumes over
FY2010-15E, on completion of Phase-III expansion by October 2012. This would Sector Steel
be sweetened by EBITDA/tonne increasing to US $331 in FY2011E. Being one of Market Cap (Rs cr) 5,929
the first entrants in auto grade steel in India, BSL with its strategic relationships with Beta 1.6
OEMs and growing investments by foreign OEMs would witness lower demand
52 Week High / Low 1,856/506
risks and uncertainties. With debt/equity expected to decline from 3.3x in FY2009
to 2.0x in FY2012E, we Initiate Coverage on the stock with a Buy recommendation Avg. Daily Volume 131390
and Target Price of Rs1,979, valuing the stock at 6.5x FY2012E EV/EBITDA. Face Value (Rs) 10
At our Target Price, the stock would trade at 1.2x FY2012E EV/IC. BSE Sensex 16,863
Entering a new orbit: With the commissioning of its new HR plant, BSL has moved Nifty 5,067
from being a steel converter to a leading primary producer of steel, extending its
Reuters Code BSSL.BO
presence in the steel value chain. The company is also expanding its HR capacity
Bloomberg Code BHUS IN
by 2.5mn tonnes by October 2012E, taking its total HR capacity to 4.4mn tonnes.
Volume growth sweetened by increasing EBITDA/tonne: With the commissioning Shareholding Pattern (%)
of BSL's Phase-III expansion plan, we expect sales volume to grow at a 26.2%
Promoters 69.2
CAGR over FY2010-15E, much higher than peers , which are expected to register
10-14% CAGR in volumes. Despite BSL not having raw material linkages, we MF / Banks / Indian FIs 24.8
expect EBITDA to register 42.3% CAGR over FY2010-12E through a combination FII / NRIs / OCBs 2.2
of BF-EAF technology and low conversion cost. Thus, BSL is expected to earn
Indian Public / Others 3.8
EBITDA/tonne of US $331 in FY2011E and US $345 in FY2012E.
Top supplier of niche auto grade products: Over the years, BSL has been shifting Abs. (%) 3m 1yr 3yr
its customer base from the trade segment to OEMs/exports. We believe growing Sensex 2.6 18.0 17.1
investments by foreign OEMs and the strategic alliance with Sumitomo Metal
BSL (12.7) 119.5 110.2
complement its OEM relationships and will likely help BSL mitigate demand risks.

Key Financials
Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E
Net Sales 4,943 5,641 6,290 7,131
% chg 18.3 14.1 11.5 13.4
Net Profit 421 829 968 1,259
% chg (0.6) 96.9 16.7 30.0
EPS (Rs) 99.2 195.3 228.0 296.4
OPM(%) 20.8 25.7 37.5 41.1
P/E (x) 14.1 7.1 6.1 4.7
P/BV (x) 2.4 1.8 1.4 1.1
Paresh Jain
RoE (%) 20.8 29.2 26.0 26.1
+91 22 4040 3800 Ext: 348
RoCE (%) 8.7 10.0 12.6 14.0
Email: pareshn.jain@angeltrade.com
Net Debt/Equity 3.3 3.1 2.5 2.0
Pooja Jain
EV/IC (x) 1.3 1.2 1.1 1.0
+91 22 4040 3800 Ext: 311
EV/EBITDA (x) 13.5 11.0 7.0 5.7 Email: pooja.j@angeltrade.com
Source: Company, Angel Research

Please refer to important disclosures at the end of this report

Bhushan Steel | Initiating Coverage

Investment Arguments
Entering a new orbit
BSL is a leading player in India producing value-added steel products used in the
automobile and white goods sectors. The company offers a superior product mix in
the value-added segment as compared to large players like Tata Steel (India), SAIL,
JSW Steel and Essar Steel. In addition to offering galvanized steel, cold rolled (CR)
steel, galume, color-coated steel - which the large players also offer - BSL also offers
precision pipes, hardened and tempered cold rolled steel strips (H&T) and high tensile
steel strappings (HTSS).

Exhibit 1: BSL extending its presence in the steel value chain

Source: Angel Research; *Partly integrated; ** Post commissioning of the Phase-II expansion

BSL has moved from being a converter BSL has undertaken an expansion plan in Orissa to increase its foothold in the industry.
to a primary steel producer The project is being executed in three phases, with Phase-I already commissioned in
FY2007 and Phase-II commissioned recently. Post the completion of Phase-II, the
company's primary steel-making capacity has increased to 2.2mn tonnes. Moreover,
commissioning of the HR capacity has extended BSL's presence in the steel value
chain, from being a converter to a primary steel producer. Phase-III is currently under
execution and is expected to come on stream by 3QFY2013E. On completion of
Phase-III, BSL's primary capacity will increase to 4.7mn tonnes, making it one of the
leading steel producer.

Exhibit 2: Existing Capacity Exhibit 3: Total estimated capacity by FY2015E

Source: Company, Angel Research Source: Company, Angel Research

May 28, 2010 2


Under Phase-II, BSL is also setting up a 300MW power plant under Bhushan Energy,
where it holds a 26% stake. While 150MW of the power plant was commissioned in
June 2009, the remaining is likely to get commissioned by June 2010E. The transfer
pricing for the power plants under Bhushan Energy is fixed at Rs4.0 per unit.

Orissa expansion plan executed in Exhibit 4: Orissa project details
various stages (tonnes) Phase I Phase II Phase III Total
Sponge iron 680,000 680,000 1,360,000
Hot metal 1,269,000 2,900,000 4,169,000
Billets 340,000 340,000
Slabs 2,000,000 3,000,000 5,000,000
HR coils 1,900,000 2,500,000 4,400,000
Coke oven 850,000 1,200,000 2,050,000
Sinter plant 1,670,000 3,810,000 5,480,000
Power (MW) 110 300* 410
Completion date FY2007 Q1FY2011E Q3FY2013E
Total Cost (Rs cr) 1,500 5,500 8,500 15,500
Source: Company, Angel Research; * Under Bhushan Energy

Expanding its color coated capacity BSL is expanding its color coated capacity by 80,000 tonnes at Sahibabad and is
and setting up an ERW plant setting up a 0.5mn tonne ERW plant at Khopoli. The total project cost of the color-
coated and ERW plant is estimated to be Rs150cr and Rs1,200cr, respectively. The
color-coated plant is expected to come on stream by June 2010E and the ERW plant
is likely to be commissioned by FY2013E. The company is also in the process of
setting up power plants of 185MW (under Bhushan Energy) and 197MW (under BSL),
which are likely to be commissioned by March 2012E and October 2012E, respectively.
However, the financial closure for the 197MW power plant is yet to be achieved and
the expected cost is likely to be Rs960cr.

Exhibit 5: Other projects
Detail Capacity (tonnes) Timeframe Location Cost (Rs cr)
Color-coated plant 80,000 Jun'2010E Sahibabad 150
ERW plant 500,000 FY2013E Khopoli 1,200
Power plant* 185MW Mar'2012E Orissa 750
Power plant 197MW Oct'2012E Orissa 960
Source: Company, Angel Research; * Under Bhushan Energy

Volume growth sweetened by increasing EBITDA/tonne

Sales volume to grow at a 26.2% CAGR BSL currently has a CR capacity of 1.0mn tonnes, and the total primary steel capacity
over FY2010-15E after completion of Phase-II has increased to 2.2mn tonnes, which is expected to
increase to 4.7mn tonnes post the Phase-III expansion. With the commissioning of the
Phase-III expansion plan, we expect BSL's sales volume to grow at a 26.2% CAGR
over FY2010-15E, much higher than its peers, including SAIL, Tata Steel (India) and
JSW Steel, which are expected to register volume growth at 10-14% CAGR. We expect
BSL's sales volume for FY2011E and FY2012E to be 1.6mn tonnes and 1.9mn tonnes,
respectively; post the Phase-III expansion plan, sales volume will likely increase to
4.1mn tonnes and 4.6mn tonnes in FY2014E and FY2015E, respectively.

May 28, 2010 3


Exhibit 6: Sales volume growth to jump in FY2014E Exhibit 7: Highest volume growth amongst peers


Excess HR coils to be sold in the open With the recent commissioning of the Phase-II project, BSL's upstream sales volume is
market from FY2012E expected to increase to 0.82mn tonnes in FY2012E from 0.27mn tonnes in FY2010,
as excess HR coils are sold in the open market (approx 0.5mn tonnes in FY2012E).
With no significant capacity being added downstream, sales volume is expected to be
flat at 1.07mn tonnes in FY2012E. The flat segment continues to dominate the
company's product mix, increasing to 78.2% in FY2012E from 72.0% in FY2010;
while the long portfolio as a percentage of total sales volume is expected to decline to
21.8% in FY2012E from 28% in FY2010.

Exhibit 8: Upstream operations gaining steam Exhibit 9: Product profile skewed towards the flat segment


Lo w e r c o nv e rsi o n c o st a nd Despite BSL not being integrated, cost of production is expected to be low due to a) its
technological advantage to lower unique combination of BF-EAF technology to produce steel and b) lower conversion
overall cost costs. The usage of BF-EAF technology will result in lower coal costs. While the blast
furnace requires coking coal, the electric arc furnace requires thermal coal, which is
significantly cheaper than coking coal. This will help keep raw material prices under
check and in line with its non integrated peers like JSW Steel.

The technological advantage is also accompanied by low conversion cost. For
FY2011E, we expect BSL's conversion cost to be around US $107/tonne as compared
to other players such as SAIL, Tata Steel (India) and JSW Steel, which are likely to incur
a cost of US $130-330/tonne.

May 28, 2010 4


Exhibit 10: Lower coal costs... Exhibit 11: along with lower conversion cost...

Source: Angel Research; Note: FY2011E numbers Source: Angel Research; Note: FY2011E numbers

Consequently, BSL is expected to earn an EBITDA/tonne of US $331 and US $345 in
FY2011E and FY2012E, respectively, which is likely to be at the higher end of the
industry curve, whereas SAIL, Tata Steel (India) and JSW Steel are expected to register
an EBITDA/tonne of US $170-300.

Exhibit 12: ...leading to higher EBITDA/tonne. Exhibit 13: EBITDA/tonne vis-à-vis other players


We expect BSL’s EBITDA to grow at a 42.3% CAGR from FY2010-12E - much higher
than its peers such as SAIL, Tata Steel (India) and JSW Steel which are expected to
grow at ~9-23% CAGR over FY2010-12E.

May 28, 2010 5


Exhibit 14: BSL to register higher EBITDA growth


Top supplier of niche auto grade products

Dominant supplier to the auto and BSL is a dominant supplier to the auto and white goods sectors. The company has its
white goods sectors manufacturing facilities at Shahibabad (Uttar Pradesh) and Khopoli (Maharashtra),
where it enjoys close proximity to its customers. At Sahibabad, BSL has a dedicated
service centre for large OEM customers. The company’s Khopoli facility is well
connected to ports, facilitating smooth export operations.

Over the period, BSL has shifted its customer base from the trade segment to OEMs/
exports. Consequently, the company's share in the OEM segment improved to 66% in
FY2009 from 55% in FY2003, while share in the trade segment declined to 7% in
FY2009 from 33% in FY2003. Moreover, contracts with OEMs are typically quarterly,
semiannual or annual; this reduces BSL's exposure to volatility in the spot market.

Exhibit 15: Increasing share in the OEM segment

FY2003 FY2009


May 28, 2010 6


OEMs increasing their foothold in the Indian market

Total estimated investment in the auto The Indian economy's growth over the past few years and the ailing auto sector in
component industry is likely to be developed markets such as Europe, US and Japan are the primary drivers for setting
Rs510-560bn for the next five years up of new capacities and capital flow to the Indian automobile industry. In order to
capitalize on growing demand, massive investment plans have been announced by
domestic and foreign OEMs, thus resulting into higher demand for auto components.
According to Crisil Research, the total estimated investment in the auto component
industry is likely to be in the range of Rs510-560bn for the next five years
(FY2011E-15E).

Exhibit 16: Major Investment plans announced by OEMs (Rs cr)
Domestic OEMs International OEMs
Players Additional Capacity Planned Investments Players Additional Capacity Planned Investments
Mahindra & Mahindra 200,000 4,000 Renault-Nissan 400,000 4,500
Tata-Fiat 100,000 4,000 Ford India 100,000 2,500
Tata Motors 250,000 3,000 Intl. Cars & Motors 24,000 800
Honda Siel Cars India 180,000 3,000 Bosch - 2,000
Toyota Kirloskar Motors 100,000 1,400 Setco Automotive - 1,000
Source: Crisil Research, D&B
Although car ownership in emerging markets is rising, there is a significant gap
between car ownership in developed markets and emerging markets. In the UK there
are 511 cars on roads for every 1,000 citizens, whereas there are only 11 cars per
1,000 people in India and 22 per 1,000 people in China.

Significant gap between car ownership Exhibit 17: Huge potential exists to be tapped by OEMs
in developed markets and emerging
markets

Source: Deloitte

India a preferred hub for global OEMs: Labor advantage

Trained manpower at competitive cost The move towards India is also driven by the trained manpower at competitive costs.
in India The cost of labor in emerging countries like India is a fraction of that in the developed
world. The lower cost advantage is also increasing the attractiveness of India vis-à-vis
other markets for OEMs.

May 28, 2010 7


Cost of labor in India is a fraction of Exhibit 18: Labor cost comparison (US $/hour)
that in the developed world

Source: Deloitte

First mover advantage

India imports nearly 30% of high-grade Currently, Indian automakers import nearly 30% of high-grade automotive steel.
automotive steel Annual demand for auto grade steel is expected to grow at ~13% till FY2015E. In
order to capitalize on the strong demand, Indian companies have recently entered
into technical tie-ups with their foreign counterparts. JSW Steel has entered into a
technical tie-up with Japan's JFE Corp and Uttam Galva has signed an agreement
with ArcelorMittal. JSW's tie-up will help the company produce high-grade skin panels,
now being imported, for cars and bikes. Recently, Tata Steel (India) has formed a
51:49 joint venture with Japan's Nippon Steel for the production of automotive CR
products. By virtue of being an early mover, BSL stands to gain as it had first entered
into a six-year strategic alliance with Sumitomo Metal Industries of Japan in 1997 for
making auto grade steel. Later in 2003, the alliance for the process know-how was
further extended for six years. Recently, Sumitomo has inked an agreement with BSL
for sourcing HR coils from the latter's new plant in Orissa. In our view, the strategic
alliance complements its OEMs' relationships, and we believe it is likely to help the
company in mitigating demand risks.

Strong track record and a consistent profit-making company
Stable EBITDA margin, timely servicing Traditionally, BSL has been a pure converter (converting HR coils into CR and other
of debt and regular dividends paying value added products). The company's margins were dependent on the differential of
company HR coil and CR coil prices, which resulted in stable margins withstanding the cyclicality
of the industry. BSL's EBITDA margin has remained stable between 15-20% for FY1999-
2009. Moreover, timely servicing of debt and regular dividends to shareholders over
the years are other positives about the company.

May 28, 2010 8


Exhibit 19: Stable margins over the years Exhibit 20: Consistently paying dividend


Future catalyst: Raw material linkages in progress

BSL is trying to increase its raw material integration to reduce its raw material costs.
Currently, BSL sources 60-70% of its iron ore requirements from NMDC and the
balance is procured from the spot market. The company imports its coking coal
requirements from Australia and thermal coal is sourced from Mahanadi coal fields
and e-auction.

Over the last couple of years, the company has been allotted iron ore and coal
blocks in India and has also made investments overseas. However, we have not
factored the benefit of the same in our estimates.

Iron ore

BSL has been allocated Marsua Tirba mines in Keonjhar district, Orissa with reserves
of 70mn tonnes. The company is in the process of receiving the forest and environmental
clearance.

Coal and coking coal

BSL has been allotted coal mines in New Patrapara, Orissa, in a joint venture with
Visa Steel, SMC Power Generation Ltd, Orissa Sponge Iron and Steel, Deepak Steel
and Power, Sri Metaliks and Adhunik Corp.; BSL owns a 50% stake in the joint venture.
Total reserves are estimated to be 650mn tonnes, of which BSL's share will be 325mn
tonnes.

In addition, BSL has been allotted the Andal East Coal block in West Bengal, with
estimated reserves of 235mn tonnes, and the Urtan North coking coal block in Madhya
Pradesh, which has an estimated reserves of 55mn tonnes.

Bowen Energy

BSL, through its subsidiary Bhushan Steel (Australia) Pty, holds a 60% stake in Bowen
Energy. The company has already spent US $50mn for the development of mines. It
has the right to explore four major coal mines: 1) 2 open-cut steam thermal mines
(West Rollestone and Tarang Projects), 2) one underground coking coal mine (black
water south projects) and 3) one underground coking, Pulverised coal injection (PCI),
thermal coal mine (East Middlemount).

May 28, 2010 9


Financial Analysis
Muted revenue growth in the near term

BSL's net revenue to grow at a 12.4% We expect BSL's net revenue to grow at a 12.4% CAGR over FY2010-12E, mainly
CAGR over FY2010-12E driven by the commissioning of its 1.9mn tonnes of HR coil capacity. As HR produced
will be used for captive consumption (100% in FY2011E, 70% in FY2012E), sales
volumes are expected to grow at a 14.0% CAGR. Average realisations are expected
to dip marginally in FY2012E as external sales of HR takes place. Consequently, net
revenue is expected to grow by 11.5% yoy to Rs6,290cr in FY2011E and by 13.4% yoy
to Rs7,131cr in FY2012E.

Exhibit 21: Revenue growth muted Exhibit 22: Average realisation to dip marginally


OPM and net profit to increase significantly

EBITDA likely to grow at a 42.3% CAGR Despite muted revenue growth, the company's EBITDA is likely to grow at a 42.3%
o ve r FY 20 10 -1 2E as c ap ti ve H R CAGR over FY2010-12E as captive HR replaces external purchase of HR. This will be
replaces external purchase of HR supported by low conversion costs and technological advantage of the BF-EAF process
for steelmaking, which will result in lower utilisation of coking coal.

EBITDA is expected to increase by 62.7% yoy to Rs2,357cr in FY2011E and by 24.4%
to Rs2,933cr in FY2012E. Consequently, EBITDA margin is likely to expand by 1178bp
to 37.5% in FY2011E and by 365bp to 41.1% in FY2012E. Thus, driven by the strong
operational performance, we expect net profit to increase by 16.7% yoy to Rs968cr in
FY2011E and by 30% to Rs1,259cr in FY2012E. Net profit margin is expected to
improve from 14.7% in FY2010 to 15.4% in FY2011E, which is further expected to
extend to 17.7% in FY2012E.

May 28, 2010 10


Exhibit 23: EBITDA margins on an uptrend... Exhibit 24: followed by improved net profit margin...


Return ratios improving

Return ratios to improve As Phase-II expansion starts contributing to the cash flows we expect RoCE to increase
to 12.6% and 14.0% in FY2011E and FY2012E, respectively, from 8.7% in FY2009.
RoE is also expected to increase from 20.8% in FY2009 to 26% in FY2011E and
26.1% in FY2012E.

Exhibit 25: ...leading to higher ratios.


Net debt/equity to decline

Net debt/equity to decline to 2.5x in BSL's net debt is expected to increase until FY2012E as the funding of Rs8,500cr for
FY2011E and 2.0x in FY2012E from Phase-III expansion is still remaining. However, we believe the increase in cash flow
3.3x in FY2009 resulting from Phase-II expansion will lead to a decline in the company's net
debt-equity ratio. We expect net debt/equity to decline to 2.5x in FY2011E and 2.0x in
FY2012E from 3.3x in FY2009. Net debt/EBITDA is also expected to decline from
7.7x in FY2009 to 3.7x in FY2012E.

May 28, 2010 11


Exhibit 26: Net Debt/Equity to decline Exhibit 27: Net Debt/EBITDA to dip


Free cash flow turning positive from FY2013E

Given that most of the capex is expected to be incurred in FY2011E and FY2012E, we
expect the company's free cash flow to turn positive from FY2013E onwards, as
Phase-III starts generating cash flows.

Exhibit 28: Free cash flow to turn positive


May 28, 2010 12


Exhibit 29: Key Financials
Key Assumptions FY2011E FY2012E FY2013E FY2014E FY2015E
Revenue/tonne (Rs) 39,696 37,786 38,271 34,991 34,387
Fines/tonne (Rs) 2,250 2,275 2,275 2,275 2,275
Lumps/tonne (Rs) 3,600 3,625 3,625 3,625 3,625
Coal/tonne (Rs) 2,300 2,350 2,400 2,400 2,400
Coking coal/tonne (US $) 210 230 240 240 240
Sales Volume (mn tonnes) 1.6 1.9 2.0 4.1 4.6
Key Financials (Rs cr)
Revenue 6,290 7,131 7,663 14,191 15,984
% change 11.5 13.4 7.5 85.2 12.6
EBITDA 2,357 2,933 3,222 6,049 7,236
% change 62.7 24.4 9.9 87.7 19.6
EBITDA/tonne (US $) 331 345 358 331 346
Net Income 968 1,259 1,290 3,081 4,120
% change 16.7 30.0 2.4 138.9 33.7
EPS 228.0 296.4 303.6 725.3 970.0
BPS 990.6 1,284.2 1,584.8 2,307.2 3,274.3
Capex (Rs cr) 2,500 2,500 1,000 500 500
Financial Ratios
EBITDA margin (%) 37.5 41.1 42.1 42.6 45.3
Net margin (%) 15.4 17.7 16.8 21.7 25.8
Net debt/Equity 2.5 2.0 1.5 0.8 0.3
RoE (%) 26.0 26.1 21.2 37.3 34.8
RoCE (%) 12.6 14.0 14.4 26.3 31.3
Valuation Ratios
EV/EBITDA 7.0 5.7 5.0 2.3 1.5
EV/Total Assets 1.0 1.0 0.9 0.7 0.5
P/E (Diluted) 6.1 4.7 4.6 1.9 1.4
P/BV 1.4 1.1 0.9 0.6 0.4
Source: Angel Research

May 28, 2010 13


Sensitivity Analysis
Exhibit 30: Realisations
1% change will impact our FY11 EPS by 1.9% 1% change will impact our FY12 EPS by 2.5%
(US $/tonne) 475 525 575 625 675 (US $/tonne) 475 525 575 625 675
EPS (Rs) 150.8 189.4 228.0 266.5 305.1 EPS (Rs) 168.3 232.4 296.4 360.5 424.6

Exhibit 31: Exchange rate
1% change will impact FY11E EPS by 3.3% 1% change will impact FY12E EPS by 3.1%
(INR/US $) 40 42.5 45 47.5 50 (INR/US $) 40 42.5 45 47.5 50
EPS (Rs) 145.6 186.8 228.0 269.2 310.4 EPS (Rs) 194.2 245.3 296.4 347.5 398.6

Exhibit 32: Iron ore costs
(Rs/tonne) 2150 2200 2250 2300 2350 (Rs/tonne) 2175 2225 2275 2325 2375
EPS (Rs) 232.4 230.2 228.0 225.7 223.5 EPS (Rs) 302.2 299.3 296.4 293.6 290.7

Exhibit 33: Coking coal costs
(US $/tonne) 190 200 210 220 230 (US $/tonne) 190 210 230 250 270
EPS (Rs) 238.5 233.2 228.0 222.7 217.4 EPS (Rs) 323.8 310.1 296.4 282.8 269.1

Exhibit 34: Coal costs
(Rs/tonne) 2200 2250 2300 2350 2400 (Rs/tonne) 2250 2300 2350 2400 2450
EPS (Rs) 231.4 229.7 228.0 226.2 224.5 EPS (Rs) 300.4 298.4 296.4 294.5 292.5

Risks and Concerns
Delay in expansion plans
The Orissa project is critical for BSL's growth. Any delay in ramping up of the new
capacities and commissioning of Phase-III may affect our estimates.

Adverse movement in product prices
Any adverse movement in product prices is likely to have a negative impact on the
company's earning and our estimates.

Captive raw material still missing
Currently, BSL does not have captive raw material linkages as the allotted mines are
in the preliminary stages of approvals. In the event of rising raw material prices and
the company's inability to pass on the cost push can affect our estimates negatively

May 28, 2010 14


Outlook and Valuation
At the CMP BSL is trading at 7.0x FY2011E and 5.7x FY2012E EV/EBITDA and 1.4x
,
FY2011E and 1.1x FY2012E P/BV respectively. The company's stock price has corrected
,
by 21% over the last one month. With net debt/equity expected to decline from 3.3x in
FY2009 to 2.0x in FY2012E accompanied by volume growth of 14% CAGR over
FY2010-12E and EBITDA growth of 42.3% CAGR over the same period, we believe
the current valuation does not factor in the company's future growth potential fully.
We Initiate Coverage on the stock with a Buy recommendation and Target Price
of Rs1,979 valuing the stock at 6.5x FY2012E EV/EBITDA. At our Target Price, the
stock would trade at 1.2x FY2012E EV/IC.

On a relative basis also, the company is trading cheaper than its peers. On the return
ratios front, BSL is expected to have a healthy margin of 37.5% and 41.1% in FY2011E
and FY2012E, respectively as compared to its peers, which are expected to have
EBITDA margin of 12-24% over the same period. The RoE for BSL is expected to be at
the higher end of around 26% in FY2011E and FY2012E as compared to its peers.

Exhibit 35: Valuation Ratio
Companies CMP Target Price Reco P/E (x) P/BV (x) EV/EBITDA (x)
FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E
SAIL 206 - Neutral 12.6 12.7 12.4 2.6 2.2 2.0 7.9 8.1 7.7
Tata Steel* 496 697 Buy - 8.1 8.7 1.6 1.4 1.2 11.7 6.5 5.9
JSW Steel* 1,090 1,360 Buy 17.2 11.8 9.3 2.3 1.9 1.6 8.6 7.0 5.4
Bhushan Steel 1,396 1,979 Buy 7.1 6.1 4.7 1.8 1.4 1.1 11.0 7.0 5.7
Source: Company, Angel Research; *Tata Steel, JSW Steel are consolidated numbers

Exhibit 36: Return Ratio
Companies EBITDA margin (%) RoE (%) RoCE (%)
FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E
SAIL 24.5 22.1 22.5 22.5 19.0 16.9 20.9 18.0 16.8
Tata Steel* 7.9 12.5 12.8 - 17.9 14.7 5.2 11.8 11.7
JSW Steel* 22.2 23.3 23.6 16.1 19.4 20.2 11.1 13.8 15.6
Bhushan Steel 25.7 37.5 41.1 29.2 26.0 26.1 10.0 12.6 14.0
Source: Company, Angel Research; *Tata Steel, JSW Steel are consolidated numbers

Exhibit 37: 1-year forward P/E band

Source: Bloomberg, Angel Research

May 28, 2010 15


Exhibit 38: 1-year forward P/BV band


Exhibit 39: 1-year forward EV/EBITDA band


May 28, 2010 16


Business Overview
BSL is a leading player in India producing value-added steel products used in the
automobile and white goods sectors. The company offers a superior product mix in
the value-added segment. Incorporated in 1989, with a capacity of 0.06mn tonnes,
BSL has emerged as one of the fastest growing companies with the current capacity of
2.2mn tonnes of saleable steel.

Exhibit 40: Growth path of BSL

Rich product portfolio

BSL produces CR steel, galvanized steel and special steel, ranging from CRCA, galume,
color-coated sheets, HTSS, H&T to drawn tubes. The company was the first to
manufacture and market auto grade CR steel in India. BSL manufactures CR coils
and sheets upto a width of 1,700mm and galvanised steel coils and sheets up to a
width of 1,350mm.

Exhibit 41: Downstream profile
Products Plants (tonnes) Total
Sahibabad Khopoli
Cold Rolling
Widest (upto 1700) 350,000 - 350,000
Wider (upto 1200) 100,000 350,000 450,000
Narrow (upto 550 mm) 50,000 150,000 200,000
Total Cold Rolling 500,000 500,000 1,000,000
Galvanized Sheets 225,000 240,000 465,000
Hardened & Tempered Strips - 11,000 11,000
Color Coated Sheets - 80,000 80,000
Galume (Aluminium and Zinc coated - 70,000 70,000
Drawn/Precision Tubes 15,000 85,000 100,000
High Tensile Steel Strappings - 25,000 25,000
Alloy Steel/Wire Rods 63,000 - 63,000
Service Centre 300,000 - 300,000
Captive Power 24MW 24MW 48MW

May 28, 2010 17


Location advantage

BSL's downstream operations are located at Sahibabad and Khapoli and its upstream
plant is strategically located in Orissa. While downstream plants are closely associated
to BSL's user industries, upstream operations enjoy close proximity to raw material
mines.

Exhibit 42: Plants closely associated to user industries


Diversified customer base

BSL is a regular supplier to white goods and automobile manufacturers. Over the
years, BSL has managed to develop strong relationships with OEMs and has the best
names, such as Daewoo, LG Electronics, Whirlpool, Electrolux, IFB and Carrier, in its
customer portfolio. The company exports to the US, China, Ethiopia, UAE, Myanmar,
Senegal, Iran, Australia, New Zealand, Saudi Arabia and African countries.

Exhibit 43: Key customers
Automobile sector
 Maruti, Tata Motors, Mahindra & Mahindra, Ashok Leyland, Bajaj Auto, Hyundai,
Fiat, Ford, General Motors, Honda, Hindustan Motors, Neel Metal Products, Veegee
Industrial Enterprise, Yamaha
Consumer durable sector
 LG, Godrej & Boyce, Electrolux, Whirlpool, Videocon, Samsung, BPL

May 28, 2010 18


Profit & Loss Statement Rs crore
Y/E March FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E

Gross sales 4,179 4,645 5,395 6,004 6,800 7,709

Less: Excise duty (364) (467) (452) (363) (510) (578)

Net Sales 3,815 4,177 4,943 5,641 6,290 7,131

Other operating income 23 28 14 0 40 50

Total operating income 3,838 4,205 4,957 5,641 6,330 7,181

% chg 37.4 9.6 17.9 13.8 12.2 13.5

Total Expenditure 3,210 3,370 3,928 4,192 3,973 4,248

Net Raw Materials 2,843 2,973 3,352 3,538 3,212 3,314

Other Mfg costs 316 323 475 570 650 793

Personnel 51 74 101 84 111 142

Other - - - - - -

EBITDA 628 835 1,029 1,449 2,357 2,933

% chg 58.6 33.0 23.2 40.8 62.7 24.4

(% of Net Sales) 16.5 20.0 20.8 25.7 37.5 41.1

Depreciation& Amortisation 209 211 234 220 495 605

EBIT 419 624 795 1,229 1,862 2,327

% chg 82.0 48.8 27.4 54.7 51.5 25.0

(% of Net Sales) 11.0 14.9 16.1 21.8 29.6 32.6

Interest & other Charges 77 137 252 217 557 647

Other Income 30 52 18 116 21 44

(% of PBT) 8.2 9.6 3.2 10.2 1.6 2.5

Share in profit of Associates - - - - - -

Recurring PBT 372 539 561 1,128 1,326 1,725

% chg 133.2 44.7 4.1 101.2 17.5 30.0

Extraordinary Expense/(Inc.) - - - - - -

PBT (reported) 372 539 561 1,128 1,326 1,725

Tax 59 115 139 299 358 466

(% of PBT) 15.9 21.4 24.9 26.5 27.0 27.0

PAT (reported) 313 424 421 829 968 1,259

Add: Share of earnings of associate - - - - - -

Less: Minority interest (MI) - - - - - -

Extraordinary Expense/(Inc.) - - - - - -

PAT after MI (reported) 313 424 421 829 968 1,259

ADJ. PAT 313 424 421 829 968 1,259

% chg 102.8 35.3 (0.6) 96.9 16.7 30.0

(% of Net Sales) 8.2 10.1 8.5 14.7 15.4 17.7

Basic EPS (Rs) 75.0 99.8 99.2 195.3 228.0 296.4

Fully Diluted EPS (Rs) 74.4 99.8 99.2 195.3 228.0 296.4

% chg 97.2 34.0 (0.6) 96.9 16.7 30.0

May 28, 2010 19


Balance Sheet Rs crore
Y/E March FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E

SOURCES OF FUNDS

Equity Share Capital 42 42 42 42 42 42

Reserves& Surplus 1,172 1,583 1,992 2,809 3,764 5,011

Shareholders Funds 1,215 1,625 2,034 2,851 3,807 5,054

Share Warrants - - 400 400 400 400

Minority Interest - - - - - -

Total Loans 3,242 5,718 8,066 10,366 11,346 11,826

Deferred Tax Liability 124 197 246 246 246 246

Total Liabilities 4,580 7,540 10,747 13,864 15,800 17,526

APPLICATION OF FUNDS

Gross Block 2,694 2,927 3,282 8,482 10,482 11,582

Less: Acc. Depreciation 970 1,168 1,396 1,616 2,110 2,716

Net Block 1,723 1,759 1,886 6,866 8,372 8,866

Capital Work-in-Progress 1,892 4,568 7,400 5,800 6,300 7,700

Goodwill - - - - - -

Investments 21 58 114 114 114 114

Current Assets 1,763 2,418 2,744 3,026 3,464 3,824

Cash 100 28 124 301 689 898

Loans & Advances 367 644 769 769 769 769

Other 1,295 1,747 1,850 1,956 2,006 2,157

Current liabilities 819 1,264 1,396 1,943 2,450 2,978

Net Current Assets 944 1,155 1,347 1,084 1,014 846

Mis. Exp. not written off - - - - - -

Total Assets 4,580 7,540 10,747 13,864 15,800 17,526

May 28, 2010 20


Cash Flow Statement Rs crore
Profit before tax 372 539 561 1,128 1,326 1,725

Depreciation 209 211 234 220 495 605

Change in Working Capital (230) (372) (468) 441 458 376

Less: Other income 42.9 123.9 255.9 0.0 - -

Direct taxes paid 41 63 46 299 358 466

Cash Flow from Operations 353 439 537 1,490 1,920 2,241

(Inc.)/ Dec. in Fixed Assets (1,323) (2,415) (1,770) (3,600) (2,500) (2,500)

(Inc.)/ Dec. in Investments (1) (36) (49) 0 0 0

(Inc.)/ Dec. in loans and advances

Other income 26 17 13 - - -

Cash Flow from Investing (1,298) (2,434) (1,806) (3,600) (2,500) (2,500)

Issue of Equity 20 - 400 - - -

Inc./(Dec.) in loans 1,206 2,430 1,956 2,300 980 480

Dividend Paid (Incl. Tax) 12 11 8 12 12 12

Others 251 495 982 - - -

Cash Flow from Financing 964 1,923 1,366 2,287 968 468

Inc./(Dec.) in Cash 19 (73) 97 177 388 208

Opening Cash balances 82 100 28 124 301 689

Closing Cash balances 100 28 124 301 689 898

May 28, 2010 21


Key Ratios
Valuation Ratios (x)
P/E (on FDEPS) 18.9 14.0 14.1 7.1 6.1 4.7
P/CEPS 11.4 9.3 9.0 5.7 4.1 3.2
P/BV 4.9 3.6 2.4 1.8 1.4 1.1
Dividend yield (%) 0.2 0.2 0.2 0.2 0.2 0.2
EV/Sales 2.4 2.8 2.8 2.8 2.6 2.4
EV/EBITDA 14.4 13.9 13.5 11.0 7.0 5.7
EV/Total Assets 2.0 1.5 1.3 1.2 1.0 1.0
Per Share Data (Rs)
EPS (Basic) 75.0 99.8 99.2 195.3 228.0 296.4
EPS (fully diluted) 73.8 99.8 99.2 195.3 228.0 296.4
Cash EPS 122.9 149.5 154.4 247.0 344.4 439.0
DPS 2.5 2.5 2.5 2.5 2.5 2.5
Book Value 286.0 382.7 573.2 765.6 990.6 1,284.2
Dupont Analysis
EBIT margin 11.0 14.9 16.1 21.8 29.6 32.6
Tax retention ratio (%) 84.1 78.6 75.1 73.5 73.0 73.0
Asset turnover (x) 1.0 0.7 0.5 0.5 0.4 0.5
RoIC (Post-tax) 9.6 8.2 6.6 7.5 9.5 10.8
Cost of Debt (Post Tax) 2.5 2.4 2.7 2.2 3.7 4.1
Leverage (x) 2.6 3.5 3.3 3.1 2.5 2.0
Operating RoE 28.0 28.7 19.2 23.7 24.2 24.2
Returns (%)
RoCE (Pre-tax) 11.1 10.3 8.7 10.0 12.6 14.0
Angel RoIC (Pre-tax) 19.9 22.6 25.8 22.4 22.5 26.2
RoE 29.7 29.8 20.8 29.2 26.0 26.1
Turnover ratios (x)
Asset Turnover (Gross Block) 1.7 1.5 1.6 1.0 0.7 0.7
Inventory (days) 97 139 134 130 130 130
Receivables (days) 52 54 46 45 50 50
Payables (days) 79 114 80 90 100 100
Working capital cycle (days) 48 57 62 67 64 61
Solvency ratios (x)
Net debt to equity 2.6 3.5 3.3 3.1 2.5 2.0
Net debt to EBITDA 5.0 6.8 7.7 6.9 4.5 3.7
Interest Coverage 5.4 4.6 3.2 5.7 3.3 3.6

May 28, 2010 22

Bhushan Steel

Disclaimer
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment
decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make
such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies
referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and
risks of such an investment.

Angel Securities Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment
decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are
those of the analyst, and the company may or may not subscribe to all the views expressed within.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading
volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources
believed to be true, and is for general guidance only. Angel Securities Limited has not independently verified all the information contained
within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents
or data contained within this document. While Angel Securities Limited endeavours to update on a reasonable basis the information
discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so.

This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed
or passed on, directly or indirectly.

Angel Securities Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other
advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past.

Neither Angel Securities Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in
connection with the use of this information.

Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section).

Disclosure of Interest Statement Bhushan Steel
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock Yes
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No

Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to -15%) Sell (< -15%)

Bhushan Steel

Address: Acme Plaza, ‘A’ Wing, 3rd Floor, M.V. Road, Opp. Sangam Cinema, Andheri (E), Mumbai - 400 059.
Tel : (022) 3952 4568 / 4040 3800

Research Team
Fundamental:
Sarabjit Kour Nangra VP-Research, Pharmaceutical sarabjit@angeltrade.com
Vaibhav Agrawal VP-Research, Banking vaibhav.agrawal@angeltrade.com
Vaishali Jajoo Automobile vaishali.jajoo@angeltrade.com
Shailesh Kanani Infrastructure, Real Estate shailesh.kanani@angeltrade.com
Anand Shah FMCG , Media anand.shah@angeltrade.com
Deepak Pareek Oil & Gas deepak.pareek@angeltrade.com
Puneet Bambha Capital Goods, Engineering puneet.bambha@angeltrade.com
Sushant Dalmia Pharmaceutical sushant.dalmia@angeltrade.com
Rupesh Sankhe Cement, Power rupeshd.sankhe@angeltrade.com
Param Desai Real Estate, Logistics, Shipping paramv.desai@angeltrade.com
Sageraj Bariya Fertiliser, Mid-cap sageraj.bariya@angeltrade.com
Viraj Nadkarni Retail, Hotels, Mid-cap virajm.nadkarni@angeltrade.com
Paresh Jain Metals & Mining pareshn.jain@angeltrade.com
Amit Rane Banking amitn.rane@angeltrade.com
Rahul Jain IT, Telecom rahul.j@angeltrade.com
Jai Sharda Mid-cap jai.sharda@angeltrade.com
Sharan Lillaney Mid-cap sharanb.lillaney@angeltrade.com

Amit Vora Research Associate (Oil & Gas) amit.vora@angeltrade.com
V Srinivasan Research Associate (Cement, Power) v.srinivasan@angeltrade.com
Aniruddha Mate Research Associate (Infra, Real Estate) aniruddha.mate@angeltrade.com
Mihir Salot Research Associate (Logistics, Shipping) mihirr.salot@angeltrade.com
Chitrangda Kapur Research Associate (FMCG, Media) chitrangdar.kapur@angeltrade.com
Vibha Salvi Research Associate (IT, Telecom) vibhas.salvi@angeltrade.com
Pooja Jain Research Associate (Metals & Mining) pooja.j@angeltrade.com

Technicals:
Shardul Kulkarni Sr. Technical Analyst shardul.kulkarni@angeltrade.com
Mileen Vasudeo Technical Analyst vasudeo.kamalakant@angeltrade.com
Derivatives:
Siddarth Bhamre Head - Derivatives siddarth.bhamre@angeltrade.com
Jaya Agarwal Derivative Analyst jaya.agarwal@angeltrade.com
Sandeep Patil Jr. Derivative Analyst patil.sandeep@angeltrade.com

Institutional Sales Team:
Mayuresh Joshi VP - Institutional Sales mayuresh.joshi@angeltrade.com
Abhimanyu Sofat AVP - Institutional Sales abhimanyu.sofat@angeltrade.com
Nitesh Jalan Sr. Manager niteshk.jalan@angeltrade.com
Pranav Modi Sr. Manager pranavs.modi@angeltrade.com
Sandeep Jangir Sr. Manager sandeepp.jangir@angeltrade.com
Ganesh Iyer Sr. Manager ganeshb.Iyer@angeltrade.com
Jay Harsora Sr. Dealer jayr.harsora@angeltrade.com
Meenakshi Chavan Dealer meenakshis.chavan@angeltrade.com
Gaurang Tisani Dealer gaurangp.tisani@angeltrade.com

Production Team:
Bharathi Shetty Research Editor bharathi.shetty@angeltrade.com
Bharat Patil Production bharat.patil@angeltrade.com
Dilip Patel Production dilipm.patel@angeltrade.com

Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE: INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946
Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302

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