Bhushan Steel

Company's Fundamentals Have Changed & Warrant A Higher Valuation Than Current P/E Of 11.8
BHUSHAN Steel, a major secondary steel producer in the country, saw its scrip outperforming the Sensex as well as the Metal Index in the past six months besides other blue-chip stocks such as Steel Authority (SAIL) and Tata Steel.

Bhushan Steel’s backward integration plan has been critical to its performance. The company has already completed phase I of its expansion plan and phase II is expected to get completed by this year-end. The partial impact of its integration plan is clearly visible in its operating margin. During the September 2009 quarter, Bhushan Steel reported more than a 300-basis point sequential improvement in its operating margin. The margin will improve further when the company starts commissioning different projects in phases. The recent run-up in its stock price seems to be in anticipation of future improvement in margin as well as topline.

The last time when the Sensex was close to 17,000, Bhushan Steel’s stock was trading at a trailing price-earnings multiple of 11. Now, when the Sensex is again hovering close to the 17,000-mark, the stock is trading at around 11.8. This is despite the fact that the fundamentals of the company changed significantly during the time period. It has reported strong numbers in the first half of FY10. The half-year earnings per share (EPS) stands at Rs 85 and we expect this to be higher for the second half. Assuming a conservative growth of 10% in EPS in second half, the stock is currently trading at a forward price-earnings multiple of around 7.5. This appears to be low considering the fact that the stock has always been traded at a P/E multiple of 13-17 in good times.