Stock Review: Bhushan Steel

In a relatively negative market, shares of Bhushan Steel have declined a mere six percent since January 2011 while its peers, measured on the BSE Metal Index, lost over 15%. Bhushan Steel is one of the fastest-growing, mid-sized steel companies in India with a 20% growth rate over the last six quarters. Despite rising input costs, the company has been able to consistently increase its operating profit margins. It aims to sustain the trend through further backward integration and major capacity expansion. The only concern is its high debt-equity ratio.

BUSINESS

Bhushan Steel (BSL) is the third-largest secondary steel producer in the country with a capacity of 2.2 million tonnes per annum, which it plans to raise to 5.2 million tonnes by the year-end. The company will set up a steel-rolling mill and a galvanising unit with an annual capacity of 1.8 million tonnes. It plans a total investment of about 5,000 crore.

GROWTH DRIVERS

BSL manufacturers valueadded steel products for automobile majors like Maruti Suzuki, Tata Motors and Honda Siel . The company plans to increase its presence in the growing OEM industry.

BSL is expanding its HR coil production to 2.5 million tonnes per annum from 1.9 million tonnes, and the process is expected to be completed by October 2011. This move towards backward integration will help protect margins in an environment of rising input prices. It is also setting up a 0.5 million tonne ERW (electric resistance welded) pipe project at Khopoli.

FINANCIALS

Over the past four years, the company's net sales have grown at 12%, when compounded annually. It posted total revenues of 7,000.46 crore in 2011, 24% more than the previous year, and a net profit growth of 22% at 1,033.07 crore. During the last two quarters of 2011, iron ore and coking coal prices rose sharply. Despite this, BSL managed to increase its operating profit margin by 500 basis points to 31% during Q4 on account of better operational efficiencies, higher volumes and increased realisations. This resulted in a 20% rise in EPS at 13.6.

VALUATIONS

The stock gives a return on capital of 10.7 and a return on equity of 28.3. At 456, it commands a price which is 5.2 times its trailing 12 months earnings per share. Compared with other mid-sized steel makers, the stock is under-valued.

CONCERNS

Apart from a slowdown in steel consumption over the next quarter on account of the monsoon, the company's total debt is 3 times its equity (as on September 2010).