Edelweiss on Bhushan Steel

Edelweiss initiates coverage on Bhushan Steel with a 'Buy' recommendation. Bhushan Steel, with a 1-mtpa flat steel capacity, sells 30% of its volumes to the Indian auto segment and about 20% to the white goods sector. In spite of being a pure converter, the company enjoys a high EBITDA/t of $210 by virtue of its value-added product mix. Driven by the 2.3-mtpa greenfield capacity expansion involving captive metallics and HR coils (HRCs) and the expected 10-12% growth in the auto and consumer durables sectors, Edelweiss expect BSL's EBITDA/ t to increase significantly to $320 in FY12E. Phases I and II of 2.3-mtpa steel capacity is nearly completed with a capital cost of about $825/t (against benchmark of $1,000/t). Furthermore, efficient technology and low conversion costs enable HRCs' cash cost of about $495/t in FY12E. The expected ramp up of the 2.3-mtpa steel capacity will drive volumes over the next two years and enable Bhushan Steel to further strengthen its position in the auto and white goods sectors. The backward integration facility right up to the metallic stage will give a fillip to EBITDA margins as dependence on external HR will be eliminated. Edelweiss values the stock at 5.5x EV/EBITDA on FY12E and arrives at a fair value of Rs 2,245/share.