March 11th, 2006

Alloy Steel Industry

Steel sector can broadly be divided into normal steel and Alloy steel. Alloy and special
steel are characterized by their enhanced properties caused due to presence of one or
more alloying elements such as Manganese, Silicon, Nickel, Chromium, Molybdenum,
Vanadium, Micro alloy grain structure etc. In order to impart special characteristics,
varying percentages of alloying elements are added to produce alloy and special steels.
There are more than 60 grades of stainless steel. However, the entire group can be
divided into five classes. Each is identified by the alloying elements which affect their
microstructure and for which each is named. The vast majority of steel produced in the
world is carbon and alloy steel, with the more expensive stainless steels representing a
small, but valuable niche market. A grade wise bifurcation of aggregate demand of Alloy
& Special Steels in India can be seen in the graph shown below.

Grade wise Aggregate Demand of Alloy & Special Steels: 2004-05

The user industries of alloy steel are widely spread across varied segments. Alloy steel is
used extensively by industries like forging, auto ancillaries, seamless steel and tubes,
alloy steel wire rods, railways, engineering, defense etc. In the last few years,
application of alloy steel is increasing in consumer items as well as consumer durables
and automobiles. Use of alloy steels has enabled the industry to make the machinery
light in weight thus making them energy efficient. Use of alloy steels in two wheelers
and four wheelers has enabled automobile manufacturers to produce lighter and fuel-
efficient vehicles. The relative share of these user industries can be seen in the graph
below.

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Share of user industries

Demand Supply Scenario

Given the changing dynamics in the demand supply pattern within the sector, the
availability of alloy and special steels in India is likely to fall short of requirements from
2008-09 onwards, though more of less balanced as of now. However India has imported
a sizeable quantity of special and alloy steel in last few years. The gap in domestic
availability is likely to increase to almost 1.6 – 2.0 million tonnes per annum by 2013-
14. Automobiles industry is the largest consumer of alloy and special steels. Most of the
requirements of alloy and special steels for the automotive sectors and tractors are
routed through intermediate processors like steel forging units, bright bar industries,
spring industries and auto ancillaries. From the adjoining table one can see that a few
years back the industry was facing severe overcapacities. But the situation has changed
and now demand outstrips supply which is further expected to widen by the year 2009-
10.

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Alloy and Special Steel Industry in India

There are around 20 recognized units engaged in the manufacture of alloy and special
steels with an installed capacity of almost 2.8 million tonnes per annum. Out of these
VISP, SISCOL, Kalyani Steels, Usha Martin are based on MBFs. In addition to these
Mukand also gets 58 per cent of the production of semis at Hospet Steel, which is also
based on MBF. Sunflag is based on sponge iron route, starting from iron ore itself. All
the remaining recognized alloy and special steel producers are based on EAF technology.

The demand for alloy and special steel has been buoyant on account of robust demand
from user industries namely automobiles, auto ancillary units, seamless pipes and tubes
etc. Demand for Auto Grade Special Steel has reached at approximately 2 Million tonnes
on account of the buoyancy in Auto Ancillary sector. The current upswing in the said
sector (which is the major customer of Auto grade Special Steel) is expected to continue
in the medium term. The Automotive Component Manufactures Association (ACMA)
expects the domestic Auto Component growth at a CAGR of 15% till FY 2012. Leading
global component majors are planning to set up shop in India to cash in on the booming
industry growth trends. The basic rationale for the large scale shifting of manufacturing
facilities to India lies in low labour costs and high quality engineering skills in auto
ancillary manufacturing. Some high profile global auto component dealers and
manufactures have set their sights on India. Demand in the Indian auto components
industry is growing at a rate of about 25-30% annually, while the automotive sector
grew 12% last year. The prospect of export from India is also a major attraction. The
global majors are interested in exporting back low cost good quality products to their
global factories and other markets to reduce overall costs. Export of auto components
from India have grown at a compounded growth rate of 19% over the past six years.
During fiscal ’04, the industry achieved a milestone of $1bn worth of exports.

According to Industrial Development Services Private Ltd, New Delhi, the aggregate
domestic demand for different categories of alloy and special steel is likely to increase
from 2.45 million tones in 2004-05 to almost 5.2 million tones per annum by the year
2013-14, at a CAGR of 8.7%. According to a McKinsey report, exports are expected to
touch $25 billion by 2015. ACMA expects exports to reach $5 billion by 2010. The global
auto component market is currently estimated at $1 trillion with OEMs accounting for
70% of this market and the balance being represented by the replacement market. By
2015, approximately 25-30% of the total requirement of auto components is expected to
be sourced from low cost countries such as India, China, Brazil, Mexico, East Europe,
etc. Indian manufacturers are now in a position to offer a complete range of engineering
solutions including analysis & simulation, modeling & drafting, tooling design etc. India is
fast becoming the hub for the $1 trillion global auto-component industry.

Major Players and Valuations

The current landscape in the Alloy and Special Steel sector in India can be summarized
and depicted in the following Table. The total capacity of this industry is 2.8 million
tonnes per annum. The technology being used in the process of manufacturing the
products is a key element which determines the overall profitability of the companies.
EAF (Electric Arc Furnace) and MBF (Mini Blast Furnace) are the most commonly used
technology. Some companies make use both these technologies in a combination. MBF
technology is regarded to be superior to the EAF technology. The choice of the
technology is based on the merits and demerits of various technologies, the status of
technology, flexibility of operation, availability of raw materials, capital investment and
economics of operations.

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Industry Structure

Installed
Current Main
Manufacturers Capacity Technology
Production Products
Tonnes
Forging
Aarti Steel 100000 65000 EAF/VD/CC
quality steel
Full range of
Durgapur EAF/VAD/CC/&
164000 90000 alloy and
steel Ingots
special steel
Forging
Bhushan 30000 25000 EAF/CC
quality steel
Forging
quality steel, EAF/VD/CC and
Ferro alloy
50000 10000 ball bearing AOD for Stainless
corp.
quality steel steel
and SS
Forging
quality steel,
ball bearing
ISMT 240000 200000 EAF/VD/CC
quality steel,
seamless pipe
quality steel
Billets for
forging quality
Jindal Steel &
steel, wire
Power Ltd. 140000 MBF/EAF/VD/CC
rods and
Raigarh
seamless steel
pipes.
Forging
quality steel,
ball bearing
Kalyani EAF/VD/CC/and
150000 100000 quality steel,
carpenter ingots
specialized
and high alloy
steels
Forging
quality steel,
Kalyani steel 150000 100000 MBF/EOF/VD/CC
seamless pipe
quality steel
EAF/VD/CC and
MUSCO 105000 90000 Full range
ingots
Marmagoa
75000 50000 Spring steel EAF/CC
steels
Forging
Modern steels 72000 40000 quality steel, EAF/CC
spring steel
The company
obtains billets from
Forging
Kalyani, Hospet. In
Mukand 250000 150000 quality steel,
addition it has
wire rods,SS
EAF/VD/CC at
Kalve
Forging
Remi Metals 72000 40000 EAF/VD/CC
quality steel
Southern Iron Wire rods,
250000 30000 MBF/EOF/CC
& Ispat spring steel

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Spring steel,
forging quality
Sunflag 200000 200000 EAF/VD/CC
steel, wire
rods, SS
Forging
Upper Steel quality steel,
72000 50000 EAF/VD/CC
Mfg. spring steel,
file steel
Wire rods, and
Usha martin 200000 100000 forging quality MBF/EAF/CC
steel
Vardhman Forging
70000 65000 EAF/VD/CC
special Steel quality steel
Full range of
Visvesvaraya MBF/BOF/EAF/VD
150000 90000 alloy and
Iron & steel & CC
special steel
Full range of
Adhunik MBF/
100000 60000 alloy and
Metaliks Ltd EAF/VD/AOD/LF/CC
special steel
Source: Market Survey for Alloy Steels carried out by Industrial Development Services Pvt. Ltd.

Company Valuations
As can be seen there are a number of players in the industry but the leading players
amongst these are MUSCO (Mahindra Ugine Steel Company), Mukand Ltd , ISMT (Indian
Seamless Metal Tubes), Usha Martin and Kalyani steel. These companies stand apart
from the rest of their counterparts due to their emphasis on efficient manufacturing
processes and adherence to product quality standards. The adjoining table shows the
relative valuations of the companies in the industry.

Usha
Particulars MUSCO Mukand Kalyani steel
martin
Price 129.00 92.40 188.50 279.00
Mcap (Rs crore) 399.02 675.57 836.56 1176.26
M Cap / Sales 0.69 0.43 0.70 2.00
EV/Sales (x) 0.81 1.10 1.36 2.13
EV/EBITDA (x) 5.38 8.48 7.15 10.14
P/E (x) 8.30 10.42 14.02 16.04
EPS 15.53 8.87 13.44 17.39
CEPS 18.58 16.79 29.25 21.82
EBIDTA (exc OI)
14.85 12.83 18.97 20.99
(%)
NPM (%) 8.18 4.05 4.98 12.42
Note: Valuations are based on December TTM basis.
Balance Sheet figures are as per latest available

Considering the relative valuation of the leading players in the Indian alloy steel industry
we see that the market does not seem to fairly recognize the inherent value in these
companies. The EV/Sales for MUSCO is at 0.81x and that for Mukand is at 1.10x while
EV/ EBITDA is at 5.38x and 8.48x respectively for them. Mukand steel which is the
largest amongst alloy steel manufacturers has a PE of 8.30x and its Market
Capitalization to Sales is at 0.43x. Thus one can see that even after good margins and
superior growth prospects, the companies are trading at average valuations. Looking at
EV / EBIDTA ratio, companies like MUSCO does appear to have a lot of upward growth
potential as it trails its peers. Net Profit margins are highest for Kalyani steel (12.42%)

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followed by MUSCO (8.18%) With bright growth prospects for the alloy steel industry,
we believe the sector will see sharp re rating.

Conclusion
Alloy steel is altogether different from plain vanilla steel in terms of applications. Due to
the peculiarities in the processing and customization requirement it cannot be compared
with normal steel both in terms of dynamics as well as valuations. Around 400 varieties
of steel are manufactured which depicts that products are manufactured according to the
requirements. While in case of normal steel, a product is manufactured according to the
capacities installed. The industry has been doing well in light of changing scenario in the
demand pattern. The automobile, seamless tubes, engineering and forging
manufacturers which are the end users of the alloy steel products are showing improved
performance which in turn will result in the demand for the alloy steel. Overall the
industry offers a huge potential to the companies which are cost efficient and confirm to
strict quality norms.

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