Sarda Energy

1QFY2011 Result Update | Metals
August 2, 2010

Sarda Energy and Minerals ACCUMULATE
CMP Rs260
Performance highlights Target Price Rs290

Particulars (Rs cr) 1QFY11 1QFY10 % chg (yoy) 4QFY10 % chg (qoq) Investment Period 12 months
Net sales 217 93 132.8 174 24.5
Stock Info
EBITDA 50 5 973.2 35 43.5
Sector Steel
% margin 23.0 5.0 1,798bp 19.9 304bp
Market Cap (Rs cr) 874
Adj. net profit 27 (7) - 17 65.4
Beta 1.7
Source: Company, Angel Research
52 Week High / Low 341/107
Robust top-line growth: SEML’s 1QFY2011 top line grew by 132.8% yoy to
Avg. Daily Volume 125130
Rs217cr on the back of higher sales volume and realisations. While sponge iron
Face Value (Rs) 10
sales grew by 28.9% yoy to 51,229 tonnes, ferro alloy sales grew by 161.7% yoy
BSE Sensex 18,081
to 13,800 tonnes. Further, while power production was higher by 97.6% yoy to
104mn units (last year operations were disrupted due to fire), units sold declined Nifty 5,432
by 41.0% yoy due to increased captive usage. During the quarter, SEML produced Reuters Code SAEM.BO
54,615 tonnes of pellets. Bloomberg Code SEML@IN

EBITDA growth much higher, leading to strong bottom-line growth: EBITDA grew
by 973.2% yoy to Rs50cr as margins expanded to 23.0% from 5.0% in
Shareholding Pattern (%)
1QFY2010. Raw-material costs as a percentage of sales declined to 60.7% from
Promoters 70.1
77.1% in 1QFY2010 because of availability of captive coal (Karwahi mine started
operations in 3QFY2010) and resumption of shipment of iron ore from the MF / Banks / Indian Fls 9.3
Dongarbore mine (mining operations were disrupted last year due to Naxal FII / NRIs / OCBs 7.7
problem). Staff cost and other expenses grew by 50.2% and 176.9% yoy to Rs7cr Indian Public / Others 12.9
and Rs27cr, respectively. On a sequential basis, margins improved by 304bp
because of a decrease in raw-material cost. Adjusted for forex loss of Rs14cr
(1QFY2010: gain of Rs13cr; 4QFY2010: gain of Rs5cr), net profit increased to Abs. (%) 3m 1yr 3yr
Rs27cr from a loss of Rs7cr in 1QFY2010 and a profit of Rs17cr in 4QFY2010. Sensex 3.0 15.4 20.7

Outlook and valuation: We believe SEML is well poised to benefit from SEML 16.3 98.6 0.2
a) backward integration into coal and iron ore, b) commercial production of
pellets and c) increased power and ferro alloy production. We maintain
Accumulate on the stock with a Target Price of Rs290, valuing the stock at 5.0x
FY2012E EV/EBITDA.

Key Financials (Standalone)
Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E
Net Sales 949 523 791 888
% chg 51.8 (44.9) 51.3 12.3
Net Profit 168 18 120 150
% chg 38.7 (89.0) 547.7 24.9
EPS (Rs) 49.0 5.4 35.2 43.9
EBITDA (%) 23.5 14.7 28.1 29.4
P/E (x) 5.3 47.8 7.4 5.9 Paresh Jain
P/BV (x) 1.7 1.6 1.3 1.1 Tel: 022-40403800 Ext: 348
pareshn.jain@angeltrade.com
RoE (%) 26.9 11.7 19.4 20.2
RoCE (%) 21.4 3.6 15.1 16.5
Pooja Jain
EV/Sales (x) 1.4 2.5 1.5 1.2 Tel: 022-40403800 Ext: 311
EV/EBITDA (x) 6.0 17.2 5.4 4.0 pooja.j@angeltrade.com


Please refer to important disclosures at the end of this report 1

Sarda Energy | 1QFY2011 Result Update

Exhibit 1: 1QFY2011 performance (Standalone)
Y/E March (Rs cr) 1QFY11 1QFY10 yoy % FY10 FY09 yoy %
Net sales 217 93 132.8 523 949 (44.9)
Raw material 131 72 83.3 369 618 (40.3)
% of net sales 60.7 77.1 70.6 65.1
Power & Fuel 1 2 (52.5) 4 5 (16.1)
% of net sales 0.4 2.1 0.8 0.6
Staff cost 7 5 50.2 19 17 12.5
% of net sales 3.5 5.4 3.7 1.8
Other expenditure 27 10 176.9 53 86 (37.7)
% of net sales 12.5 10.5 10.2 9.0
Total expenditure 167 88 88.8 446 726 (38.5)
% of net sales 77.0 95.0 85.3 76.5
Operating profit 50 5 973.2 77 223 (65.6)
OPM(%) 23.0 5.0 14.7 23.5
Other operating income 0 0 - 0 0 -
EBIDTA 50 5 973.2 77 223 (65.6)
EBITDA margins (%) 23.0 5.0 14.7 23.5
Interest 3 2 58.9 13 5 177.1
Depreciation 14 8 67.2 39 28 39.1
Other income 1 0 196.5 7 4 97.4
Exceptional items (14) 13 - 45 (45) -
PBT 21 8 170.4 77 149 (48.3)
% of net sales 9.5 8.2 14.8 15.7
Tax 7 2 321.6 14 26 (46.1)
% of PBT 33.2 21.3 18.1 17.4
Adj. PAT 27 (7) - 18 168 (89.0)
% of net sales 12.7 (7.0) 3.5 17.7
FDEPS (Rs) 8.1 (1.9) - 5.4 49.0 (88.9)

Other key highlights
SEML’s pellet plant started commercial production from April 2010. During the
quarter, the plant produced 54,615 tonnes.
Average realisation for sponge iron, ferro alloy and power was ~Rs16,000,
Rs59,000 and Rs4.22, respectively.
The company has shipped 150,000 tonnes of iron ore fines from its mines to
the plant. Mining operations are expected to restart post monsoons.
During the quarter, SEML was also involved in trading activity. It purchased
and resold ~Rs30cr of ferro alloy and manganese ore, which contributed
~Rs3.0cr to the operating profit.

August 2, 2010 2


Exhibit 2: Quarterly production volume
(tonnes) 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 yoy % qoq %
Sponge iron 42,675 49,440 51,561 59,112 50,329 17.9 (14.9)
Billets + Ingots 663 3,320 4,951 3,168 2,218 234.5 (30.0)
Ferro alloys 1,795 8,872 11,630 13,522 14,463 705.7 7.0
Power (mn units) 53 64 110 104 104 97.6 0.5
Pellet - - - - 54,615 - -

Exhibit 3: Quarterly sales volume
(tonnes) 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 yoy % qoq %
Sponge iron 39,729 47,204 45,206 54,298 51,229 28.9 (5.7)
Billets + Ingots 568 1,829 4,957 2,564 5,104 798.6 99.1
Ferro alloys 5,273 7,716 11,252 11,525 13,800 161.7 19.7
Power (mn units) 35 10 38 21 21 (41.0) (2.9)

Exhibit 4: Segmental performance
(Rs cr) 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 yoy % qoq %
Steel 52 61 72 94 95 83.6 0.8
Ferro alloys 21 39 65 75 113 426.3 51.0
Others 20 4 18 9 10 (50.8) 6.9
Less: Intersegment 0 (0) (0) (0) (0) - 2.4
Net sales 93 104 155 178 218 133.0 22.2
Steel (3) 3 1 10 16 - 68.2
Ferro alloys (2) 7 22 21 26 - 28.4
Others 6 (8) 9 4 2 (58.3) (33.2)
EBIT 1 1 32 34 45 5,664.3 33.4
Steel (5.7) 4.5 1.3 10.3 17.2 - -
Ferro alloys (8.8) 17.0 33.7 27.5 23.4 - -
Others 27.8 - 50.1 37.7 23.6 - -
EBIT margin (%) 0.8 0.9 20.6 19.0 20.7 - -

August 2, 2010 3


Result highlights
Robust top-line growth

SEML’s 1QFY2011 top line grew by 132.8% yoy to Rs217cr on the back of higher
sales volume and realisations. While sponge iron sales grew by 28.9% yoy to
51,229 tonnes, ferro alloy sales grew by 161.7% yoy to 13,800 tonnes. Further,
while power production was higher by 97.6% yoy to 104mn units (last year
operations were disrupted due to fire), units sold declined by 41.0% yoy due to
increased captive usage. During the quarter, SEML produced 54,615 tonnes of
pellets.

Exhibit 5: Quarterly revenue trend

250 150
217

200 174 100
154
150 50
(Rs cr)

(%)
102
93
100 0

50 (50)

0 (100)
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
Net revenue (LHS) yoy change (RHS)


EBITDA growth much higher, leading to strong bottom-line growth
EBITDA grew by 973.2% yoy to Rs50cr as margins expanded to 23.0% from 5.0%
in 1QFY2010. Raw-material costs as a percentage of sales declined to 60.7% from
77.1% in 1QFY2010 because of availability of captive coal (Karwahi mine started
operations in 3QFY2010) and resumption of shipment of iron ore from the
Dongarbore mine (mining operations were disrupted last year due to Naxal
problem). Staff cost and other expenses grew by 50% and 177% yoy to Rs7cr and
Rs27cr, respectively. On a sequential basis, margins improved by 304bp because
of a decrease in raw-material cost.

Exhibit 6: Quarterly margins trend

60 25
50
50 20
40 35
31 15
(Rs cr)

30
(%)

10
20

10 6 5
5

0 0
EBITDA (LHS) EBITDA margin (RHS)


August 2, 2010 4


Adjusted for forex loss of Rs14cr (1QFY2010: gain of Rs13cr; 4QFY2010: gain of
Rs5cr), net profit increased to Rs27cr from a loss of Rs7cr in 1QFY2010 and a
profit of Rs17cr in 4QFY2010.

Exhibit 7: Quarterly net profit trend

30 27 15
25
10
20 17
15 13
5

(Rs cr)
10

(%)
5 0

0
(5)
(5)
(4)
(10) (7) (10)
Adj. Net profit(LHS) Adj. Net margin (RHS)


Investment rationale
Captive iron ore, coal to lower costs: We expect SEML to earn incremental EBITDA
of Rs33cr and Rs36cr in FY2011E and FY2012E, respectively, on account of
securing coal from its captive mines. Moreover, SEML has started shipping iron ore
from its Dongarbore mines, which was affected by Naxal activities last year.

Pellet production to lower raw-material costs: SEML has started commercial
production of its 0.6mn tonne pellet plant in April 2010. Over the last six months,
management has successfully resolved most of the structural problems. We expect
the plant to operate at 45% and 50% utilisation levels in FY2011E and FY2012E,
thereby resulting in savings of Rs88cr and Rs105cr, respectively.

Uptick in ferro alloy prices and volume, increasing power production: Ferro alloy
prices have increased to Rs65,000/tonne from Rs51,000/tonne in December
2009. Sales volumes are likely to increase by 58.5% in FY2011E. Further, we
expect power generation to increase by 40.6% yoy as last year’s operations were
disrupted by fire. SEML is expanding its power capacity by a) 50% to 90MW at its
Raipur plant and b) by setting up an 80MW plant near its coal mine; we have not
factored these expansions in our estimates, as they are subject to regulatory
approvals.

August 2, 2010 5


Outlook and valuation

We believe SEML is well poised to benefit from: a) backward integration into coal
and iron ore, b) commercial production of pellets and c) increased power and
ferro alloy production. We expect the full benefits of captive coal to reflect in
FY2011E as the coal mine started operations in 3QFY2010. Moreover, an uptick
in ferro alloy prices accompanied by 58.5% jump in volumes and 40.6% increase
in power generation are expected to boost EBITDA by 189.6% yoy in FY2011E to
Rs222cr. We maintain Accumulate on the stock with a Target Price of Rs290,
valuing the stock at 5.0x FY2012E EV/EBITDA.

Exhibit 8: Key assumptions
FY11E FY12E
Sales volume (tonnes)
Sponge iron 214,653 222,980
Steel billets 20,000 30,000
Ferro alloys 57,471 61,456
Power (mn units) 111 97
Average realisation (Rs)
Sponge iron 18,700 19,250
Steel billets 26,700 27,250
Ferro alloys 60,000 65,000
Power 4.0 4.0
Average cost (Rs)
Iron ore 3,596 3,604
Coal/coke 1,752 1,775
Manganese ore 11,000 11,550

Exhibit 9: EPS - Angel forecast vs. consensus
Year (%) Angel forecast Bloomberg consensus Variation (%)
FY11E 35.2 41.5 (15.2)
FY12E 43.9 55.6 (20.9)
Source: Bloomberg, Angel Research

August 2, 2010 6


Exhibit 10: EV/EBITDA band
3,500
14x
3,000

2,500 11x

(Rs cr)
2,000 8x

1,500
5x
1,000

500 2x

0
Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10


Exhibit 11: P/E band

1,200

1,000

800 20x
(Rs)

600 15x

400 10x

200 5x

0
Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10


Exhibit 12: P/BV band

900
4x
800
700
3x
600
500
(Rs)

2x
400
300
200 1x

100
0
Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10


August 2, 2010 7


Exhibit 13: Recommendation summary
Target Upside
Companies CMP Reco. Mcap P/E (x) P/BV (x) EV/EBITDA (x) RoE (%) RoCE (%)
Price (%)
(Rs) (Rs) (Rs cr) FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E
SAIL 203 - Neutral 83,971 - 13.4 11.8 2.2 1.9 8.8 7.6 17.9 17.6 16.3 16.9
Tata Steel 537 697 Buy 48,516 29.8 9.0 9.6 1.5 1.3 6.8 6.2 17.9 14.7 11.8 11.7
JSW Steel 1,117 1,344 Buy 29,038 20.4 14.9 11.4 1.5 1.3 7.0 5.5 13.9 12.4 12.5 12.6
Bhushan
1,559 1,979 Buy 6,623 26.9 6.8 5.3 1.6 1.2 7.3 6.0 26.0 26.1 12.6 14.0
Steel
Sesa Goa 361 - Neutral 30,086 - 7.1 7.4 2.5 1.9 3.9 3.1 45.9 31.5 43.7 34.7
NMDC 260 247 Reduce 104,014 (5.1) 14.5 12.1 5.2 3.9 9.0 7.1 41.8 36.7 55.7 48.3
Electrosteel 49 72 Buy 1,593 47.5 7.5 7.3 0.9 0.8 5.7 5.0 14.2 13.1 11.9 12.3
Godawari
250 322 Buy 673 28.9 4.7 3.5 1.0 0.8 3.5 2.3 26.1 26.7 21.2 23.5
Power
Sarda Energy 260 290 Accumulate 874 11.6 7.4 5.9 1.3 1.1 5.4 4.0 19.4 20.2 15.1 16.5
Prakash Ind. 175 232 Buy 2,353 32.9 7.9 5.3 1.2 1.0 5.5 4.2 19.7 23.2 16.6 18.7
Monnet Ispat 450 534 Buy 2,699 18.8 10.0 6.9 1.3 1.1 9.1 7.4 14.8 17.6 11.7 12.7


August 2, 2010 8


Profit & Loss Statement (Standalone)
Y/E March (Rs cr) FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E
Gross sales 412 703 1,032 556 855 960
Less: Excise duty (48) (78) (83) (33) (64) (72)
Net sales 364 625 949 523 791 888
Other operating income - - - - - -
Total operating income 364 625 949 523 791 888
% chg 68.9 71.6 51.8 (44.9) 51.3 12.3
Total expenditure 296 456 726 446 569 627
Net raw materials 240 384 618 369 469 514
Other mfg costs 49 61 91 58 78 88
Personnel 7 11 17 19 22 25
Other - - - - - -
EBITDA 69 168 223 77 222 262
% chg 244.9 145.3 32.4 (65.6) 189.6 17.7
(% of Net sales) 18.8 26.9 23.5 14.7 28.1 29.4
Depreciation 23 22 28 39 55 58
EBIT 46 146 195 38 167 203
% chg 246.6 217.3 33.4 (80.6) 341.4 21.5
(% of Net sales) 12.7 23.4 20.6 7.3 21.2 22.9
Interest charges 7 12 5 13 28 28
Other income 12 5 4 7 10 11
(% of PBT) 23.9 3.6 1.9 22.4 6.6 5.9
Share in profit of asso. - - - - - -
Recurring PBT 51 139 194 32 150 187
% chg 352.2 174.1 39.6 (83.3) 361.0 24.9
Extra. Inc/(Expense) 0 0 (45) 45 - -
PBT (reported) 51 139 149 77 150 187
Tax 8 18 26 14 30 37
(% of PBT) 16.1 12.8 17.4 18.1 20.0 20.0
PAT (reported) 43 121 123 63 120 150
Add: Earnings of asso. - - - - - -
Less: Minority interest - - - - - -
Extra. Expense/(Inc.) - - - - - -
PAT after MI (reported) 43 121 123 63 120 150
ADJ. PAT 43 121 168 18 120 150
% chg 386.8 185.1 38.7 (89.0) 547.7 24.9
(% of Net sales) 11.7 19.4 17.7 3.5 15.1 16.8
Basic EPS (Rs) 14.4 35.6 49.4 5.4 35.2 43.9
Fully diluted EPS (Rs) 14.4 35.4 49.0 5.4 35.2 43.9
% chg 115.3 145.7 38.7 (88.9) 547.7 24.9

August 2, 2010 9


Balance Sheet (Standalone)
Y/E March (Rs cr) FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E
SOURCES OF FUNDS
Equity share capital 30 34 34 34 34 34
Reserves & surplus 179 367 479 531 638 776
Shareholders’ funds 208 402 513 565 672 810
Share warrants - 0.5 - - - -
Minority interest - - - - - -
Total loans 209 323 533 460 460 460
Deferred tax liability 17 19 28 29 29 29
Total liabilities 434 745 1,075 1,053 1,161 1,298
APPLICATION OF FUNDS
Gross block 295 331 498 830 910 985
Less: Acc.
100 121 147 186 240 299
depreciation
Net Block 196 210 352 644 670 687
Capital work-in-
95 255 355 155 110 65
progress
Goodwill
Investments 22 20 73 66 66 66
Current assets 174 382 352 282 412 579
Cash 21 98 35 25 139 287
Loans & advances 36 66 199 91 91 91
Other 117 218 118 166 182 201
Current liabilities 53 123 57 96 98 99
Net current assets 121 259 295 186 314 480
Mis. exp. not written
1 1 0 0 0 0
off
Total assets 434 745 1,075 1,053 1,161 1,298

August 2, 2010 10


Cash flow statement (Standalone)
Y/E March (Rs cr) FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E
Profit before tax 51 139 149 77 150 187
Depreciation 23 22 28 39 55 58
Change in working
3 (76) (1) (51) (15) (18)
capital
Less: Other income 7 (11) 47 - - -
Direct taxes paid 7 12 22 14 30 37
Cash flow from
77 63 201 51 159 190
operations
(Inc.)/ Dec. in fixed
(87) (196) (234) (132) (35) (30)
assets
(Inc.)/ Dec. in
20 1 (52) - - -
investments
(Inc.)/ Dec. in loans
and advances
Other income (0) (0) (73) - - -
Cash flow from
(67) (196) (359) (132) (35) (30)
investing
Issue of equity - 86 - - - -
Inc./(Dec.) in loans 21 114 94 (73) - -
Dividend paid 10 1 12 12 10 12
Others 7 11 (15) - - -
Cash flow from
3 187 97 (85) (10) (12)
financing
Inc./(Dec.) in cash 13 55 (61) (166) 114 148
Opening cash bal. 9 44 96 191 25 139
Closing cash bal. 21 98 35 25 139 287

August 2, 2010 11


Key ratios
Y/E March FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E
Valuation ratio (x)
P/E (on FDEPS) 18.1 7.3 5.3 47.8 7.4 5.9
P/CEPS 11.8 6.2 4.5 15.4 5.1 4.3
P/BV 3.7 2.2 1.7 1.6 1.3 1.1
Dividend yield (%) 0.8 1.2 1.2 1.2 1.2 1.2
EV/Sales 2.6 1.8 1.4 2.5 1.5 1.2
EV/EBITDA 13.8 6.5 6.0 17.2 5.4 4.0
EV/Total assets 2.2 1.5 1.2 1.3 1.0 0.8
Per share data (Rs)
EPS (Basic) 14.4 35.6 49.4 5.4 35.2 43.9
EPS (fully diluted) 14.4 35.4 49.0 5.4 35.2 43.9
Cash EPS 22.0 42.1 57.6 16.8 51.3 61.0
DPS 2.0 3.0 3.0 3.0 3.0 3.0
Book value 70.4 118.1 150.8 165.8 197.5 237.9
DuPont analysis
EBIT margin 12.7 23.4 20.6 7.3 21.2 22.9
Tax retention ratio (%) 83.9 87.2 82.6 81.9 80.0 80.0
Asset turnover (x) 1.2 1.2 1.2 0.5 0.8 0.9
RoIC (Post-tax) 13.2 24.5 19.8 3.1 13.1 16.0
Cost of debt (post tax) 4.0 4.0 0.9 0.9 0.8 0.8
Leverage (x) 0.8 0.5 0.9 0.8 0.5 0.2
Operating RoE 20.9 35.7 36.3 4.8 18.9 19.3
Returns (%)
RoCE (Pre-tax) 14.9 24.8 21.4 3.6 15.1 16.5
Angel RoIC (pre-tax) 15.7 28.1 23.9 3.8 16.3 20.0
RoE 30.6 39.8 26.9 11.7 19.4 20.2
Turnover ratios (x)
Asset turnover (gross
1.7 2.0 2.3 0.8 0.9 0.9
block)
Inventory (days) 104 142 59 150 125 125
Receivables (days) 48 40 7 10 10 10
Payables (days) 51 69 3 3 3 3
WC cycle (days) 63 60 47 96 79 77
Solvency ratios (x)
Net debt to equity 0.8 0.5 0.9 0.8 0.5 0.2
Net debt to EBITDA 2.6 1.3 2.0 5.7 1.4 0.7
Interest coverage 6.2 12.1 42.5 3.0 6.1 7.4

August 2, 2010 12


Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com

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
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risks of such an investment.

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investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this
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Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and
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Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please
refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and
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Disclosure of Interest Statement Sarda Energy
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
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%)

August 2, 2010 13

Sarda Energy

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