Steel Sector

SteelSector
ValuationunderplaylikelygainsH2FY12onwards
Attractive Valuations
Demand drivers intact
RM Cost
Greenfield expansions lagging
Easing RM Supply
Oversupply
Inflation
Neartermconcerns GainsH2FY12onwards
BikashBhalotia+912266186387 bikash.bhalotia@pinc.co.in HarleenBabber+912266186389 harleen.babber@pinc.co.in
22June2011
DiptiVijaywargi+912266186393 dipti.vijaywargi@pinc.co.in
Sector Update
Sector: Metals and Mining (Ferrous)
Sensex: 17,551 Sector View: Positive

Bikash Bhalotia +91-22-6618 6387 bikash.bhalotia@pinc.co.in Harleen Babber +91-22-6618 6389 harleen.babber@pinc.co.in Dipti Vijaywargi +91-22-6618 6393 dipti.vijaywargi@pinc.co.in
Steel: Valuation factors in the near-term concerns; Underplays likely gains H2FY12 onwards
Top Buy: Tata Steel, Godawari Power Top Sell: Bhushan Steel
Valuation summary Indian steel companies
Company Tata Steel SAIL JSW Steel Godaw ari Pow er Monnet Ispat Usha Martin Bhushan steel Sesa Goa CMP (Rs) 558 130 838 152 493 51 438 268 TP# (Rs) 713 168 1,239 278 630 68 389 361 Upside (%) 27.8 29.1 47.9 82.5 27.8 33.5 (11.2) 34.8 Rating BUY BUY BUY BUY BUY HOLD SELL BUY Mkt Cap (Rs bn) 535 537 187 5 32 15 93 233 FY12E 12.5 18.6 18.3 19.6 26.7 19.7 29.5 53.2 OPM(%) FY13E 13.9 20.3 20.7 19.1 23.0 20.0 33.3 49.8 EV/EBITDA# FY12E 5.0 3.9 4.1 3.2 4.1 3.8 6.4 2.2 FY13E 4.9 4.9 3.5 2.9 4.0 4.1 5.9 1.8 FY12E 10.9 9.2 7.8 3.4 4.2 6.5 9.2 4.3 P/E (x) FY13E 8.9 8.3 7.4 3.4 3.1 6.4 11.2 4.4
Relative Performance
PINC ferrous rebased 120 110 100 90 Jun-10 Sensex rebased
Sep-10
Dec-10
Mar-11
Jun-11
P/BV (x) FY12E 1.2 1.3 1.0 0.7 0.6 0.8 1.9 1.3 FY13E 1.1 1.1 0.9 0.6 0.5 0.7 1.6 1.0 FY12E 12.1 14.7 14.7 21.5 14.2 12.7 22.9 34.5
RoE (%) FY13E 12.8 14.6 13.1 17.9 16.5 11.6 15.6 25.3
Source: Bloomberg, PINC Research; Note: * EV-based valuation ratios and target price calculated by valuing capital WIP at book value adjusted at an appropriate discount and adjusting for VoI
bikash.bhalotia@pinc.co.in June 22, 2011
Infinity.Com Financial Securities Ltd.
Table of Contents
Executive Summary
Steel: Margins unsustainably low; improvement likely. Steel demand improvement likely led by China, India. 4 6
PINC: Price assumptions and recommendations Comparative fundamentals and valuations Steel Industry
Global: Macro indicators for steel industry. Rising raw material cost Big concern for steelmaking. China: Kingpin of steel growth until now. What next? Developed economies: Robust growth in 2010 on easy liquidity and low base; is this sustainable? India: High demand potential; Supply faces regulatory hurdles!
7 9
16 18 23 29 32
Company Section
Tata Steel SAIL JSW Steel Godawari Power and Ispat Monnet Ispat and Energy Usha Martin Bhushan Steel Sesa Goa
bikash.bhalotia@pinc.co.in
42 50 57 65 71 78 83 88 2
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Steel: Margins unsustainably low; improvement likely

USD/t
Global steel output reached an all-time high in May11 to ~130mnt (YTD ~631mnt) led by robust growth in emerging economies and demand recovery in developed nations
Globally, steel prices increased 25-40% since Jan10
RM cost exceed pre-crisis levels, steel prices yet to catch up

300 250 200 150 100 50 Dec-08 Sep-07 Mar-10 Jan-07 Oct-10 Apr-08 Jun-11
Japan, Europe 100%
HRC
Iron ore
Coking coal
Nevertheless, profitability of steel companies has suffered because increase in input cost (iron ore, coking coal) has been steeper after moving to the quarterly contract system in 2010.
Raw material industry (iron ore, coking coal) is highly consolidated and enjoys tremendous bargaining power vis--vis the fragmented steel industry Avg. FY11 contract prices of iron ore and coking coal rose 115% and 68% YoY respectively on higher spot prices steel making cost ~USD200/t Consequently, mining profit improved at the cost of steelmakers.
Source: Bloomberg, PINC Research
Although steel margin expanded in Q4FY11 on higher prices, we expect margin to contract in H1FY12 as impact of high cost RMs come through with a lag amidst lower steel prices, mainly in China, India.
We believe that Chinese mills would be incurring losses of ~USD50-60/t at operating level based on current steel and raw material prices
Steel margin unsustainably low in current quarter (Q1FY12), mainly for China
(USD/t) 1,000 900 800
China CIS, India, S America
HRC - CoP (Q1FY12)
HRC Price (Current)
Jul-09
HRC - CoP (2010)
China incurring losses at operating levels
Such low margins are unsustainable: Expect improvement in profitability in H2FY12, FY13 led by reduction in RM cost as supply concerns ease. However, integrated producers benefit from margin expansion on higher steel prices as input costs remain low for captive availability
Access to captive resources remains the key to higher profitability
700 600 500

0%
Cumulative Capacity
Source: Industry, PINC Research
Steel: Margin declines despite higher steel prices

Steel prices have increased globally since Jan10
(USD/t) 1,000 World China Europe US
However, profitability has suffered as miners benefit on higher RM cost hike

50.0 40.0 30.0
Despite high steel prices, profitability of steelmakers have declined as miners benefit on higher RM cost hike
Mining OPM (%)
Steel OPM (%)
875
750 20.0 625 10.0 May -10 Sep-10 Jan-11 Jun-11 H1CY09 H2CY09
500 Jan-10
H1CY10
H2CY10
Source: Bloomberg, PINC Research; Note: China domestic HRC price includes 17% VAT
Source: Industry, Company data, Bloomberg, PINC Research; Note: Miners include BHPB, Rio Tinto, Anglo American, Xstrata, CVRD, Cliffs, NMDC; Steel includes Arcelor Mittal, Baoshan, Nucor, US Steel, POSCO, Evraz amongst others
Low level of profitability unsustainable, improvement likely

1,200 900 HRC (USD/t) - LHS Gross Profit (USD/t) - RHS 750 550
Integration benefits: Regions with captive access to key RMs more profitable (OPM %)
40 30 20 India Europe China Korea CIS S America USA Japan
600 300 Dec-04 Dec-07 Dec-10 Jun-06 Sep-05 Sep-08 Jun-09 Sep-11 Mar-07 Mar-10
350 150 (50)
10 (10) (20) Q1CY09 Q2CY09 Q3CY09 Q4CY09 Q1CY10 Q2CY10 Q3CY10 Q4CY10 Q1CY11
Source: Industry, Bloomberg, PINC Research; Note: Gross margin = steel price less RM cost (Iron ore + coking coal + 5% of steel prices)
Source: Industry, Bloomberg, Company, PINC Research; Note: Based on actual performance of the leading steelmakers in the region
Steel demand improvement likely led by China, India

China: Steel demand growth may slow down, but has miles to go before the dragon sleeps; Industry consolidation likely
Steel intensity of GDP growth may decline on increasing focus on domestic consumption and energy efficiency. However, we believe that rising FAI investments in hitherto lagging. Western and Central China to keep metal consumption at high levels. Steel output in China reached all-time high in Jan-May11. We expect output to decline in Q3CY11 given Chinas efforts on energy saving and high cost RM impacting profitability.
China: Steel output and inventory (mn tonnes)
75.0 60.0 45.0 30.0 15.0 0.0
Oct-06 Nov-08 Dec-10 Aug-07 Apr-09 Sep-09 Mar-07 Jan-08 Jun-08 Feb-10 Jul-10 May-11
Steel output
Steel inv entory - RHS
10 8 6 4 2 -
India: We expect steel supply to outpace demand by FY13E on capacity addition; expect India to turn net exporter in FY13E
Although near-term demand concerns on inflation and monetary tightening, long-term demand drivers remain intact (infra investment, growing consumerism, increase in steel intensity of investment). WSA expects growth of 13.3% in CY11 and 14.3% in CY12. Supply: Brownfield expansions to increase supply by FY13 leading to net export in FY13E; Capacity addition post FY13 to slowdown as greenfield expansions face regulatory hurdles We expect domestic pricing to be tight vis--vis landed cost.
India: To turn net exporter in FY13E despite likely improvement in demand (mn tonnes)
90 75 60 45 30 15 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Source: JPC, CRISIL, PINC Research
Production
Consumption
Net imports (RHS)
4.5 3.0 1.5 (1.5) (3.0) (4.5)
Outlook: Although there are near-term concerns facing steel industry, we believe valuations factors in the concerns, while underscoring likely improvement from H2FY12 onwards. Top BUYs: Tata Steel, Godawari Power Top SELL: Bhushan Steel
PINC: Price assumptions and recommendations

PINC Assumptions (USD/tonne) Benchmark HRC Iron ore Contract Coking coal price Contract Steel EBITDA/t USD/INR
Current Prices
Actual FY10 FY11 715 133 215 72 45.6 Revised 780 160 295 20 45.0 553 62 129 110 47.5
FY12E Earlier 760 140 280 46 45.0 Var (%) 2.6 14.3 5.4 (57.6) Revised 735 140 250 49 43.5
FY13E Earlier 735 130 250 65 43.5 Var (%) 7.7 (24.5) -
807 167 330 3 44.8
Top BUY Tata Steel
Key themes Benefit from improved steel profitability H2FY12 onwards (as RM cost reduces on easing supply constraints), rising share of highly profitable Indian operations with 2.9mntpa brownfield expansion by FY12-end and hedging of high RM cost at TSE with commencing of mining at Riversdale (coal) and New Millennium (iron ore); Financial leverage reduced to manageable levels. Increased iron ore and pellet output to improve GPIL's performance in FY12E amid higher steel prices, stabilisation of operations at Ardent Steel is expected to provide additional volume and earnings growth.
Godawari Power
Source: PINC Research
Top SELL Bhushan Steel
Key themes Despite volume and EBITDA growth in FY12E, we expect EPS to remain subdued on increased interest and depreciation charges on capitalisation of Odisha phase-II expansion; Additional concerns of high financial leverage (net D/E of 4.3x) and overvaluation (6.4x FY12E EV/EBITDA)
PINC revised estimates

Company In Rs mn
Tata Steel (C)*
Parameters
Rev enue EBITDA EPS (Rs) TP (Rs) Rev enue EBITDA EPS (Rs) TP (Rs) Rev enue EBITDA EPS (Rs) TP (Rs) Rev enue EBITDA EPS (Rs) TP (Rs) Rev enue EBITDA EPS (Rs) TP (Rs) Rev enue EBITDA EPS (Rs) TP (Rs) Rev enue EBITDA EPS (Rs) TP (Rs) Rev enue EBITDA EPS (Rs) TP (Rs)
FY11 Actual
1,187,531 155,235 55.7 441,633 79,310 12.4 241,161 48,786 78.6 11,161 2,323 50.0 15,737 4,655 42.4 30,626 5,827 4.5 70,005 20,372 47.1 92,051 52,031 47.5
FY12E Revised
1,211,085 151,886 51.4 709 516,649 96,270 14.1 168 370,732 67,989 107.4 1,239 17,300 3,383 68.1 278 21,823 5,830 48.8 630 39,251 7,719 7.8 68 93,061 27,474 47.5 389 115,143 61,249 61.9 361
FY13E Var (%)

(2.5) (2.7) (2.7) (1.9) (3.8) (11.5) (12.5) (6.7) 2.5 0.6 0.7 0.7 0.9 1.3 54.2 3.1 1.0 3.1 4.5 2.9 2.2 (0.4) (0.9) (2.0) 2.5 (0.5) (0.9) (1.5) 2.9 6.8 (6.8) 0.6
Previous
1,242,602 156,113 52.8 723 536,970 108,745 16.2 180 361,574 67,581 106.6 1,231 17,142 3,339 44.2 270 21,596 5,654 46.7 612 38,418 7,753 7.9 69.0 90,779 27,600 48.0 395 111,950 57,341 66.5 359
Revised
1,232,271 171,873 62.7 561,185 113,737 15.7 371,388 76,895 113.9 18,087 3,457 (0.1) 37,469 8,622 65.6 40,647.2 8,124 8.0 86,643 28,837 39.1 115,020 57,225 60.8
Previous
1,254,432 180,661 68.2 573,775 122,313 16.9 370,971 78,980 120.1 17,933 3,423 44.3 37,469 8,622 65.6 40,647 8,694 9.2 87,050 29,271 33.5 117,856 57,531 69.6
Var (%)
(1.8) (4.9) (8.1) (2.2) (7.0) (7.5) 0.1 (2.6) (5.2) 0.9 1.0 (100.2) (6.6) (13.7) (0.5) (1.5) 16.8 (2.4) (0.5) (12.6)
SAIL
JSW Steel (C)*
Godaw ari Pow er & Ispat (C)*
Monnet Ispat
Usha Martin (C)*
Bhushan Steel
Sesa Goa
Source: Company, PINC Research; Note: * C - Consolidated
Comparative fundamentals and valuations
Indian ferrous comparative fundamentals

Return ratios FY12E
40 ROCE (post-tax ) RoE
Financial leverage Net D/E (x)

4.4 FY12E FY13E
30
3.3
20
2.1
10
1.0
0 USM GPIL BHUS MISP TATA SAIL JSW SESA
(0.1)
USM
GPIL
BHUS
MISP
TATA
SAIL
JSW
SESA
Source: Company, PINC Research; Sesas RoE is higher due to share in profit of associate (Cairn India)
Source: Company,, PINC Research
Valuation ratios FY12E

14.0 EV/EBITDA P/E
Sales volume growth (CAGR %)

35 CAGR (FY11-FY13E)
10.5
26
7.0
18
3.5
USM GPIL BHUS MISP TATA SAIL JSW SESA
0 USM GPIL* BHUS MISP TATA SAIL JSW SESA
Source: Company, PINC Research; Note: EV based valuation ratios adjusted for VoI and CWIP discounted at appropriate rate
Source: Company, PINC Research; Note: * Includes pellet sales volume
10
Comparative valuations
EBITDA CAGR vs. EV/EBITDA multiple
40%
Monnet Ispat 30% EBITDA FY11-13E CAGR (%) JSW Steel
Godawari Power 20%
SAIL Usha M artin
Bhushan Steel
10% Sesa Goa 0% 1.0 2.0 3.0 4.0 FY12E EV/EBITDA 5.0 6.0 7.0 Tata Steel
Size of the bubble represents current market cap

Source: Company, PINC Research
11
Global peer comparison : Indian steel companies at attractive valuation

Region Mcap (USD mn) Steel - World HRC (USD/t) ArcelorMittal Thy ssenKrupp AG Voestalpine AG SSAB AB Nucor Corp United States Steel Corp Cia Siderurgica Nacional SA Usinas Siderurgicas de Minas Gerais SA Gerdau SA Ev raz Group SA Nippon Steel Corp JFE Holdings Inc Kobe Steel Ltd POSCO Baoshan Iron & Steel Co Ltd Angang Steel Co Ltd Wuhan Iron & Steel Co Ltd Hebei Iron & Steel Co Ltd Maanshan Iron & Steel Steel Authority of India Ltd * Tata Steel Ltd * JSW Steel Ltd * Bhushan Steel Ltd * Usha Martin Ltd * Monnet Ispat & Energy Ltd * Godaw ari Pow er and Ispat Ltd * Europe Europe Europe Europe N America N America S America S America S America CIS Japan Japan Japan S Korea China China China China China India India India India India India India 798 50,769 26,201 8,666 4,434 12,744 6,057 17,599 11,364 16,169 13,539 20,632 15,673 6,683 35,763 15,878 7,385 6,466 4,650 3,884 11,966 11,923 4,164 2,072 344 706 108 77,219 37,318 13,405 7,331 14,947 9,391 24,268 13,545 24,120 20,970 42,062 33,632 15,987 42,280 25,573 12,632 10,582 10,996 6,391 12,554 21,558 7,389 5,715 784 1,147 272 0.4 0.7 1.0 0.7 0.6 1.0 2.6 0.4 0.7 1.3 0.6 1.0 1.5 0.3 0.6 0.7 1.0 1.5 0.8 0.5 1.5 1.0 4.3 1.2 1.3 1.5 Curr EV (USD mn) Curr Stock perf. (%) D/E (x) 5D (0) 1 4 (0) (3) (1) (2) (4) 3 (4) (6) 3 4 2 2 (3) (2) (3) (2) (1) (7) (1) (6) 6 (4) (3) (10) 3M 1-Yr (4) (9) 27 11 (8) (12) (21) (27) (29) (22) (18) (10) (18) (19) (13) (16) (24) (9) 12 (19) (20) (8) (5) 0 (5) (6) (9) 15 (8) 58 41 (23) (2) (3) (31) (6) (39) 16 (24) (31) (7) (11) (6) (25) (9) 8 (8) (35) 13 (22) 54 (38) 34 (31) 10.8 7.3 14.1 9.5 6.2 3.1 43.6 21.6 17.6 18.5 11.4 13.5 12.1 23.2 16.7 12.4 10.7 NA 11.1 18.0 13.1 20.2 29.1 19.0 29.6 20.8 11.8 7.7 15.3 11.3 11.1 7.9 43.3 13.5 16.3 21.5 9.7 11.1 11.0 18.2 14.5 11.3 9.2 NA 9.8 18.6 12.5 18.3 29.5 19.7 26.7 19.6 13.4 9.3 15.9 13.9 12.9 10.3 43.3 16.9 17.6 22.2 11.1 12.9 12.1 19.3 15.6 12.3 10.0 NA 11.1 20.3 13.9 20.7 33.3 20.0 23.0 19.1 8.8 9.1 6.1 12.6 15.3 17.7 6.3 8.0 7.3 8.7 7.3 6.3 5.7 6.3 5.2 7.4 8.6 NA 6.0 4.6 5.8 5.0 9.0 5.5 3.0 5.2 6.9 6.9 5.1 8.8 6.8 5.7 5.4 11.1 6.8 6.0 7.9 7.0 6.0 6.0 5.0 6.9 7.5 NA 5.7 3.9 5.0 4.1 6.4 3.8 4.1 3.2 5.8 5.3 4.8 6.5 5.4 4.1 4.9 7.8 5.8 5.4 6.5 5.8 5.2 5.6 4.3 6.0 6.5 NA 4.8 4.9 4.9 3.5 5.9 4.1 4.0 2.9 13.3 25.2 12.2 41.0 111.1 (17.2) 10.0 17.8 11.1 (136.2) 15.9 14.7 11.3 8.8 8.4 19.8 19.4 23.3 21.0 10.5 10.0 10.7 9.3 11.3 4.9 5.6 11.4 16.3 8.4 15.7 14.9 15.8 8.2 29.9 11.4 10.1 14.0 14.9 15.7 8.6 7.5 19.4 13.1 16.1 17.6 9.2 10.9 7.8 9.2 6.5 4.2 3.4 8.0 9.8 7.3 9.5 10.9 7.8 7.6 19.3 8.8 7.9 10.0 9.4 10.7 8.0 6.2 13.6 9.9 11.9 10.2 8.3 8.9 7.4 11.2 6.4 3.1 3.4 0.8 1.9 1.5 1.0 1.8 1.4 3.5 1.4 1.2 1.3 0.9 0.8 1.0 1.1 1.0 0.9 1.2 NA 0.8 1.4 1.4 1.2 2.4 0.9 0.6 0.8 0.8 1.7 1.3 0.9 1.7 1.5 2.3 1.2 1.1 1.6 0.8 0.8 0.9 1.0 0.9 0.8 1.1 1.0 0.8 1.3 1.2 1.0 1.9 0.8 0.6 0.7 0.7 1.5 1.2 0.9 1.5 1.2 1.9 1.2 1.0 1.3 0.8 0.8 0.8 0.9 0.8 0.8 1.0 0.9 0.7 1.1 1.1 0.9 1.6 0.7 0.5 0.6 5.5 7.7 13.0 2.1 1.8 (9.2) 39.4 8.0 10.9 0.9 5.5 5.6 8.8 13.4 11.9 4.6 5.8 4.0 4.0 14.5 17.0 14.4 29.4 7.9 15.0 15.6 6.9 10.4 16.0 5.6 10.3 12.1 35.0 4.6 11.2 15.7 5.8 5.0 6.0 12.3 11.4 3.8 7.6 6.5 4.4 14.7 12.1 14.7 22.9 12.7 14.2 21.5 9.2 15.4 16.3 9.3 14.3 20.7 30.9 6.9 14.3 18.0 8.4 8.3 8.3 11.8 12.4 5.6 9.3 7.8 7.2 14.6 12.8 13.1 15.6 11.6 16.5 17.9 CY10/ FY11 OPM (%) CY11/ FY12E CY12/ FY13E EV/EBIDTA (x) CY10/ FY11 CY11/ FY12E CY12/ FY13E CY10/ FY11 P/E (x) CY11/ FY12E CY12/ FY13E CY10/ FY11 P/B (x) CY11/ FY12E CY12/ FY13E CY10/ FY11 ROE (%) CY11/ FY12E CY12/ FY13E
Source: Bloomberg, PINC Research Note: * EV-based valuation ratios and target price calculated by valuing capital WIP at appropriate discount to book value and VoI at fair value/ disc. to market value
12
Global peer comparison : Sesa Goa at attractive valuation

Region Mcap (USD mn) Iron ore - CFR China (USD/t) Vale SA Rio Tinto PLC BHP Billiton Ltd Anglo American PLC Cliffs Natural Resources Inc Sesa Goa Ltd * S America Britain Australia Britain United States India 182 157,150 138,158 223,159 62,024 12,364 5,191 186,319 148,983 223,886 72,755 12,510 3,239 0.4 0.2 0.3 0.4 0.4 0.1 Curr EV (USD mn) Curr Stock perf. (%) D/E (x) 5D 1 0 2 (1) 2 (2) (5) 3M 1-Yr 6 (6) 5 (4) (5) (8) 2 19 6 22 7 8 52 (29) 56.8 45.7 53.7 40.2 34.9 56.5 61.3 49.4 56.8 45.3 46.8 53.2 63.8 48.4 55.3 45.7 47.5 49.8 7.1 5.8 5.9 6.3 7.7 2.7 4.8 4.5 4.9 4.5 3.7 2.2 4.6 4.5 5.0 4.2 3.3 1.8 8.9 9.5 10.9 11.8 12.4 5.6 5.5 6.9 9.1 7.6 5.8 4.3 5.5 6.8 9.3 6.7 5.8 4.4 2.1 2.4 4.1 1.8 3.1 1.8 1.6 1.8 3.1 1.4 1.8 1.3 1.3 1.5 2.5 1.2 1.5 1.0 23.1 27.7 40.8 17.0 29.3 40.3 31.1 28.0 38.7 20.9 36.8 34.5 26.3 23.3 29.8 20.5 27.2 25.3 CY10/ FY11 OPM (%) CY11/ FY12E CY12/ FY13E EV/EBIDTA (x) CY10/ FY11 CY11/ FY12E CY12/ FY13E CY10/ FY11 P/E (x) CY11/ FY12E CY12/ FY13E CY10/ FY11 P/B (x) CY11/ FY12E CY12/ FY13E CY10/ FY11 ROE (%) CY11/ FY12E CY12/ FY13E
Source: Bloomberg, PINC Research Note: * EV-based valuation ratios and target price calculated by valuing capital WIP at book value
13
Steel valuation Through the cycles

Steel valuations closely co-related to benchmark HRC prices
JSW Steel EV/EBITDA 12 9 6 3 Apr-03 Jun-04 Aug-05 Oct-06 Dec-07 Feb-09 Apr-10 SAILEV/EBITDA HRC prices - RHS
(USD/t)
JSW Steel EV/EBITDA vs EBITDA/t

1y r fw d rolling EV/EBITDA(x ) - LHS 1,200 900 600 300 Jun-11 10.0 8.0 6.0 4.0 2.0 Jul-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 1y r fw d rolling EBITDA/t (Rs) - RHS 12,500 10,000 7,500 5,000 2,500 Jun-11
Source: Bloomberg, Company, PINC Research
Over the steel cycles, the valuations of steel companies tend to follow benchmark HRC prices. However, lately correlation with EBITDA/t has become more pronounced due to reduced profitability, despite high steel prices.
We expect steel prices to correct, but profitability to improve

PINC assumptions (USD/t) Benchmark HRC * Contract Iron ore Contract hard coking coal Steel EBITDA/t (Est) FY11 715 133 215 72 Current 807 167 330 3 FY12E 780 160 295 20 FY13E 735 140 250 49
We expect improvement in steel valuations as profitability increases, despite a correction in steel prices.
Source: Bloomberg, PINC Research: * Note: We take world HRC price (Bloomberg ticker SBBSTRWF Index) as Benchmark price
14
Steel Industry
Global: Macro indicators for steel industry Rising raw material cost Big concern for steelmaking China: Kingpin of steel growth until now. What next? Developed economies: Robust growth in 2010 on easy liquidity and low base; is this sustainable? India: High demand potential; Supply faces regulatory hurdles!
15
Steel scenario: Global

World: Steel production and capacity utilisation
1,750 1,400 1,050 80% 700 350 Aug '10 Sept '10 Dec '10 Jan '11 Oct '10 Mar '10 Apr '10 Feb '11 Feb '10 May '10 Nov '10 Mar '11 Jan '10 Jun '10 Apr '11 2004 2005 2006 2007 2008 2009 Jul '10 May'11
Steel Price Vs capacity utilisation (CU)

% CU (RHS) 100% 90%
(USD/t)
World steel output annualised (mnt)
World 1,100 1,000 900 800
China
Europe
US
Global CU (%) RHS 86% 82% 78% 74% 70%
70% 60%
700 600 500 Jan-10 May -10 Sep-10 Jan-11 Jun-11
Source: Bloomberg, WSA, PINC Research; Note: Annualized production for Jan-Aug10
Source: Bloomberg, WSA, PINC Research
Production PMI falling towards contraction levels

80 US China
Recovering IIP globally (% YoY)

30.0 20.0 10.0 India China US
65
50
(10.0) (20.0)
Aug-08 Sep-09 Mar-09 Jan-08 Oct-10 Apr-10
35
Feb-06
Mar-07
Mar-08
Apr-09
Apr-10
May -11
May-11
20 Jan-05
16
Global steel production

Steel production summary
(mn tonnes) Asia - China - India - Japan - Other Asia EU N America CIS S America Others World
Source: WSA, Bloomberg, Pinc Research
May-11 82.7 60.2 5.9 5.9 10.7 19.4 10.1 9.6 4.5 3.5 129.9
May-10 78.1 56.1 5.5 9.7 6.7 19.4 10.0 9.6 3.7 3.8 124.6
YoY (%) 5.8 7.3 6.3 (39.8) 58.9 0.3 0.9 0.5 21.6 (6.5) 4.3
CY11-YTD 404 293 29 42 40 93 49 47 20 18 631
CY10-YTD 374 269 27 45 33 87 47 44 18 18 588
YoY (%) 8.1 9.0 7.8 (7.1) 21.5 6.5 4.7 6.1 15.4 (2.0) 7.3
CY10 881 626 64 110 81 206 112 108 44 44 1,395
CY09 775 566 58 88 63 166 82 96 38 40 1,197
YoY (%) 13.7 10.6 9.7 25.2 29.8 24.0 36.5 12.3 16.0 9.1 16.5
CY10 share (%) 63.2 44.9 4.6 7.9 5.8 14.8 8.0 7.7 3.1 3.2 100.0
CY08 747 499 57 119 72 228 126 113 48 42 1,304
YoY (%) 3.7 13.5 2.9 (26.3) (13.4) (27.0) (34.8) (15.0) (21.0) (4.3) (8.2)
Steel: China and World ex-China

(mn tonnes) China World ex-China World
Source: WSA, Bloomberg, Pinc Research
May-11 60.2 69.6 129.9
May-10 56.1 68.4 124.6
YoY (%) 7.3 1.7 4.3
CY11-YTD 292.9 338.1 631
CY10-YTD 268.6 319.2 588
YoY (%) 9.0 5.9 7.3
CY10 626.5 768.8 1,395
CY09 566.4 631.0 1,197
YoY (%) 10.6 21.8 16.5
CY10 share (%) 44.9 55.1 100.0
CY08 499.1 804.6 1,304
YoY (%) 13.5 (21.6) (8.2)
17
Rising raw material cost Big concern for steelmaking
18
Rising raw material cost Key concern for steelmakers

Despite resistance by steel producers, raw material suppliers have been able to abandon 40-year old annual contract system to move to a quarterly contract pricing, to benefit from strong spot prices. This move has exacerbated steel price volatility, as raw material cost is aligned frequently to volatile spot prices, benefiting resource miners in the process. To complicate things further, BHP Billiton has been trying to enforce a move to monthly contract pricing, which could increase steelmaking cost further.
Iron ore: Contract price seen higher on strong spot prices
Iron Ore - CFR China
(USD/t)
Iron ore - Contract prices
240 180 120 60
0 Jan-05
Dec-05
Nov -06
Oct-07
Sep-08
Aug-09
Jul-10
Jun-11
Source: Bloomberg, Industry, PINC Research
RM cost exceed pre-crisis levels, steel prices yet to catch up

USD/t
Coking coal: Q1FY12 contract price up 47% QoQ , 65% YoY

(USD/t)
300 250 200
HRC
Iron ore
Coking coal
350 275
Spot price
Contract
200 150 100 50

Dec-08 Sep-07 Oct-10 Apr-08 Mar-10 Jan-07 Jun-11 Jul-09
125 50
Sep-06 Sep-08 May-07 May-09 Sep-10 Jan-06 Jan-08 Jan-10 May-11
Source: Bloomberg, PINC Research; Spot price - Shanxi as collected by McCloskey/Xinhua
Source: Bloomberg, PINC Research; Spot price - Shanxi as collected by McCloskey/Xinhua
19
Coking coal impacted by floods in Australia

Floods in Australia impacted the supply of coking coal globally as Australia accounts for >80% of global sea-borne trade Australian coking coal exports declined 24% YoY in Jan-Apr11 Resulting supply glut led to surging of spot prices and subsequently higher contract prices (USD330/t and USD315/t in Q1FY12 and Q2FY12 respectively). Although the impact of flood has now receded (Rio Tinto has lifted force majeure from all its mines), workers strike at BHP Billiton may keep the supply tight and avert a correction in coking coal prices. We assume coking coal contract prices of USD295/t and USD250/t for FY12E and FY13E respectively.
Impact of floods in Australia
No impact of floods Major iron ore deposits
Maximum impact of floods Major coking coal deposits Accounts for ~83% of Australias coking coal exports
Moderate impact of floods Major non- coking coal deposits Accounts for ~17% of Australias coking coal exports
Share of Australia in global sea-borne trade of coking coal

Australia coking coal ex port (mnt) 16 12 8 4 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Share in global seaborne trade (%) - RHS 95 90 85 80 75
Coking coal supply impacted by floods, leading to a spurt in spot prices

Australia coking coal ex port (mnt) 16 12 8 4 Jan-09 May -09 Sep-09 Jan-10 May -10 Sep-10 Jan-11 May -11 Coking coal spot price (USD/t) - RHS 400 300 200 100 -
Source: Bloomberg, Industry, PINC Research; Spot price - Shanxi as collected by McCloskey/Xinhua
20
Miners benefit at the cost of steelmakers

Global: Steel OPM improves in Q1CY11 on higher steel prices (%)
16 12 8 4 Q1CY09 (4)
Source: Industry, Bloomberg, Capitaline, PINC Research
Global: Mining OPM on an upswing benefiting from higher resource prices (%)
50 40 30
Impact of higher RM prices to come in Q2CY11
20 10
Q2CY09
Q3CY09
Q4CY09
Q1CY10
Q2CY10
Q3CY10
Q4CY10
Q1CY11
H1CY09 H2CY09 H1CY10 H2CY10
India: Steel margin improves on higher steel prices, but is it sustainable?

1,200 900 600 300 Realisation (USD/t) EBITDA (USD/t) OPM (%) - RHS 35 30 25 20 15
India: Integrated operations bigger beneficiary of higher steel prices

60 50 40 30 20 10 Industry SAIL Tata Steel India JSW Steel JSPL (S) OPM (%)
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q4FY11
21
Steel profitability unsustainably low; improvement likely

Q1FY12 contract prices for iron ore, coking coal has increased by 20% and 47% QoQ to USD167/t, USD330/t respectively.
This, along with rising energy cost, would result in increase of >USD150/t in steelmaking cost on complete pass through. Q2FY12 contract price have also settled at higher level (coking coal at USD315/t and iron ore at USD170/t)
Steel margin unsustainably low in current quarter (Q1FY12), mainly for China
(USD/t) 1,000 900 800
CIS, India, S America
HRC - CoP (Q1FY12)
HRC Price (Current)
HRC - CoP (2010)
China incurring losses at operating levels Japan, Europe China
Steel prices in US and EU increased 20-40% since Nov10 (USD130-240/t), effectively passing on the increase in input cost. However, steel prices (export) in China could not sustain at higher levels and have declined USD60/t since mid-Feb11.
We estimate EBITDA loss of ~USD50-60/t for Chinese steelmakers.
700 600 500

0%
Cumulative Capacity
100%
We believe steel profitability is unsustainably low (particularly for China) and expect gradual improvement in H2FY12 and FY13.
While steel producers, at large, would benefit from improvement in profitability, integration remains the key to super-normal profitability
We expect steel prices to correct, but profitability to improve
PINC assumptions (USD/t) Benchmark HRC * Contract Iron ore Contract hard coking coal Steel EBITDA/t (Est) FY11 715 133 215 72 Current 807 167 330 3 FY12E 780 160 295 20 FY13E 735 140
Low level of profitability unsustainable, improvement likely

1,200 900 HRC (USD/t) - LHS Gross Profit (USD/t) - RHS 750 550
600 300 Dec-04 Dec-07 Dec-10 Sep-05 Mar-07 Sep-08 Mar-10 Sep-11 Jun-06 Jun-09
350 150 (50)
250 49
Source: Bloomberg, PINC Research: * Note: We take world HRC price (Bloomberg ticker SBBSTRWF Index) as Benchmark price
Source: Bloomberg, PINC Research; Note: Gross margin = steel price less RM cost (Iron ore + coking coal + 5% of steel prices)
22
China: Kingpin of steel growth until now. What next?
23
China: Growth of steel industry

China: Share in global steel industry grew from 17% in CY01 to 45% in CY10
1,800 1,500 1,200 900 600 300 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Mar-01 Apr-07 May-08 May-09 May-10 May-11 China (mnt - ann.) RoW (mnt - ann.) China's share (%) - RHS 60.0 50.0 40.0 30.0 823 20.0 10.0 600 300 World CY01
China: Accounts for 85% of rise in global steel output (CY01-CY10) mn tonnes
1,500 1,200 900 1,394 China Asia Ex China US, EU CIS S America Others World CY10 483 62 (4) 10 6 13
Source: Bloomberg, WSA, PINC Research; Note: Monthly production numbers annualised
China: Steel capacity, output and capacity utilisation (CU)

1,000 800 600 400 200 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 Capacity (mnt) Output (mnt) CU (%) - RHS 100
But on higher dependence on ore import

800 Iron ore imports (mnt) Import depend (%) - RHS 80
Value-added focus: Share of flats rising

100 80 Longs (%) Flats (%)
80
600 60
60 40 20 400 200 CY04 CY05 CY06 CY07 CY08 CY09 CY10 40 20 -
60 40 20 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10
Source: Bloomberg, Industry, India Steel Market Conference, PINC Research
Source: India Steel Market Conference, PINC Research
24
China: Steel demand drivers

China: Steel consumption grew at a CAGR of 15% during CY01-CY10
Steel demand (mnt) 600 480 360 240 120 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 Steel demand grow th (%) - RHS 30 24 18 12 6 20.0 16.0 12.0 8.0 4.0 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 9.6 8.3 9.1 10.0 10.1 11.3 16.7 12.7 12.7 14.2 9.6 9.2 10.3
Driven by robust growth in GDP and Industrial Production

GDP grow th (%) 16.2 15.9 16.4 IP grow th (%) 15.9 12.6 12.5
14.5
Source: WSA, Industry, PINC Research
China: End-use of steel driven by construction

Automobiles Machinery 13% 8% Others 16%
China: Investments in Fixed assets continues unabated

China Urban FAI (USD bn) 6,000 5,000 4,000 3,000 2,000 1,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Ann 16 8 YoY (%) - RHS 40 32 24
China: Growth in automobile demand also robust

China Auto production (mn units) 20 16 12 8 4 YoY (%) - RHS 50 40 30 20 10 -
Construction 63%
Source: CRISIL, PINC Research
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
Source: NBS, Bloomberg, PINC Research
Source: Bloomberg, Wikipedia, PINC Research
CY10
25
China: Where is the steel industry headed?

Inflation concerns Rate tightening could slow down GDP growth
Inflation in May11 at 5.5% reached 34-month high. China gradually increased reserve requirements by 550bps since Jan10 and interest rate by 100bps since Oct10 to curb inflation. IMF expects Chinas GDP to grow at 9.6% in 2011, at a slower rate compared to 10.3% in 2010, but still high.
China: Rate tightening to curb inflation could slow down GDP growth rate
Reserv e requirement (%) 22 20 18 16 14 Inflation (%) - RHS PBOC Interest rate (%) - RHS 7.5 5.0 2.5 (2.5)
12th five-year plan Focus on increasing domestic consumption

GDP growth target reduced to 7% (11th plan 7.5%; actual 11%). Urbanisation to increase by 4% to 51.5%. Energy consumption per unit of GDP to be cut by 16%.
Sep-09
Sep-10
Mar-09
Mar-10
Nov-09
May-09
May-10
Nov-10
Mar-11
Jan-09
Jan-10
Jan-11
Jul-09
Jul-10
Consolidation in the Chinese steel industry likely

China is working toward closing small and inefficient steel mills, which could impact 10-15% of ~770 mnt capacity target to cut 26.3mnt of obsolete steelmaking capacity in 2011 China intends to have 60% of domestic steel capacity in the hands of 10 largest steel makers by 2015 & 70% by 2020 vs. 48% as of 2010. Recently, Chinese officials have expressed their intent to reduce export to 5% of output from current 7% Local govt. is not encouraging steel capacity expansion under the pressure of policy of reducing energy emission.
Source: Industry, Bloomberg, PINC Research
China Steel output and Inventory (mn tonnes)

75.0 60.0 45.0 30.0 15.0 0.0 Steel output Steel inv entory - RHS 10 8 6 4 2 -
Steel output reach all time high after curtailment in H2CY10 to meet energy efficiency target
China curtailed steel output during H2CY10 to meet energy efficiency target for 11th five-year plan ending 2010
Output revived in CY11 YTD to reach all-time high levels. We expect output to decline in Q3CY11 given Chinas efforts on energy saving and high cost RM impacting profitability.
Aug-07
Mar-07
Nov-08
Dec-10
Oct-06
Apr-09
Sep-09
Feb-10
Jan-08
Jun-08
Jul-10
May-11
May-11
26
China: Miles to go before the dragon sleeps

China: Focus shifting towards domestic consumption
With focus on domestic consumption, steel intensity per unit of GDP is likely to decline.
Focus on export oriented coastal China until now (Steel consumption per capita)
FAI in hitherto lagging. Western and Central China growing faster than Coastal China, resulting in rising share in national FAI
Although decline in steel intensity could reduce steel demand growth rate going forward, we believe that increasing FAI in the western and central regions would keep demand for metals at high level.
World Steel Association (WSA) expects growth in Chinas steel demand to slow down to 5% in 2011 and 2012 each.
We believe it may turn out to be conservative.
Source: Indian Steel markets conference, PINC Research
China: Steel intensity of GDP growth to decline (tonnes/USD mn of GDP)

200
FAI in Western and Central China Higher growth and rising share
Share - CY09 (%) 50 Share - CY10 (%) CY10 grow th in FAI (%) - RHS 28 26 24 20 10 Western Central Coastal 22 20
180 40 160 30 140 120 100
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
Source: Indian Steel Markets Conference, WSA, Bloomberg, PINC Research
CY10
Source: National Bureau of Statistics China, Indian Steel Markets Conference, PINC Research
27
China: Steel exports and RM imports likely to decline

Chinas steel exports grew 9% YoY during Jan-May11 to 18.1mnt on record output, re-kindling threats of cheap imports
However, we believe that lower steel profitability (on high cost RMs) would force Chinese steelmakers to reduce output in Q3CY11. With Chinas focus shifting to exports of end-user products (power plants, automobiles), we dont see exports of steel to remain high.
China: Iron ore imports and domestic production (mn tonnes)
200 160 120 60 80 40 45 30 Domestic Iron ore (30% Fe) Iron ore import Share of import (%) - RHS 90 75
Iron ore and coal: Focus on increasing domestic output as international prices become dearer
China has been aggressively investing to acquire/develop resources Coking coal import has declined since Jan11 Iron ore import dependence may decline going forward
Sep-08
Sep-09
Sep-10
Mar-08
Mar-09
Mar-10
Nov-08
Nov-09
May-08
May-09
May-10
Nov-10
Mar-11
Jan-09
Jan-10
Jan-11
Jul-08
Jul-09
Jul-10
China steel exports (mn tonnes): Is threat of exports from China re-surfacing?
60 50 40 30 20 10 -
China: Domestic coking coal consumption (derived) and imports (mn tonnes)
50.0 45.0 40.0 35.0 30.0 Domestic coal consumption China coking coal import - RHS 5.0 4.0 3.0 2.0 1.0 -
CY04
CY05
CY06
CY07
CY08
CY09
CY10
Jan-May'11
25.0
- Ann
Sep-08
Sep-09
Sep-10
Jan-08
Jan-09
Jan-10
May-08
May-09
May-10
Jan-11
Source: Bloomberg, China Customs, PINC Research
May-11
May-11
28
Developed economies: Dead cat bounce in 2010?
29
Developed economies: Dead cat bounce in 2010?

Steel output in developed economies (US, Japan and EU) grew 27% YoY in 2010 on a low base (decline of 28% YoY in 2009). Yet, it is 20% below the peak output seen in May 2008 before the global financial crisis (GFC). Although a prolonged recession has been averted in developed world by injecting easy liquidity and bailouts, problems galore.
Massive debt crisis situation in Europe threatening sovereign default Economic data from US mixed as QE2 nearing end Natural disasters: Tsunami in Japan, unprecedented flood in Australia Political uncertainty in MENA
Developed economies lead steel output growth in CY10 on low base (YoY %)
40 CY09 CY10
20
(20)
(40) China India Japan EU N America World
Source: WSA, Bloomberg, JPC, PINC Research
Developed economies IIP growth (%)

40 20 (20) (40)
Oct-08 Oct-09 Oct-10 Apr-08 Apr-09 Apr-10 Jan-08 Jan-09 Jan-10 Jan-11 Apr-11 Jul-08 Jul-09 Jul-10
Industrial output in Japan impacted post Tsunami
Steel output and capacity utilisation still ~20% below peak seen before GFC (May08)
UK Germany Japan 500 400 300 200 100 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
US
Steel output (mn tpa)
CU (%) - RHS
100 80 60 40 20 -
Source: WSA, Bloomberg, PINC Research; Note: We have considered data for US, Japan and EU for developed economies
30
Japan Disrupted by Tsunami

Japan steel output and YoY growth: May output at 26 month low (Tsunami impact)
12.0 10.0 8.0 6.0 4.0 2.0 0.0
Sep-09 Sep-10 Jan-09 Jan-10 Jan-11 May-09 May-10 May-11
Japan: Steel export declines post Tsunami (mn tonnes)

75 50 25 0 -25 -50
5.0 4.0 3.0 2.0 1.0 0.0 Oct-09 Oct-10 Apr-09 Apr-10 Jan-09 Jan-10 Jan-11 Apr-11 60 48 36 24 12 Oct-09 Oct-10 Apr-10 Jan-10 Jan-11 Apr-11 Jul-09 Jul-10 Jul-09 Jul-10
Japan steel output (mnt)
YoY grow th (%) - RHS
Source: Bloomberg, WSA, PINC Research; Note: Annualized production for Jan-Aug10
Japan: Iron ore and concentrate imports (mn tonnes)

12.5 10.0 7.5 5.0 2.5 0.0 Oct-09 Oct-10 Apr-09 Apr-10 Jan-09 Jan-10 Jan-11 Apr-11 Jul-09 Jul-10
Japan: Coking coal import decline in Apr11 but rise as a share of global trade
7.5 6.0 4.5 3.0 1.5 Japan coking coal imports (mnt) Share of global seaborne trade (%) - RHS
However, reconstruction of the economy could revive demand in 2012 for metals, mainly steel
31
India: High demand potential; Supply faces regulatory hurdles!

Expect India to turn net exporter of steel in FY13E
32
India: Steel demand supply dynamics

Indias steel consumption has grown at a CAGR of 8.9% during FY01-FY11, driven by robust GDP and IIP growth However, domestic supply of steel languished at 7.9% CAGR during the same period
Indias steel demand has exceeded domestic supply since FY08
India: Steel consumption growth on robust GDP and IIP growth
20 16 12 8 4 (4) (8) FY01 FY02 GDP grow th (%) IIP grow th (%) Steel demand grow th (%)
Consequently, India turned net importer of steel since FY08 But are we seeing a reversal in trend?
Steel net import in India has declined since Aug10, with reversal in trade during Nov10-Jan11 (net exporter) Domestic price at a discount to landed cost
Based on regression, steel demand growth (%) = (2.5) + (0.2)*GDP growth (%) + 1.7*IIP growth (%) Correlation with IIP growth: 0.77, GDP growth: 0.35
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
Source: JPC, CSO, Bloomberg, Indian Steel Markets Conference, PINC Research
India: Steel imports (net) decline; Domestic price at a discount to landed

1,200 900 600 300 (300)
Govt. capped price hike in India
India: Turns net importer of steel since FY08 as demand outgrew supply (mnt)
75 50 25 (25) (50) FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 75 60 45 30 15 Production Consumption Net imports (RHS) 6.0 4.0 2.0 (2.0) (4.0)
India net steel import (kt)
Price prem. to landed cost (%) - RHS
Growth premium subsequent to GFC
Mar-07 Aug-07 Jan-08 Jun-08 Nov -08 Apr-09 Sep-09 Feb-10

Source: JPC, CRISIL, PINC Research
Jul-10 Dec-10 May -11
Source: JPC, Indian Steel Markets Conference, PINC Research
33
India: Demand likely to grow at double-digit CAGR

In India, growth led by infra investment and growing consumerism (auto, consumer durables, real estate) are +ve for steel demand
Steel demand is expected to grow at a CAGR of 10-12% in an investment-led growth phase, to sustain GDP growth at 8-9%. Further, steel intensity of investment in India is one of the lowest globally as seen by cement/steel consumption Rise in steel intensity would provide further impetus to steel demand We expect steel demand to reach 110mnt by FY16 (65mnt in FY11)
India: Growth across user industries to drive demand for steel
Mfg (2%) C Durables (3%) Oil & gas (5%) Construction (35%) Pipes (12%)
Key themes to drive steel demand: Rising urbanisation, growth in middle class to drive consumption, investment in infrastructure WSA expects Indias steel demand to grow at 13.3% in CY11 and 14.3% in CY12 fastest among major economies
India: Vehicle output Double-digit growth despite high base
600 525 450 375 300 225 150 75 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May -11 20 10 Dec09 125% YoY on low base
Others (21%)
Capital goods (8%) Automobiles (13%) Railw ay s (3%)
India: Investment in Infrastructure (Rs bn)

50 40 30
3,500 2,800 2,100 1,400 700 FY12E FY13E FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
% 13.3
India: Intensity of steel use low (cement/ steel use high)

CY09 4.0 CY10
Passenger v ehilcle output ('000s)
YoY grow th (%) - RHS
Infrastructure
Industrial
CAG
3.0 2.0 1.0 Global USA Japan China India
Source: SIAM, PINC Research
Source: WSA, USGS, PINC Research
34
However, demand concerns in the near term

Although Indias long-term growth potential remains intact, steel demand has slowed down in last one year
Indias steel demand has grown at 7.4% since Jul10 mainly on slow offtake from construction and capital goods (43% of steel demand) Demand in Apr11 and May11 has slowed down to 1.8% YoY and 2.5% YoY respectively.
India: Steel demand growth showing near-term slowdown
40 30 20 10 (10) Dec-10 Oct-10 Apr-10 Aug-10 Sep-10 May-10 Nov-10 Mar-11 Feb-11 Jun-10 Jan-11 Apr-11 Jul-10 Steel demand grow th YoY (%)
Raging inflation and consequent monetary tightening also does not augur well for steel demand
Aggressive monetary tightening RBI has increased repo and reverse repo rates by 275bps to 7.5% and 325bps to 6.5% respectively since Mar10 to curb raging inflation Despite this, May11 inflation at 9.1% continues to remain high
Source: JPC, PINC Research
Government in-action and lack of policy initiatives are further overhang on demand growth Nevertheless, we remain optimistic that steel demand would improve from H2FY12 onwards
We have assumed steel demand growth of 10% for FY12E and 12% FY13E onwards
India: Inflation concern and interest rate tightening could impact demand further
WPI Inflation (%) 12.0 9.0 6.0 3.0 0.0 -3.0 Jan-09 May -09 Sep-09 Jan-10 May -10 Sep-10 Jan-11 May -11 Rev erse Repo rate (%) Repo rate (%)
Source: Bloomberg, Trading Economies, Industry, PINC Research
35
Supply: Greenfield capacity face regulatory hurdles

To meet the growing demand for steel in India, many producers, local as well as global, have set their eyes on adding >250mn tonnes capacity in India by 2020.
Resource rich states of Odisha, Jharkhand, Chhattisgarh in focus Companies: SAIL, Tata Steel, JSW Steel, JSPL, POSCO, Arcelor Mittal; Japanese cos tapping the JV and technical collaboration route
India: Significant steel capacity addition planned (as per MoUs signed by states)
Planned capacity (mntpa) 120 90 60 30 Odisha Jharkhand Chattisgarh West Bengal Other States # of MoUs
However, execution of greenfield projects remains a big concern:

Land acquisition, forest and environmental clearances Raw material security: Mine allocation not smooth 26% tax on mining profit as proposed in MMDRA, if implemented, could be additional deterrent to invest in setting up steel capacity Logistics: Insufficient infra renders material movement slow and costly Technological: High dependence on induction furnace route, which could see consolidation in the coming decade
Source: FY10 annual report Ministry of Steel, PINC Research
India: However, actual commissioning to be slow due to regulatory hurdles

Tata Steel 200 160 120 80 40 0 Current
Source: Industry, Indian Steel Markets Conference, PINC Research
Granting approval to POSCOs Odisha project a big development in speeding regulatory process to set up mega steel projects
However, project stuck in land acquisition amidst protests Further, captive mine allotment and clearance process still dubious
SAIL
JSW Steel
Essar Steel
JSPL
RINL
Bhushan 160.0
Others
India's finished steel capacity (mn tpa)
100.6 73.0
We believe that significant greenfield steel capacity addition in India will slowdown post completion of current leg of brownfield expansions by FY13
FY13
FY16
36
Nevertheless, India to turn net exporter in FY13E

Although many greenfield projects in India are stuck in regulatory hurdles, brownfield expansion projects by Indian incumbents (Tata Steel, SAIL, JSW, et al) to provide supply growth in the next 2-3 years
We expect Indian steel output to grow at 15.1% CAGR over FY1113E to 82mn tonnes, led by ~24mntpa of new capacity addition Capacity additions by FY13E: Tata 2.9mntpa, SAIL 8mntpa, JSW 2mntpa, JSPL and RINL 3mntpa each among others
India: Steel supply growth to exceed demand growth on capacity expansion (mn tonnes) Capacity Steel output YoY (%) Steel demand YoY (%) Net Import FY07 56.5 47.1 5.8% 46.8 5.6% (0.3) FY08 58.0 50.2 6.5% 52.1 11.4% 2.0 FY09 60.0 49.8 -0.7% 51.9 -0.5% 2.0 FY10 66.0 55.2 10.8% 59.3 14.4% 4.1 FY11 73.0 62.0 12.3% 65.2 9.9% 3.2 FY12E 79.9 71.1 14.7% 71.7 10.0% 0.6 FY13E 96.9 82.1 15.5% 80.3 12.0% (1.8)
Hence, despite double digit demand growth (10% for FY12E and 12% forFY13E vs. 13.3% for CY11 & 14.3% for CY12 projected by WSA), supply growth is expected to exceed demand growth
Consequently, we expect Indias import dependence to decline in FY12E and India to turn net exporter of steel in FY13E.
Source: Indian Steel Markets Conference, Industry, PINC Research
India: We expect India to turn net exporter of steel by FY13E (mn tonnes)
4.5 3.0
We believe this would put pressure on domestic pricing, forcing producers to price steel at a discount to landed cost. Key success factors in such a competitive environment are:
Cost focus mainly through resource integration Differentiation through value added products Distribution strength in domestic as well as export markets Balance sheet strength: Manageable financial leverage
Net steel import
1.5 (1.5) (3.0) FY12E FY13E FY07 FY08 FY09 FY10 FY11
Net steel export
Source: Industry, Indian Steel Markets Conference, PINC Research
37
India: Steel prices and profitability

Steel prices in India have risen, broadly in line with landed cost
The price premium seen in 2009 and 2010 has waned so much so that domestic prices were at a discount to landed cost recently as slow demand pick-up from the construction industry led to a reduced steel demand growth during H2FY11.
India: Domestic prices in line with landed cost
84,000 72,000 60,000 48,000 36,000 24,000 12,000 May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 Q4FY11 Domestic HRC Price (Rs/t) CIS HRC landed cost (Rs/t)
Despite increased prices, steel profitability has declined on steeper hike in raw material cost, mainly imported coking coal
Integrated producers have benefited from higher steel prices, as access to captive resources kept input cost low
We expect domestic steel prices to be aligned tightly with landed cost, albeit with a bias towards a discount, as domestic supply of steel rises faster than demand, led by capacity expansions.
We expect Indias import dependence to decline in FY12E and India to turn net exporter of steel in FY13E
India: Despite decline in steel profitability, integrated producers benefit

60 50 40 30 20 10 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Industry SAIL Tata Steel India JSW Steel JSPL (S) OPM (%)
Although we expect correction in steel prices in H2FY12 and FY13, we believe that steel profitability would improve on a steeper decline in raw material prices (iron ore and coking coal)
Access to captive raw materials key to super-normal profitability
Source: Company, CRISIL, PINC Research
38
India: Scope for operational improvements

Despite sufficient capacity, steel output in India has been unable to grow at the same pace as demand owing to
High dependence on low technology EAF/IF route Operational inefficiencies in the form of high raw material usage per tonne of steel production further impacts steel output in India
India: Dependence on EAF/IF route high; consolidation likely
75 60 45 30 15 2003 2004 2005 2006 2007 2008 2009 BF EAF/IF OHF Share of EAF/IF (%) - RHS 75 60 45 30 15 -
We believe that these concerns would ease going forward as

Most of the incremental capacity is coming through the BF/BOF route Increased focus on managing cost and technological tie-ups with Japanese steel companies would aid in improving RM consumption
Explosive growth of retail outlets across India by - Reaching to the last mile customer by all leading steel makers of the nation
Steel/ capita in rural India at 13kg vs 57kg for India, ~200kg world
Input: RM usage per tonne of steel high for Indian steel companies (CY09/ FY10)
India av g. 2.00 1.75 1.50 1.25 1.00 0.75 0.50 Iron ore Coking coal + PCI Tata Steel SAIL JSW Steel Arcelor Mittal China
Source: WSA, Industry, Bloomberg, PINC Research
India steel CU historically low due to high share of EAF/IF route

Capacity (mn tpa) 100 80 60 80 40 20 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 70 60 Steel output (mn tpa) CU (%) - RHS 100 90
Source: Industry, Company, PINC Research; Note: India avg. is the average of Tata Steel India, SAIL, JSW Steel
Source: WSA, Industry, PINC Research
39
Indias steel Industry - Conclusion

There are many concerns facing steel industry in India Near term demand outlook weak on rising interest rate and slow offtake from construction and capital goods Likely oversupply on brownfield capacity addition leading to India turning net exporter in FY13E High raw material cost putting pressure on margin Proposed 26% tax on mining profit However, we expect improvement from H2FY12 onwards Demand potential remains intact on high requirement for investment in infra, rising urbanisation and consumerism Capacity addition to slow-down post FY13 as greenfield capacity additions impacted by regulatory hurdles We expect easing of raw material supply resulting in improvement in steel profitability from H2FY12 onwards Focus on technology to result in further efficiency gains Valuation attractive: We believe that stock prices factor in the concerns while underscoring the likely improvement BSE Metal index and ferrous stocks in our coverage have underperformed Sensex by 6.5% in last one year Ferrous stocks in our coverage universe are trading at 1yr forward EV/EBITDA of 4.2x, below avg. of 4.8x
Relative performance: BSE Metal and ferrous stocks have underperformed Sensex
Sensex 120 115 110 105 100 95 90 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 BSE Metl PINC ferrous cov erage
Source: Bloomberg, PINC Research; Note: Indexed to 100 as on 22/06/2010; PINC Coverage is market-cap weighted index of ferrous companies in PINC universe: Tata Steel, SAIL, JSW Steel, Sesa Goa, Bhushan Steel, Monnet Ispat, Usha Martin, Godawari Power
Valuation attractive: Our ferrous universe trading at 4.2x one-year forward EV/EBITDA
EV/EBITDA 9.0 7.5 6.0 4.5 3.0 1.5 Apr-06 Av g+1std Av . EV/EBITDA Av g-1std
Jul-07
Oct-08
Feb-10
Jun-11
40
Company section
Large Caps Tata Steel: Near-term concerns on higher RM cost for TSE; Fundamental improvements from H2FY12 onwards (capacity expansion, RM integration) SAIL: Performance to improve on revival of demand and higher steel prices while captive iron ore result in margin expansion. Strong balance sheet puts the company in good stead to undertake expansion projects providing volume growth FY12E onwards. JSW Steel: Best volume growth profile in India, partnership with JFE +ve. Steel margins to improve over FY12-13E led easing RM supply constraints. However, lack of captive raw materials exposes to high raw material cost Sesa Goa: To benefit from volume growth on revival of exports from Karnataka post monsoon, 50%+ OPM on better realizations despite increasing cost, leading to strong operating cash flow. Valuation factors in many concerns. Mid Cap Steel: Focus on vertical and resource integration to improve profitability; valuation attractive BUY Godawari Power, Monnet Ispat HOLD Usha Martin: Concerns on underperformance and lack of margin expansion leading to RoE contraction despite full integration SELL Bhushan Steel: Higher interest and depreciation to result in FY12E EPS decline despite higher volumes leading to growth in operating profit; High financial leverage and expensive valuation additional concerns
41
Tata Steel
Company Update
CMP: Rs558 Target Price: Rs713
Reco: BUY Upside: 28%

Near-term concerns, fundamental improvements
Tata Steel 720 640 560 480 400 Jun-10 BSE (Rebased)
Financial Summary (Consolidated)

Key Financials (Rs mn) Net Rev enue YoY Gr. (%) Op. Profit OPM (%) Adj. Net Profit YoY Gr. (%) Dil. EPS (Rs) ROCE (%) RoE (%) PER (x ) P/BV (x ) EV/EBDITA (x ) FY09 1,473,293 12.0 181,277 12.3 90,454 50.4 104.1 13.7 26.4 4.4 1.3 4.3 FY10 1,023,931 (30.5) 80,427 7.9 (6,430) (6.8) (2.2) 1.7 9.6 FY11 1,187,531 16.0 155,235 13.1 56,869 55.7 8.3 17.0 10.0 1.4 5.8 FY12E 1,211,085 2.0 151,886 12.5 53,118 (6.6) 51.4 7.1 12.1 10.9 1.2 5.0 FY13E 1,232,271 1.7 171,873 13.9 64,812 22.0 62.7 8.6 12.8 8.9 1.1 4.9
Sep-10
Dec-10
Mar-11
Jun-11
Key Stock Data Market cap (Rs mn) BV(Rs/share) Shares O/S (F.V. Rs10) Free Float (%) 6-mth av g trade v alue(Rs mn) 52 w eek High/Low Bloomberg Code Reuters Code
Shareholding Pattern
570,045 388 1,022 mn 69.4 3,429 Rs714/449 TATA IN TISC.BO
Source: CLine, PINC Research
Promoter 30%
Public 26% Other Institution 26%
FII 18%
Source: Company, PINC Research; Note: EV based valuation ratios adjusted ffor CWIP at BV
bikash.bhalotia@pinc.co.in Mar. 24, 2011 June 22, 2011
42
Tata Steel India: Strong fundamentals support growth

Tata Steel India (TSI): One of the lowest-cost producers of steel globally on 100% captive iron ore, ~50% coal
To benefit from higher steel prices, as cost hike remains subdued due to access to captive resources providing security and low cost We expect TSI to report globally highest EBITDA/t of USD416 and USD362 in FY12E and FY13E respectively
Expansion at Jamshedpur to provide volume growth, offset impact of EBITDA/t contraction
Sales v olume - TSI (mnt) 10.0 8.0 6.0 350 4.0 2.0 FY08
TSI EBITDA (USD/tonne) - RHS 450 400
Brownfield expansion of 2.9mnt by Q4FY12 to result in volume CAGR of 13% for TSI over FY11-FY13E
Rising volume share (31% in FY13E vs. 27% in FY11) of highly profitable Indian operation to help in sustaining consolidated margin despite declining profitability of TSE on higher RM prices To offset impact of margin contraction we expect TSI EBITDA to grow 3% YoY to Rs132bn in FY13E despite lower EBITDA/t
TSI: Highest OPM globally as operating cost low on integration benefits (CY10)
1,250 1,000 750 500 250 US Steel NLMK JFE Severstal Baoshan POSCO Nippon Gerdau Arcelor Nucor Kobe Evraz Mittal CSN TSI
300 250 FY09 FY10 FY11 FY12E FY13E
Higher share of highly profitable Indian operations to aid in sustaining margins

50 40 30 30 20 10 10 FY08
Operating cost (USD/t)
OPM (%) - RHS
40
Sales v olume - TSI (mnt) TSI - v olume share (%) - RHS
Sales v olume - subs. (mnt) Consol OPM (%) - RHS
55% 45% 35%
20 25% 15% 5% FY09 FY10 FY11 FY12E FY13E
43
Tata Steel Europe: Stronger post GFC

Tata Steel Europe (TSE): Global financial crisis (GFC) provided opportunity for much needed cost rationalisation.
Reduced headcount resulting in lower employee cost Business restructuring: Hived off unprofitable TCP operations to Sahaviriya Steel of Thailand for USD469mn; working on restructuring of Scunthorpe (to reduce headcount by further 1,200) Turned profitable at EBITDA level since H2FY10 with higher CU
42,000 3,000 38,000 2,000 34,000
GFC provided opportunity to rationalise cost structure; employee cost declines

4,000 Employ ee Cost (USD mn) Head Count - RHS 46,000
Near term concerns as high raw material cost threatens to squeeze margin in ongoing H1FY12.
We expect EBITDA/t to contract from USD53 in Q4FY11; Q2FY12 could see further contraction, with threat of loss at EBITDA level
1,000 FY08
30,000 FY09 FY10 FY11 FY12E FY13E
We expect profitability of TSE to improve from H2FY12 onwards on decline in raw material prices and restructuring benefits.
With hive off of loss-making TCP (apart from USD469 as sale consideration, received USD130mn as full and final settlement from consortium of former offtakers) and part of Scunthorpe, the share of profitable Ijmuiden plant to increase.
Turned EBITDA +ve since H2FY10 on improved CU

100% 75% 50% 25% 0% Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 EBITDA/tonne (USD) - RHS Capacity Utilization (%) 200 100 (100) (200)
Raw material supply security with commencement of mining at Riversdale (40% coking coal off take from Riversdales Benga project, expected H2FY12) and New millennium (100% off take agreement, expected FY13) remain future growth triggers.
44
Tata Steel Consolidated: Fundamentally stronger

We expect consolidated profit to improve H2FY12 onwards led by higher share of integrated Indian ops. and improvement in TSE
FY13E consol. EBITDA/t to grow 6.3% YoY despite lower steel prices
Tata Steel group: Consol. EBITDA/t to improve despite lower steel price assumption
USD/t 500 400 300 200 100 FY08 (100)
TSE
TSI
Tata Steel (consol.)
Financial leverage at manageable levels

Net D/E declined to 1.0x in FY11 (vs. 1.3x in FY10) on equity dilution (raised Rs34.8bn through FPO); interest cover improved to 4.2x in FY11 compared to 1.4x in FY10
Commencement of merchant mining at Riversdales Benga project (H2FY12E) and New Millennium (FY13E) with off take agreements to provide natural hedge to high RM cost for TSE
Consolidated raw material integration to improve Pls refer next 2 slides for details of Riversdale and New Millennium
Tata Steel group: Raw material integration to improve with foray in merchant mining
80 Share of resource requirement (%) FY10 57.9 FY15
FY09
FY10
FY11
FY12E
FY13E
Tata Steel group: Concerns of high financial leverage reduces

500 400 300 Rs bn Net Debt Net debt/Equity (x ) - RHS Net debt/EBITDA (x ) - RHS 5.0 4.0 3.0 2.0 1.0 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
60
40
27.5 15.3
21.9
200 100 -
20
Iron ore
Coking coal
45
Riversdales Benga project - Coal Integration

Tata Steel
0% (Earlier 26.3%)
Rio Tinto
99.47%
Riversdale Mining Limited

35% 65% 100% 100%
Benga coal project - Mozambique

Resources: 4bnt Reserves: 502mnt Commencement timeline: 2011 Tata Steel off-take: 40%
Zambeze coal project Mozambique

Resources: 9bnt Commencement timeline: 2014
Zululand Anthracite Colliery (ZAC) - South Africa

Resources: 40.1mnnt Mine life: 13yrs Production (2010): 0.8mnt
Tata Steel sold its 26.3% stake in Riversdale to Rio Tinto in an open offer for a consideration of AUD1.06bn (~Rs50bn) earning an IRR of 51% on investment of ~Rs20bn over 4 years Would continue to hold 35% equity stake in Benga project in Mozambique along with 40% coal offtake for TSE Production guidance from Benga project 5.3mt ROM with ore output of ~2mnt (1.7mnt coking coal and 0.3mnt thermal coal) in 1st year of operations
Source: Company, PINC Research bikash.bhalotia@pinc.co.in
46
New millennium Iron Ore Integration

Tata Steel
27.2%
New Millennium Corp (NML)

80% 20% 36% 64%
DSO (Direct Shipping Ore) project

Reserves (P&P): 64.1mnt (58.8% Fe) Resources (M&I): 7.2mnt (58.8% Fe) Resources (Inferred): 7.2mnt (56.8% Fe) Tata Steel off-take: 100%
Taconite Project
Tata Steel to incur: 64% feasibility cost Potential mine life: 100years Production capacity: 22mntpa
LabMag
Reserves (P&P): 3.5bnt (29.6% Fe) Resources (M&I): 1bnt (29.5% Fe) Resources (Inferred): 1.2bnt (29.3% Fe)
KeMag
Reserves (P&P): 2.1bnt (31.3% Fe) Resources (M&I): 0.3bnt (31.3% Fe) Resources (Inferred): 1bnt (31.2% Fe)
DSO project to produce 4mnt iron ore every year - 2012 onwards Taconite: Tata Steel has to arrange the required equity portion of the financing based on a max. capex of up to $4.85 billion if both deposits are developed and up to $4.68 billion and up to $3.76 billion respectively, if only the KeMag or LabMag deposits are developed.
Source: Company, PINC Research, P&P Proven and Probable; M&I - Measured and Indicated; bikash.bhalotia@pinc.co.in
47
Recommendation - Top BUY

We find the stock attractively valued at 5.0x FY12E and 4.9x FY13E EV/EBITDA Maintain BUY with a revised target price of Rs713 (6.0x consolidated EV/EBITDA)
1-yr Forward EV/EBITDA : Avg of 5.6x
EV/EBITDA 9.0 7.5 6.0 4.5 Av g+1std dev Av . EV/EBITDA Av g-1std dev
Target Price Calculation Based on EV/EBITDA on FY12 Estimates

In Rs mn Tata Steel India Corus (TSE) Tata Steel Thailand Natsteel Tata Steel consol.
Target EV/ EBIDTA 6.2 5.0 5.0 5.0 6.0
Target EV 793,586 97,768 4,116 17,556 913,027
CWIP (on BV) 120,000 15,573 135,573
FY12 Net Debt 110,365 201,353 311,718
Residual Equity 803,221 (88,012) 4,116 17,556 736,881
Target Price (Rs) 777 (85) 4 17 713
3.0 Apr-06
Aug-07
Nov -08
Feb-10
Jun-11
1-yr Forward P/BV: Avg of 1.4x

P/BV Av g+1std dev Av P/BV Av g-1std dev
3.0
Target Price: Sensitivity to steel price and target multiple

(USD/t) 713 FY12E Coking prices (USD/t) coal contract 275 285 295 305 315 FY12E Benchmark HRC price estimate (USD/t) 680 191 162 134 105 77 730 480 452 423 395 366 780 770 741 713 684 656 830 1,060 1,031 1,003 974 946 880 1,349 1,321 1,292 1,264 1,235
2.3 1.5 0.8 0.0 Apr-06
Aug-07
Nov -08
Feb-10
Jun-11
48
Company Financials (Consolidated)

(Rs mn)
Income Statement Net Revenue Grow th (%) Operating Profit Other income EBITDA Grow th (%) Depreciation EBIT Interest Ex pense PBT (before E/o items) Tax Prov ision Minority Interest Adjusted Net Profit Grow th (%) E/o (loss)/income Reported Net profit Adjusted EPS (Rs) EPS Grow th (%)
Balance Sheet Equity Share Capital Reserv es & surplus Shareholders' funds Minorities interests Total Debt Capital Employed Net fix ed assets Cash & Cash Eq. Net other curr. assets Inv estments Net Def. tax Assets Total Assets
FY09 1,473,293 12.0 181,277 7,662 188,939 1.0 42,654 146,285 37,907 108,378 18,940 1,017 90,454 50.4 (40,945) 49,509 104.1 50.4
FY09 8,685 299,703 308,388 8,949 563,218 880,555 606,708 95,529 164,224 30,134 (16,040) 880,555
FY10 1,023,931 (30.5) 80,427 13,406 93,833 (50.3) 44,917 48,915 34,943 13,972 21,518 1,116 (6,430) (13,662) (20,092) (6.8)
FY11 1,187,531 16.0 155,235 4,721 159,956 70.5 44,148 115,807 27,746 88,062 32,459 1,266 56,869 32,958 89,827 55.7
FY12E 1,211,085 2.0 151,886 11,603 163,489 2.2 46,740 116,749 31,258 85,492 33,769 1,395 53,118 (6.6) 40,230 93,348 51.4 (7.7)
FY13E 1,232,271 1.7 171,873 13,889 185,762 13.6 52,818 132,944 34,378 98,567 34,498 744 64,812 22.0 64,812 62.7 22.0
FY13E 10,336 520,748 531,084 8,989 476,112 1,016,185 787,658 94,701 112,039 41,913 (20,126) 1,016,185
Cash Flow Statement Pre-tax profit Depreciation Total Tax Paid Chg in w orking capital Other operating activ ities Cash flow from oper (a) Capital Ex penditure Chg in inv estments Other inv esting activ ities Cash flow from inv (b) Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Change in minority interest Div idend (incl. Tax ) Other financing activ ities Cash flow from fin (c) Net chg in cash (a+b+c)
Key Ratios OPM (%) Net Margin (%) Yield (%) Net debt/Equity (x ) Working Capital Day s RoCE (%) RoE (%) EV/Net Sales (x ) EV/EBITDA (x ) PER (x ) PCE (x ) Price/BV (x )
FY09 67,432 42,654 (33,813) 2,848 77,838 156,959 (83,611) (8,121) 4,104 (87,628) 69,331 145 20,514 (12,266) (35,941) (27,548) 41,783
FY09 12.3 6.1 3.2 1.4 28 13.7 26.4 0.5 4.3 4.4 3.0 1.3
FY10 310 44,917 (24,586) 46,465 37,603 104,710 (69,498) 9,951 (2,072) (61,619) 43,091 24,465 (26,866) (13,209) (35,739) (51,350) (8,259)
FY10 7.9 1.7 1.3 34 (2.2) 0.8 9.6 1.7
FY11 88,062 44,148 (32,459) (81,100) 23,025 41,676 (110,124) (23,608) (7,744) (141,476) (99,801) 45,462 90,840 (14,316) (27,746) 94,240 (5,560)
FY11 13.1 4.8 2.2 1.0 36 8.3 17.0 0.8 5.8 10.0 5.6 1.4
FY12E 85,492 46,740 (33,769) 49,420 19,654 167,537 (105,500) 18,800 51,833 (34,867) 132,670 5,346 (75,000) (14,484) (31,258) (115,395) 17,275
FY12E 12.5 4.4 2.2 0.6 31 7.1 12.1 0.6 5.0 10.9 5.8 1.2
FY13E 98,567 52,818 (34,498) (19,103) 20,489 118,272 (104,800) 13,889 (90,911) 27,361 (30,000) (14,484) (34,378) (78,862) (51,500)
FY13E 13.9 5.3 2.2 0.6 38 8.6 12.8 0.7 4.9 8.9 4.9 1.1
FY10 9,496 261,619 271,114 8,841 490,272 770,227 603,377 87,270 61,257 34,865 (16,541) 770,227
FY11 10,216 386,329 396,545 8,889 581,112 986,546 676,916 128,926 142,357 58,473 (20,126) 986,546
FY12E 10,336 470,419 480,755 8,489 506,112 995,356 735,676 146,201 92,937 40,669 (20,126) 995,356
49
SAIL
Company Update

Concerns of expansion delays and high employee cost factored in the price: Risk reward favourable!
SAIL 320 270 220 170 120 Jun-10 BSE (Rebased)
Financial Summary
Key Financials (Rs mn) Net Rev enue YoY Gr. (%) Op. Profit Adj. Net Profit YoY Gr. (%) Dil. EPS (Rs) OPM (%) ROCE (%) RoE (%) PER (x ) P/BV (x ) EV/ EBITDA (x ) FY09 443,031 9.6 111,127 81,877 (9.7) 19.8 25.1 24.8 32.1 6.0 1.8 2.9 FY10 418,966 (5.4) 83,499 50,838 (37.9) 12.3 19.9 13.9 16.6 14.7 2.2 6.6 FY11 441,633 5.4 79,310 51,386 1.1 12.4 18.0 10.0 14.5 10.5 1.4 4.6 FY12E 516,649 17.0 96,270 58,386 13.6 14.1 18.6 10.0 14.7 9.2 1.3 3.9 FY13E 561,185 8.6 113,737 64,729 10.9 15.7 20.3 9.3 14.6 8.3 1.1 4.9
Sep-10
Dec-10
Mar-11
Jun-11
Key Stock Data Market cap (Rs mn) BV (Rs) Shares O/S (F.V. Rs10) Free Float (%) 6-mth av g trade v alue(Rs mn) 52 w eek High/Low Bloomberg Code Reuters Code
537,159 91 4,130 mn 14.2 Rs493mn Rs 234/129 SAIL IN SAIL.BO
Other Institution 7% FII 4%
Public & Others 2%
GOI 87%
Source: Bloomberg, PINC Research; Note: EV based valuation ratios and TP adjusted for CWIP at 10% disc. to BV
bikash.bhalotia@pinc.co.in Mar. 24, 2011 June 22, 2011
50
Capacity expansion to support growth

SAIL is incurring a capex of ~Rs830bn to increase its capacity by 10.5mntpa to 23mntpa in phases by FY15 among other investments
Expansion projects to increase capacity by 60% in 3yrs and 80% in 5yrs To re-gain the position of largest domestic steelmaker by FY13, after losing it recently to JSW Steel (capacity of 12.4mntpa incl. 43% stake in Ispat)
SAILs capacity expansion
mnt 30 25 20 15 10 5 FY10 FY13 FY15 Crude Steel Saleable steel
To regain domestic leadership (capacity)

mnt 25 20 15 10 5 Current FY13 SAIL JSW TSI
Rs283bn already incurred till March11 with Rs102bn spent in FY11 (lower than targeted Rs123bn)
We assume capex of Rs150bn, Rs170bn for FY12E, FY13E respectively
We expect SAIL to enter a volume growth phase with a 12.4% CAGR over FY11-13E, 11.9% over FY13E-16E (vs. 1.4% over FY05-FY10) Strong balance sheet (net D/E of 0.1x at FY11) puts the company in good stead to undertake expansion projects
SAIL to enter a volume growth phase over FY10-FY16E led by capacity expansion
20 16 12 8 4 0 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY15E FY16E Sales Volume (mnt) YoY (%) - RHS 30 20 10 0 -10 -20
Capex break-up for expansion to 20.2mn tpa by FY13

Purpose
Expansion to 20.2mntpa by FY13 Additional Capex Value addition/product mix improvement Technological Upgradation/ Modernisation Sustenance including debottlenecking, AMR and Environment Augmenting Raw Material from existing Mines and Development of new mines Total 70 35 123 100 698
Capex (Rs bn)

370
SAIL entering a volume growth phase
SAIL: Status of Brownfield expansion projects

Plant
BSP RSP BSL ISP SSP
Completed by FY11
Upgradation of Plate Mill Installation of 700 tpd Oxygen Plant and simultaneous blowing of converters in SMS-II BF2 commissioned in July'10 Sinter Plant, Pig casting machine, Main Receiving Station and Oxygen Plant; rebuilding of Coke Oven Battery # 10 Completed
Expansion timeline
Dec'12-Mar'13 Dec'12-Mar'13 Dec '11 Sep '11
Source: Company, PINC Research; Note: * BSP Bhilai Steel Plant, RSP - Rourkela, BSL - Bokaro, ISP IISCO, SSP - Salem
51
Expansion besides capacity addition

Apart from capacity expansion SAIL is incurring capex of Rs105bn for value-addition and technological improvement
Improved product mix to result in an expansion of premium of SAILs realisation over benchmark HRC (12.0% in FY13E vs. 8.4% in FY11)
SAILs product mix to improve post expansion leading to premium pricing
Pre-expansion Post-expansion
GPC CRC 6% Semis 20% Pipes 1% 2%
Railw ay s Others 7% 1%
HRC 27%
Pipes, Tin Plates 6% Railw ay s 7%
CRC 10%
HRC 22%
Further capex of Rs100bn is planned for augmentation of raw material from existing mines and development of new mines
The capacity of existing mines at Kiriburu, Meghataburu, Bolani, Gua and Barsua are being ramped up; 4mntpa pellet plant planned
Plates Structurals 4% Wire rods 12% 20%
Structurals 15% TMT 23%
Plates 17%
Further, SAIL has received forest clearances for Chiria mine, one of the largest mine with ~2.0bn tonnes of iron ore reserves, which shall help meet captive iron ore requirement for increased capacity of 60mnt by 2020
These mines have the potential of producing 30-35mtpa of iron ore for the next 50 yrs
Plans in place to meet increased RM requirements

FY11
Crude steel production Iron ore 13.6 23.4
FY15*
23.5 40.0
Current
Post-expansion
~10mtpa capacity expansion
100% captive
100% captive Development of existing mines 4mtpa pellet plant being set up Dependence on imported coal to increase 24% Indigenous and 76% Imported
Coking coal
13.8
21.0
22% Indigenous and 78% Imported
Source: Company, PINC Research; *Post-expansion
52
SAILs EBITDA to improve despite higher RM prices

We expect EBITDA/t to expand to USD166/t in FY12E and USD175/t in FY13E (USD147 in FY11) on capacity expansion and significant resource integration amidst higher steel prices. Favourable coking coal mix to lower RM cost in near-term.
Lower consumption of carry-over coking coal of USD305/t cost (~1.6mnt in FY12E, nil in FY13E vs. 3.0mnt in FY10 and FY11 each) and >1.0mnt of USD205-222/t coking coal inventory to result in SAILs blended imported coal cost to be favorable in FY12E.
Higher realisations and volumes to boost EBITDA growth
CoP (USD/t) 1,000 800 600 400 200 FY08
EBITDA (USD/t)
Sales v olume (mnt) - RHS 16
256
208 141
147
166
175
14 12
529
620
567
671
726
687 10 8
Economies of scale to rationalise high employee cost. MoU with Posco and Kobe Steel to provide technological improvement and help strengthening position in auto segment.
Employee cost (USD/t) rationalisation likely with economies of scale
150 120 Tata Steel SAIL JSW Steel
FY09
FY10
FY11
FY12E
FY13E
Imported coking coal cost to be less than contract prices on favourable mix
Blended Cost Contract prices High cost carry ov er coking coal (mnt) - RHS 4.0 3.0 2.0 1.0 FY10
300 90 60 30 FY08
200 100 FY09 FY10 FY11 FY12E FY13E FY11 FY12E FY13E
USD/t
400
53
Risks and concerns

High capital cost (USD 1,150/t) exaggerated further by cost and time over-run is major concern for SAIL. Further, SAILs dependence on imported coal to increase with limited supply of indigenous coking coal. Subsequently, we expect SAILs return ratios to remain low despite commissioning of expansion projects. Impending 10% equity dilution through FPO and delay thereon is an additional overhang on the stock.
Delayed to 2011 end; We have not factored this in our estimates.
Capacity expansion status: Actual execution remains slow (Rs bn)
100,000 80,000 60,000 40,000 20,000 Q4FY10
Actual
Orders placed
To be ordered
Q2FY11
SAILs return ratios (RoE and post-tax RoCE on a decline

50% 40% 30% 20% 10% 0% FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E RoCE (%) RoE (%)
Dependence on imported coal to increase (mnt)

25 20 15 10 5 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY15E FY16E Imported Captiv e Coal India % Indegenous - RHS 40 32 24 16 8 -
54
Valuation and Recommendation

Attractively valued at 3.9x FY12E EV/EBITDA; BUY with a TP of Rs168 (5.5x FY12E EV/EBITDA, CWIP at 10% disc. to BV)
1-yr Forward PE: Avg. of 10.2x
25 20 15 10 5 Jul-06 Oct-07 Dec-08 Mar-10 Jun-11 P/E Av + 1sd Av . P/E Av - 1sd
SAIL: Target price calculation

Parameters
Enterprise Value Add: CWIP Less: Net Debt Target Price
Total value (Rs bn)

529 270 106 793
Value (Rs/share)
128 65 26 168
Methodology
5.5x FY12E EV/EBITDA 10% disc. to book value Book Value

(Rs) 168 FY12 EV/EBITDA 4.5 5.0 (x) 5.5 6.0 6.5 FY12E Benchmark HRC price estimate (USD/t) 680 66 70 74 78 82 730 105 113 121 129 137 780 145 156 168 180 191 830 184 199 215 230 246 880 223 242 261 281 300
1-yr Forward EV/EBITDA: Avg. of 5.0x

EV/EBITDA 12 9 6 Av + 1sd Av . EV/EBITDA Av - 1sd
FY12E EBITDA/t: Sensitivity to steel price and coking coal price

USD/t 166 FY12E Coking prices (USD/t) 275 285 295 305 315 coal contract FY12E Benchmark HRC price estimate (USD/t) 680 67 62 57 52 48 730 121 116 112 107 102 780 176 171 166 161 157 830 230 225 221 216 211 880 285 280 275 270 266
3 Jul-06 Oct-07 Dec-08 Mar-10 Jun-11
Source: PINC Research; Note: Low sensitivity to coking coal contract price as ~25% of coal requirement met through inventory
55
Company financials
(Rs mn)
Income Statement Net sales FY09 443,031 FY10 418,966 FY11 441,633 FY12E 516,649 FY13E 561,185 Cash Flow Statement FY09 FY10 FY11 FY12E FY13E
Pre-tax profit Depreciation Total Tax Paid Chg in w orking capital Other operating activ ities
Cash flow from oper (a)
114,719 12,878 (32,841) 1,987 (17,561)

79,181
85,367 13,372 (38,142) (1,648) (13,054)

45,895
74,144 14,843 (21,647) (35,182) (8,885)

23,272
84,617 16,788 (26,058) 2,750 (5,136)

72,962
92,471 23,077 (27,666) 851 (1,811)

86,922
Grow th (%)
Operating Profit
9.6
111,127
(5.4)
83,499
5.4
79,310
17.0
96,270
8.6
113,737
Grow th (%) Other income EBITDA Depreciation EBIT Interest Ex pense PBT (before E/o items) Tax Prov ision
Adjusted Net Profit
(15.7) 19,063 130,190 12,878 117,313 2,594 114,719 32,841

81,877
(24.9) 19,261 102,759 13,372 89,387 4,020 85,367 34,529

50,838
(5.0) 14,401 93,712 14,843 78,869 4,725 74,144 22,758

51,386
21.4 12,235 108,504 16,788 91,716 7,099 84,617 26,231

58,386
18.1 12,422 126,159 23,077 103,083 10,612 92,471 27,741

64,729
Capital Ex penditure Chg in inv estments Other inv esting activ ities
Cash flow from inv.(b) Free cash flow (a+b)
(59,607) (1,145) (1,110)

(61,862) 17,319
(111,494) 35,960
(75,534) (29,639)
(102,486) 11,827
(90,659) (67,387)
(150,000) 12,235
(137,765) (64,803)
(170,000) 12,422
(157,578) (70,656)
Equity raised/(repaid) Debt raised/(repaid) Change in minority interest Div idend (incl. Tax ) Other financing activ ities
Cash flow from fin (c) Net chg in cash (a+b+c) Key Ratios
44,936 (14,970) (2,594)

27,371 44,691 FY09
89,725 (13,988) (4,020)

71,717 42,078 FY10
36,509 (13,978) (4,725)

17,807 (49,580) FY11
70,000 (7,249) (7,099)

55,653 (9,151) FY12E
120,000 (15,947) (10,612)

93,441 22,785 FY13E
Grow th (%) E/o income/(loss)

Reported Net Profit
(9.7) (20,173) 61,704 (18.1)

19.8
(37.9) 16,706 67,544 9.5

12.3
1.1 (2,574) 48,812 (27.7)

12.4
13.6 58,386 19.6

14.1
10.9 64,729 10.9

15.7
Grow th (%)
Diluted Adj. EPS (Rs)
Diluted EPS Grow th (%)

Balance Sheet
(9.7)
FY09
(37.9)
FY10
1.1
FY11
13.6
FY12E
10.9
FY13E
Equity Share Capital Reserv es & surplus

Shareholders' funds
41,304 238,537
279,841
41,304 291,863
333,167
41,304 334,916
376,220
41,304 377,355
418,659
41,304 426,137
467,441
OPM (%) Net Margin (%) Yield (%) Net debt/Equity (x ) Working Capital Day s RoCE (%) RoE (%) EV/Net Sales (x ) EV/EBITDA (x ) PER (x ) PCE (x ) Price/BV (x )
25.1 18.5 2.2 (0.4) 79 24.8 32.1 0.7 2.9 6.0 5.2 1.8
19.9 12.1 1.8 (0.2) 78 13.9 16.6 1.3 6.6 14.7 11.6 2.2
18.0 11.6 0.9 0.1 75 10.0 14.5 0.8 4.6 10.5 8.1 1.4
18.6 11.3 2.5 0.3 72 10.0 14.7 0.7 3.9 9.2 7.1 1.3
20.3 11.5 2.5 0.4 72 9.3 14.6 1.0 4.9 8.3 6.1 1.1
Minority interest Total Debt

Capital Employed
75,388
355,229
165,113
498,280
201,622
577,842
271,622
690,280
391,622
859,062
Net fix ed assets Cash & Cash Eq. Net Other current assets Inv estments Net Deferred tax Assets
Total Assets
188,131 182,285 (8,393) 6,527 (13,322)

355,229
286,414 224,364 (5,037) 6,688 (14,149)

498,280
374,058 174,784 37,222 6,841 (15,063)

577,842
507,269 165,633 25,600 6,841 (15,063)

690,280
654,193 188,418 24,673 6,841 (15,063)

859,062
56
JSW Steel
Company Update
CMP: Rs838 Target Price: Rs1,239

Volume growth drivers in place; Technological collaboration with JFE to help in efficiency gains
JSW steel 1550 1350 1150 950 750 Jun-10 BSE (Rebased)
Sep-10
Dec-10
Mar-11
Jun-11

Key Financials (Rs mn) Net Rev enues YoY Gr.(%) Op. Profit Adj. Net Profit YoY Gr.(%) Dil. EPS (Rs) OPM(%) ROCE (%) RoE (%) PER (x ) P/BV EV /EBDITA (x ) FY09 161,047 27.8 31,597 9,803 (36.0) 52.4 19.6 8.3 13.4 11.0 1.4 5.6 FY10 190,738 18.4 41,873 11,820 20.6 63.2 22.0 7.2 14.7 12.5 1.7 5.7 FY11 241,161 26.4 48,786 17,540 48.4 78.6 20.2 6.9 14.4 10.7 1.2 5.0 FY12E 370,732 53.7 67,989 25,830 47.3 107.4 18.3 8.6 14.7 7.8 1.0 4.1 FY13E 371,388 0.2 76,895 27,400 6.1 113.9 20.7 8.2 13.1 7.4 0.9 3.5
Key Stock Data Market cap (Rs mn) BV(Rs/share) Shares O/S (F.V. Rs10) Free Float (%) 6-mth av g trade v alue(Rs mn) 52 w eek High/Low Bloomberg Code Reuters Code
189,238 705 223 mn 62.3 1,581 Rs1,400/752 JSTL IN JSTL.BO
Promoter 30%
Public 26% Other Institution 26%
FII 18%
Source: Company, PINC Research; Note: EV based valuation ratios and TP adjusted for CWIP at BV
57
Volume growth to drive EBITDA growth

One of the fastest growing steelmaker in India Volume CAGR of 24% over FY06-FY11 (vs. 0% for SAIL, 7% for TSI) Partly commissioned 3.2mnt brownfield capacity at Vijayanagar, balance to be commissioned in the ongoing quarter (Q1FY12)
To provide volume CAGR of 24% over FY11-13E
Strong volume growth to sustain (including Ispat on a proportionate basis)
Capacity (mnt) 15 12 9 6 3 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Sales Vol (mnt) Sales grow th YoY (%) - RHS E -1 3 Y1 1 RF G CA 24% 75 60 45 30 15 -
Volume growth to aid in 26% and 20% EBITDA and EPS CAGR over FY11-13E despite declining EBITDA/t on high RM prices 2.0mntpa debottlenecking at Vijayanagar and 4.5mntpa WB project remain future volume growth drivers
Long term volume growth drivers also in place (Capacity in mn tpa)

20 2.0 16 12 8 4 7.8 3.2 12.4 1.4 18.9 4.5
Operating profit grows despite contraction in EBITDA/t on higher RM cost

EBITDA (Rs bn) 80 65 50 35 EBITDA/t (USD) - RHS 300 250 200 150 100 FY08
Ispat (43%
WB project
Brownfield
Capacity
Capacity
Debottle-
expansion
Capacity
necking
FY12E
stake)
FY14E
FY11
20 FY09 FY10 FY11 FY12E FY13E
58
Stake sale to JFE & focus on resource integration +ve

Stake sale to JFE: Japans 2nd largest steelmaker has acquired 14.99% stake in JSW (on a fully diluted basis) by infusing Rs54.1bn @Rs1,500/share
Current 16.17% stake to come down to 14.99% post conversion of 17.5mn warrants by JSWs promoters This has helped JSW in bringing down financial leverage to manageable level much needed to meet funding requirements for the many growth projects in the pipeline. Technological collaboration and possible equity funding for WB project are future +ve offshoots of stake sale to JFE
Fund infusion by JFE helped reduce leverage
Net Debt Net debt/Equity (x ) - RHS 2.5 2.0 1.5 1.0 0.5 FY08
Rs bn
200 150 100 50 FY09 FY10 FY11 FY12E FY13E
Despite lack of resource integration (only 10% captive iron ore, resulting in high RM cost), JSW has profitability in line with SAIL due to low employee cost and operational efficiencies
We believe that technological collaboration with JFE would help JSW in improving product mix and achieving further operational efficiencies, leading to EBITDA/t expansion
JSW enjoys lowest conversion cost amongst peers due to operational efficiencies
EBITDA (USD/t) 1,000 800 600 400 200 FY08 FY09
Focus on raw material integration with increased visibility

Iron ore : Company plans to ship 1mnt and 2mnt iron ore from Chile iron ore mine in FY12E and FY13E respectively (reserve of 150mnt)
o We have factored in 0.7mnt and 1mnt in FY12E & FY13E respectively with EBITDA of Rs2.6bn and Rs3.3bn in respective years.
US: JSW has received all permits for coking coal sales in US and expects 0.5mnt shipment in FY12 not factored in our estimates.
SAIL
SAIL
SAIL
SAIL
SAIL
SAIL
JSW
JSW
JSW
JSW
JSW
JSW
TSI
TSI
TSI
TSI
TSI
TSI
250
RM cost (USD/t)
FY10 FY11
Other op. cost (USD/t)

FY12E FY13E
59
Future volume growth drivers in place

Plans to increase Vijayanagar capacity by 2.0mntpa through debottlenecking at an attractive capital cost of USD300/t West Bengal greenfield project to carry future growth baton
Of the total planned expansion of 4.5mntpa steel and 660MW CPP, JSW has received approval for 3mnt steel and 300MW CPP
JSW Steel Ltd
West Bengal Project: Ownership structure and funding details
WBIDCL/ WBMDTC*
94%
6%
Value-added focus: Setting up a 2.3mntpa CR Mill at Vijayanagar for a capex of Rs40.3bn. Debottlenecking and WB project to help increase JSWs consolidated capacity to 18.9mn tpa by FY14
We have not included these projects in our estimates Details of the future expansion projects
Project
West Bengal
JSW Bengal Steel Ltd. (4.5mtpa Integrated HRC)

100% 26%
Capex Rs154bn D/E 2:1
JSW Energy Ltd.
74%
Capex (Rs bn)

160.0
Funding Timeline (D/E)

2:1 FY14
Current status
Receiv ed all formal approv als land, coal mine & commenced w ater pipeline & tow nship w ork; Recd approv al for 3.0mntpa steel and 300MW CPP out of total 4.5mntpa steel and 660MW CPP
SPV 1 Coking coal (2.4mtpa)
Capex Rs13.5bn D/E 3:1
JSW Energy Bengal Steel Ltd. (660MW)

100%
CR Mill
40.3
2:1 Q1FY14 - PhaseI Q1FY15 - PhaseII
Major
equipments
ordered,
~15%
SPV 2 Thermal Coal (2.6mtpa)
ex cav ation completed & civ il w orks orders finalized Incl. new SMS comprising EAF and slab caster for special grade thin slabs
Debottlenecking
27.0
2:1 Q1FY14
Source: Company, PINC Research;*WBIDCL - West Bengal Industrial Development Corporation Ltd. WBMDTC - West Bengal Mineral Development and Trading Corporation Ltd.
60
Ispat acquisition factors-in turnaround upside

JSW Steel acquired 43.1% (on diluted basis) in Ispat Industries for Rs23.9bn
Could acquire only 3.77% stake via open offer despite higher bid price.
Parameters Acquisition price # of shares (dil) Fully diluted mkt cap Net debt post equity infusion Enterprise value Ispat's capacity EV/tonne (USD @ Rs45) FY10 annualised EBITDA EV/ EBITDA (x) Ispat's networth post deal BV per share P/BV
Unit (Rs) (# bn) (Rs bn) (Rs bn) (Rs bn) (mn tpa) (USD/t) (Rs bn) (x) (Rs bn) (Rs) (x)
Value 20.1 2.8 55.4 67 122 3.3 823 13.8 8.9 31.5 11 1.8
Acquisition valuation factors-in most of the turnaround upside

Valued at 8.9x FY10 annualized EV/EBITDA, 4.7x post-turnaround EV/EBITDA.
The company is currently focusing on refinancing of Ispats debt which will improve financial leverage and reduce cost of debt. Further, JSW is focused on turning around Ispat through cost rationalisation with
Iron ore: Sourcing fines from Bellary, usage of pellets from JSW Steels surplus 2mnt pellet plant Coke: Supply of coke from Jindal Stainless Power: Supply from JSW Energy - Expected to commence from Q3FY12. Ispats existing capacity
Facility ('000 t)
Blast furnace DRI Plant Conarc furnace Hot Strip mill Cold rolling mill & VAP Pipe & tube mill
JSW Ispat's financials post turnaround EBITDA estimate post turnaround - Sales volume - EBITDA/ tonne Net interest expense Depreciation PBT PAT EPS
Unit (Rs bn) (mn tonnes) (USD/t) (Rs bn) (Rs bn) (Rs bn) (Rs bn) (Rs)
Value 26.0 3.3 175 6.7 6.2 13.1 10.7 3.9
Ispat s capacity expansion plan

Location
Mumbai Mumbai Mumbai Mumbai Nagpur Nagpur
Capacity
2,000 1,600 3,600 3,300 330 56
Expansion program
Pow er plant Pellet Plant Coke ov en battery Capacity debottlenecking Cost sav ing programs Total
Capacity Capex (Rs mn)

110MW 3mn tpa 1mn tpa 0.7mn tpa 4,900 6,000 5,000 14,180 1,320 31,400
61
Ispat Valuation
We have not consolidated Ispat financials with JSW steel yet and value Ispat Industries on net value addition basis (fair value - price paid for the acquisition.) Our base case net value addition is Rs14/share with a sensitivity range of Rs(46) to Rs81.
Sensitivity Analysis : JSW Steel target price (Rs/share)

Ispat's EBITDA post turnaround (USD/tonne) 1,239 4.50 EV/ EBITDA multiple (x) 4.75 5.00 5.25 5.50 145 1,180 1,190 1,199 1,209 1,219 160 1,198 1,209 1,219 1,230 1,241 175 1,216 1,228 1,239 1,251 1,263 190 1,234 1,247 1,259 1,272 1,285 205 1,252 1,266 1,279 1,293 1,306
Value of Ispat Industries USD/INR Blended realization (USD/t) Operating cost (USD/t) EBITDA (USD/t) - Post turnaround Sales Volume (mnt) EBITDA (Rs mn) - Post turnaround Target EV/EBITDA (x) EV
(Rs mn) 45 675 500 175 3.3 25,988 5.0 129,938 66,883 63,054 27,188 113 23,886 3,302 13.7
Sensitivity Analysis: Ispats Net value addition to JSW Steel (Rs/share)

Ispat's EBITDA post turnaround (USD/tonne) 14 4.50 EV/ EBITDA multiple (x) 4.75 5.00 5.25 5.50
Net Debt Residual equity value
145 (45.5) (35.8) (26.2) (16.5) (6.9)
160 (27.5) (16.9) (6.2) 4.4 15.1
175 (9.6) 2.1 13.7 25.4 37.0
190 8.4 21.0 33.7 46.3 59.0
205 26.4 40.0 53.6 67.3 80.9
JSW's share @ 42.6% Value/share (Rs) Investment by JSW NPV NPV/share (Rs.)
62
Valuations JSW Steel

We expect JSWs EBITDA and EPS to expand on volume growth
4.5mn tpa WB project and 2.0mn tpa de-bottlenecking at Vijayanagar are future volume growth drivers Value-added focus, technological collaboration with JFE and focus on resource integration would help in margin expansion.
P/E 24 18 12 6 Av g+1std Av . P/E Av g-1std
We maintain BUY on JSW steel with a revised TP of Rs1,239. (JSW steel @ 5.5X EV/EBITDA, Ispat @5.0x EV/EBITDA)
FY12E EBITDA/t: Sensitivity to steel price and coking coal contract price
USD/t 163 FY12E Coking price (USD/t) coal contract 275 285 295 305 315 FY12E Benchmark HRC price estimate (USD/t) 680 69 61 53 44 36 730 125 116 108 100 92 780 180 172 163 155 147 830 235 227 219 211 202 880 291 282 274 266 258
Jul-06 Oct-07 Dec-08 Mar-10 Jun-11
Source: Company, Bloomberg, PINC Research
1-yr Forward EV/EBITDA : Avg. of 5.1x

EV/EBITDA 12 9 Av g+1std Av . EV/EBITDA Av g-1std

(Rs) 1,239 EV/EBITDA (x) 4.5 5.0 5.5 6.0 6.5 FY12E Benchmark HRC price estimate (USD/t) 680 45 97 149 201 253 730 501 598 694 791 888 780 957 1,098 1,239 1,381 1,522 830 1,412 1,598 1,784 1,970 2,156 880 1,868 2,099 2,329 2,560 2,790
-
6 3
FY12
Jul-06
Oct-07
Dec-08
Mar-10
Jun-11
63

(Rs mn)
Income Statement Net Revenue Grow th (%) Operating Profit Other income EBITDA Grow th (%) Depreciation EBIT Interest Ex pense PBT (before E/o items) Tax Prov ision Minority Interest Adjusted Net Profit Grow th (%) E/o (loss)/income Reported Net profit Adjusted EPS (Rs) EPS Grow th (%) FY09 161,047 27.8 31,597 170 31,767 (12.5) 9,878 21,889 11,681 10,208 726 (322) 9,803 (36.0) (7,054) 2,749 52.4 (36.0) FY10 190,738 18.4 41,873 108 41,981 32.2 12,987 28,994 11,149 17,845 6,467 (443) 11,820 20.6 4,155 15,976 63.2 20.6 FY11 241,161 26.4 48,786 682 49,468 17.8 15,597 33,871 9,454 24,417 7,823 (946) 17,540 48.4 17,540 78.6 24.4 FY12E 370,732 53.7 67,989 1,698 69,688 40.9 19,281 50,406 11,522 38,884 12,832 222 25,830 47.3 25,830 107.4 36.6 FY13E 371,388 0.2 76,895 927 77,823 11.7 22,159 55,664 14,282 41,382 13,656 326 27,400 6.1 27,400 113.9 6.1 Cash Flow Statement Pre-tax profit Depreciation Total Tax Paid Chg in w orking capital Other operating activ ities Cash flow from oper (a) Capital Ex penditure Chg in inv estments Other inv esting activ ities Cash flow from inv (b) Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Change in minority interest Div idend (incl. Tax ) Other financing activ ities Cash flow from fin (c) Net chg in cash (a+b+c) FY09 10,208 9,878 (726) 26,220 10,798 56,377 (80,982) 730 (6,884) (87,136) (30,759) (763) 44,140 (558) (11,681) 31,137 378 FY10 17,845 12,987 (6,467) (7,734) 16,406 33,037 (17,741) (2,316) 4,263 (15,794) 17,242 (1,266) (4,481) (2,409) (11,149) (19,305) (2,063) FY11 24,417 15,597 (7,823) 1,787 10,905 44,883 (54,691) (22,856) 682 (76,865) (31,982) 59,397 3,013 (3,524) (9,454) 49,432 17,449 FY12E 38,884 19,281 (12,832) (5,886) 9,824 49,272 (86,750) 1,698 (85,052) (35,780) 15,882 25,000 (4,461) (11,522) 24,898 (10,882) FY13E 41,382 22,159 (13,656) 1,385 13,355 64,625 (86,525) 927 (85,598) (20,973) 35,000 (4,461) (14,282) 16,256 (4,717)
Balance Sheet Equity Share Capital Reserv es & surplus Shareholders' funds Minorities interests Total Debt Capital Employed Net fix ed assets Cash & Cash Eq. Net Other current assets Inv estments Net Deferred tax Assets Total Assets
FY09 1,871 72,669 74,540 2,732 169,002 246,274 286,775 5,093 (36,792) 3,966 (12,768) 246,274
FY10 1,871 87,911 89,781 2,187 164,521 256,488 293,082 3,030 (29,058) 6,282 (16,848) 256,488
FY11 2,231 160,272 162,503 2,358 167,534 332,395 334,115 20,480 (30,845) 29,138 (20,494) 332,395
FY12E 2,406 197,347 199,754 2,580 192,534 394,868 401,584 9,598 (24,959) 29,138 (20,494) 394,868
FY13E 2,406 220,286 222,692 2,906 227,534 453,132 465,951 4,881 (26,344) 29,138 (20,494) 453,132
FY09 19.6 1.7 0.2 2.2 26 8.3 13.4 1.1 5.6 11.0 5.5 1.4
FY10 22.0 8.4 1.2 1.8 29 7.2 14.7 1.3 5.7 12.5 6.0 1.7
FY11 20.2 7.3 1.5 0.9 20 6.9 14.4 1.0 5.0 10.7 5.6 1.2
FY12E 18.3 7.0 1.8 0.9 13 8.6 14.7 0.7 4.1 7.8 4.5 1.0
FY13E 20.7 7.4 1.8 1.0 15 8.2 13.1 0.7 3.5 7.4 4.1 0.9
64
Godawari Power and Ispat

Company Update

Time to benefit from completion of resource integration
Godaw ari Pow er 330 280 230 180 130 Jun-10 BSE (Rebased)

Key Financials (Rs mn) Net Revenues YoY Gr.(% ) Op. Profit Adj. Net Profit YoY Gr. (%) Dil. EPS (Rs) OPM (% ) ROCE (% ) RoE (% ) PER (x) P/ BV (x) EV/ EBDITA (x) FY09 10,920 31.7 1,229 623 (39.2) 22.2 11.3 12.5 14.9 5.9 0.8 4.1 FY10 8,224 (24.7) 1,305 572 (8.1) 20.4 15.9 9.2 12.1 7.2 0.8 5.7 FY11 11,161 35.7 2,323 859 50.0 27.0 20.8 12.4 15.6 5.6 0.8 5.2 FY12E 17,300 55.0 3,383 1,443 68.1 45.4 19.6 13.3 21.5 3.4 0.7 3.2 FY13E 18,087 4.5 3,457 1,442 (0.1) 45.4 19.1 11.5 17.9 3.4 0.6 2.9
Key stock data Market cap (Rs mn) BV (Rs/ share) Shares O/S (F.V. Rs10) Free Float (% ) 6-mth avg trade value (Rs mn) 52 week High/Low Bloomberg Code Reuters Code
Sep-10
Dec-10
Mar-11
Jun-11
5,072 190.5 31.8 36.3 13.0 Rs 256/157 GODPI IN GDPI.BO
Promoter 64% FII 5%
Other Inst. 5% Public 26%
Source: Company, PINC Research; Note: * EV-based valuation ratios and target price calculated by valuing capital WIP at book value
65
Reaping benefits of backward integration

Backward integration aids in margin expansion
Iron ore: Godawari Power commenced captive iron ore mine in FY10 which aided in reducing CoP of DRI in FY11 despite higher iron ore prices, owing to consumption of captive iron ore and pellets Coal: The allotted Nakia coal block is still in the forest clearance stage and is expected to be operational by FY12. Not included in our estimates. Remains future growth trigger for margin expansion.
OPM expands on volume growth and integration benefits (Consolidated)
Sponge Iron 1,000 800 600 400 200 FY09
Pellets
Billets
HB Wire
r ove
OPM (%) - RHS 25 20 15 10 5 -
7% of 4 GR 3E A -1 eC 1 um FY1 Vol
0.6mnt pellet plant commissioned in Q4FY10 boosted profitability

In FY11, the company produced 354kt (59% CU) & sold ~80kt pellets Owing to benefits of captive iron ore and pellet, companys OPM has expanded to 21% in FY11, up 500bps YoY, despite lower contribution from merchant power sales as tariffs came under pressure
('000 mt)
FY10
FY11
FY12E
FY13E
Mine
Despite rising iron ore cost, DRI CoP declined in FY11 on captive iron and pellet
Captiv e iron ore 900 750 600 450 300 12,000 150 FY08
Grade/Fe Content
64.5 63.0 F
Reserves (mnt)
7.0 7.0 243
Capacity (mnt)
0.6 0.6 NA
Distance from plant(km)

120 140 125-150
Status
Iron ore mine AriDongri mine Operational Aw aiting hand ov er by forest authorities Aw aiting forest clearance
DRI output DRI CoP (Rs/t) - RHS
Pellet output 18,000 16,000 14,000
Pellet captiv e cons ('000 t)
Boria Tibu Mine Coal Nakia Coal Block*
Source: Company,PINC Research, Note: * GPIL's stake is 26%
Savings from captive iron ore MP of iron ore (Rs/t) Captive iron ore cost (Rs/t)* Benefit to GPIL (Rs/t) Total iron ore + pellets required (mnt) Savings (Rs mn)
FY11 4,000 2,853 1,147 0.48 547
FY12E 4,800 3,521 1,279 0.50 645
FY13E 4,560 3,394 1,166 0.51 590
10,000 FY09 FY10 FY11 FY12E FY13E
Source: Company, PINC Research; * captive iron ore cost is blended for iron ore lumps and pellets.
66
Consolidation and Amalgamation impact

We have consolidated GPILs financials and included
Merger of RR Ispat and Hira Inds with GPIL, which resulted in ~13% equity dilution (financials provided below) Ardent Steel: GPILs 75% subs. Ardent Steel commissioned 0.6mntpa pellet plant in Orissa in Q2FY11 and produced ~55kt pellets in FY11, we expect Ardent to generate EBITDA of Rs692mn and Rs728mn in FY12E and FY13E respectively
Value of Ardent Steel Net pellet realisation (Rs/t) Iron ore Cost @ 1.15t of iron ore/ t of pellet (Rs/t) Conversion Cost (Rs/t) Total cost (Rs/t) EBITDA (Rs/t) FY12E Pellet output (mnt) EBITDA (Rs mn) Target EV/EBITDA (x) EV Net Debt Residual equity value Godawari share @ 75% Value/share (Rs)
(Rs mn) 7,971 3,450 2,600 6,050 1,921 0.36 692 4.5 3,112 990 2,122 1,592 50
Financials of merged entities

Company
Hira Ferro Alloy s
Operational assets
52.5kt Ferro alloy s 20MW Pow er
Holding pre-amalgamation
10% - RR Ispat 40% - Hira Inds 1.3% - GPIL 100% subs. - GPIL 0%- GPIL
Holding post amalgamation

51.2% - GPIL
FY12E Financials
Rev enues - Rs1.7bn EBITDA - Rs244mn PAT - Rs44mn
FY12E Debt
Rs1.3bn
RR Ispat Hira industries

So urce: Co mpany, P INC Research
100kt Wire rods 30kt Steel w ires 600kt crusher plant
100.00% 100.00%
Rev enue - Rs1.1bn PAT - Rs45mn NA
Rs190mn Rs200mn
67
Risks and concerns

Continued delay in acquiring forest land in the Boria Tibu mine
If the delay in commencing mining at Boria Tibu persists, company might resort to purchasing iron ore lumps at market price instead of using pellet captively to benefit from high pellet price
Foray into unrelated Solar power project

Setting up a 50MW solar power plant under its 100% subs. Godawari Green Energy Ltd. (GGEL) at an investment of Rs8bn under Jawaharlal Nehru National Solar Mission (JNNSM) Scheme Assured off-take agreement: PPA with NTPC Vidyut Vyapar Nigam Ltd (NVVN) for 25 years at Rs12.20/unit Godawari Power has infused Rs1.2bn as Equity in FY11 by raising debt on its books; additional equity investment of Rs1bn to be made in FY12E and FY13E through internal accruals; rest of the funding through debt on the books of GGEL.
Funding of solar power project

Funding Equity Equity (already infused) Debt (@ ~11.5% ) Total investment
Rs mn 2,250 1,200 5,600 7,850
Current Status of 50MW Solar Power project Financial closure Land - 355 acres Equipment orders Planned capex
10th July'11 allotted by Government of Rajasthan at Rs10,000/acre In negotiations with equipment suppliers at US and Europe; to be placed by Q3FY12 40-50% of total capex to be spent in FY12
We believe that foray in unrelated and uncertain solar power project is a concern and overhang on the stock. We have valued it at 10% discount to capex
68
Valuation attractive In our Top BUY list

Valuation: Attractively valued at 3.2x FY12E EV/EBITDA
We expect GPIL to benefit in FY12E from higher steel, DRI and pellet prices amidst increasing pellet and DRI output. Further, stabilisation of operations at Ardent steel is expected to provide additional volume and earnings growth. We maintain BUY with a TP of Rs278 (4.5x FY12E EV/EBITDA)
P/E 16 12 8 Av g+1std Av . P/E Av g-1std
Target Price: Sensitivity to power tariff and target multiple

(Rs) 278 FY12 EV/EBITDA (x) 3.5 4.0 4.5 5.0 5.5 3.25 150 195 240 285 330 FY12E Merchant Power tarrif (Rs/unit) 3.75 166 212 259 306 353 4.25 181 230 278 327 376 4.75 196 247 297 348 398 5.25 212 264 316 369 421
-
Aug-06
Oct-07
Jan-09
Mar-10
Jun-11
1-yr Forward EV/EBITDA: Avg. of 4.7x

EV/EBITDA Av g+1std 10 8 Av . EV/EBITDA Av g-1std
FY12 EBITDA : Sensitivity to power tariff and DRI Realisation

(Rs mn) 15,697 FY 12 Power tariff 3.25 (Rs/unit) 3.75 4.25 4.75 5.25 2,126 2,240 2,355 2,469 2,584 FY12E Sponge Iron net realisation (Rs/t) 16,523 2,521 2,636 2,750 2,865 2,979 17,844 3,154 3,268 3,383 3,498 3,612 18,175 3,312 3,427 3,541 3,656 3,770 19,001 3,708 3,822 3,937 4,051 4,166
-
6 4 2
Aug-06
Oct-07
Jan-09
Mar-10
Jun-11
69

(Rs mn)
Income Statement Net sales Grow th (%) Operating Profit Other Income EBITDA Grow th (%) Depreciation EBIT Interest Paid PBT (before E/o items) Tax Prov ision Minority Interest Adjusted Net Profit E/o loss/(income) Reported Net Profit Grow th (%) Adjusted Diluted EPS (Rs) Diluted EPS Grow th (%)
Balance Sheet Equity Share Capital Reserv es & surplus Shareholders' funds Minorities interest Total Debt Capital Employed Net fix ed assets Cash & Cash Eq. Net Other current assets Inv estments Net Deferred tax Assets Total Assets
FY09 10,920 31.7 1,229 114 1,343 (22.4) 285 1,058 356 702 88 9 623 623 (34.4) 22.2 (39.2)
FY09 313 4,176 4,489 67 3,548 8,104 6,127 438 1,456 101 (18) 8,104
FY10 8,224 (24.7) 1,305 40 1,345 0.2 342 1,004 337 667 106 12 572 572 (8.1) 20.4 (8.1)
FY10 281 4,701 4,982 101 5,181 10,264 8,279 196 1,680 117 (9) 10,264
FY11 11,161 35.7 2,323 155 2,478 84.2 554 1,924 731 1,193 198 (136) 859 859 50.0 27.0 32.6
FY11 318 5,731 6,048 764 8,845 15,657 10,645 1,363 3,375 220 55 15,657
FY12E 17,300 55.0 3,383 116 3,499 41.2 702 2,797 869 1,928 386 (100) 1,443 1,443 68.1 45.4 68.1
FY12E 318 7,081 7,398 868 9,845 18,111 13,943 762 3,126 224 55 18,111
FY13E 18,087 4.5 3,457 139 3,596 2.8 755 2,841 900 1,941 388 (111) 1,442 1,442 (0.1) 45.4 (0.1)
FY13E 318 8,430 8,747 983 11,845 21,575 17,389 774 3,129 228 55 21,575
Cash Flow Statement Pre-tax profit Depreciation Total Tax Paid Chg in w orking capital Other operating adj. Cash flow from oper (a) Capital Ex penditure Chg in inv estments Other inv esting activ ities Cash flow from inv. (b) Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Change in minority interest Div idend (incl. Tax ) Other financing activ ities Cash flow from fin (c) Net chg in cash (a+b+c)
FY09 702 285 (88) 342 368 1,609 (2,481) 227 114 (2,139) (531) (1) 706 67 (82) (356) 334 (196)
FY09 11.3 5.7 1.9 0.7 56.0 12.5 14.9 0.5 4.1 5.9 4.1 0.8
FY10 667 342 (106) (224) 319 997 (2,489) (5) 40 (2,454) (1,457) (32) 1,632 35 (82) (337) 1,216 (242)
FY10 15.9 7.0 1.7 1.0 68.2 9.2 12.1 0.9 5.7 7.2 4.5 0.8
FY11 1,193 554 (198) (1,694) 410 264 (2,920) (98) 155 (2,864) (2,600) 405 3,664 522 (93) (731) 3,767 1,167
FY11 20.8 7.7 1.6 1.2 81.5 12.4 15.6 1.1 5.2 5.6 3.4 0.8
FY12E 1,928 702 (386) 249 753 3,246 (4,000) 116 (3,884) (638) 1,000 (93) (869) 38 (600)
FY12E 19.6 8.3 1.6 1.2 66.0 13.3 21.5 0.6 3.2 3.4 2.3 0.7
FY13E 1,941 755 (388) (3) 761 3,066 (4,200) 139 (4,061) (995) 2,000 (93) (900) 1,007 12
FY13E 19.1 8.0 1.6 1.3 64.0 11.5 17.9 0.6 2.9 3.4 2.2 0.6
70
Monnet Ispat and Energy

Company Update

Steel and Power: Charging to fire!
Monnet Ispat 700 600 500 400 300 Jun-10 Sensex Rebased
Financial Summary
Key Financials (Rs mn) Net Rev enues YoY Gr.(%) Op. Profit Adj. Net Profit YoY Gr. (%) Dil. EPS (Rs) OPM (%) ROCE (%) RoE (%) PER (x ) P/ BV (x ) EV/ EBDITA (x ) FY09 15,487 33.6 3,747 2,127 27.4 43.0 24.2 11.2 17.9 7.9 1.3 6.0 FY10 14,807 (4.4) 4,640 2,879 35.3 42.6 31.3 12.5 19.3 0.9 0.1 2.0 FY11 15,737 6.3 4,655 2,851 (1.0) 42.4 29.6 8.9 15.0 4.9 0.6 3.0 FY12E 21,823 38.7 5,830 3,275 14.9 48.8 26.7 8.8 14.2 4.2 0.6 4.1 FY13E 37,469 71.7 8,622 4,404 34.5 65.6 23.0 10.9 16.5 3.1 0.5 4.0
Sep-10
Dec-10
Mar-11
Jun-11
Key stock data Market cap (Rs mn) BV (Rs/ share) Shares O/S (F.V. Rs10) Free Float (% ) 6-mth avg trade value (Rs mn) 52 week High/Low Bloomberg Code Reuters Code 34,195 317.4 67.2 50.6 99.3 Rs682/350 MISP IN MNET.BO
Other Inst. 4% Public 14%
FII 32%
Prom. 50%
Source: Company, PINC Research; Note: * Valuation ratios adjusted for value of Monnet Power, EV/EBITDA also adjusted by valuing CWIP at book value
71
Transforming from Metallics to Steel

Volumes to double by FY13E; Focus on integration
Expansion of 1.4mtpa by FY13 would double capacity and help Monnet Ispat transform from a sponge iron player to integrated steel producer.
Integration to increase share of steel sale; We expect blended EBITDA/t to expand from Rs4,600 in FY11 to Rs6,470 in FY13E
Volume share of steel to increase to 91% in FY13E (6% in FY11).
from n atio rm sfo steel an s tr llics to t Q1FY13 nne eta o M M Q4FY12

Q3FY12 Q1FY12 Current
DRI 0.8mnt Billet 0.3mnt Structural 0.2mnt Ferro Alloys 58.4ktpa Power 150MW Power 80MW Pig Iron 0.6mnt DRI 0.2mnt Sinter EAF-I 0.8mnt Bar mill 0.7mnt
By FY13
Metallics DRI 1.02mnt Pig Iron 0.6mnt Billet 1.9mnt Steel Structural 0.2mnt Bar mill 0.7mnt Plate mill 0.7mnt Others Ferro Alloys 58.4ktpa Coke oven 0.4mnt Pellet 1.2mnt Power 230MW
Q4FY13
Coke 0.4mnt Pellet 2mn
EAF-I 0.8mnt Bar mill 0.7mnt
We expect robust 60% CAGR in steel EBITDA, from Rs3.1bn in FY10 to Rs7.9bn in FY13E.
EBITDA to grow with better product-mix and increased volume

12 (Rs bn) Steel Pow er
Volume growth and better product-mix to result in Steel EBITDA explosion

Steel EBITDA (Rs bn) 15 EBITDA/t (Rs) - RHS 6,473 6,500
Higher share of steel sale to result in margin expansion
0.7 2.3
12 9 6 3,463 0.9 2.4 Product FY10 Volume growth Mix 0.3 3.5 4,591 2.2 2.2 7.9
2.3 1.7
1.6
4,500
7.9 3 2.1 FY09

3 2.4 FY10 3.1 FY11 3.5 0 FY13E
2,500 Product FY12E Volume growth FY13E Mix
FY12E
72
Moving towards resource integration

Cost competitive operations on captive resources
Capacity of Milupara (operational coal block) would be scaled up to 1.5mnt to meet increased steel and power demand. Power capacity would be increased by 80MW to meet additional power requirements of expanded capacity. Iron ore mine (acquired with Rameshwaram Steel) would provide further cost advantages. We have not considered this in our estimates. The company acquired coal and coking coal blocks in JVs. These are at initial stages, and thus, we have not included them in our estimates. Milupara coal block visit snapshot
We value Monnet Ispat (standalone,) at Rs343/share (6.0x FY12E EV/EBITDA)
Status of captive mines

Mine Location Type of mine Grade Reserves(mt) Regulatory approvals Status of development
Milupara - Coal
Utkal B2
Raigarh,
Angul, Odisha
Underground
Open Cast
B to D
E&F
86
85
Mandakini
Rajgamar - Coal
Talcher, Odisha
Chattisgarh
Open Cast
Underground
E&F
B to E
97*
49.9*
Recvd Environmental and Recvd Environmental Environmental clearance

No clearances obtained
Currently operational with output of 1mtpa; consumed for

Total land requirement: 298acres; Acquired: 160-170acres
Seeking government approval to increase mine capacity

Ex pected to be operational by Q3FY13
Urtan North - Coking coal

Rajnath - Iron ore
Sohagpur, MP
Chattisgarh
Underground
Underground
NA
62-65% FE
23.3*
30
Expected to be operational by Q3FY13

To get complete control by Dec'12
PT - Sarwa Sembada Karya

* MISPs stake Source: Company, PINC Research
Indonesia
65
Not a concern
Reserve based on exploration of 1,500hectares out of total
73
Monnet Power: Powered by captive coal

Monnet Ispat through its 87.5% subsidiary Monnet Power Company Ltd (MPCL) is setting up a 1,050 MW (2*525MW) CPP in Angul, Odisha. Blackstone had bought 12.5% stake in Monnet Power for Rs2.75bn, valuing the company at Rs22bn. Monnet Ispats 87.5% in Monnet Power is valued at Rs19.3bn. Due to the delay in obtaining environmental clearance, 1,050 MW power project is delayed by a qtr. Revised timeline:
Phase I (525 MW) Phase II (525MW) JanFeb 2013 Mar-Apr 2013
High margin on low power generation cost (secure captive coal, negligible freight cost)
Coal Blocks Utkal B2 Mandakini*
MIEL's stake 33.33% Source: Company, PINC Research
Reserves 85 290.5
Distance (km) 4 20
Grade E-F E-F
Timeline Q2 FY12 FY13
We value Monnet Power at Rs287/share (based on stake sale to Blackstone), which is at a 23% disc. to DCF-based fair value of Rs372/share. Monnet Power is setting up an additional unit of 660MW at Angul in Odisha. We have not included this in our estimates.
Out of the total capex of Rs51bn for the project, the company has already incurred Rs11.5bn. Equipments have already been ordered.
BTG equipment from BHEL; BoP from Indure
Off-take security: Around 85% is secured under PPA with PTC and GRIDCO; merchant sale of the rest would provide benefit of high tariffs. Commissioning of 1,050MW of CPP would boost revenue and profitability FY14E onwards.
74
Monnet Power: DCF valuation

Monnet Power - Key Parameters/Assumptions CPP capacity (MW) 1,050 State grid (25% ) 263 PPA with PTC 600 Available for merchant sale 188 Power: Merchant tariff (Rs/unit) 4.0 Blended tariff (Rs/unit) Coal required (kg/unit) O&M annual escalation (% ) Discounting rate (% )
Valuation by Blackstone Stake sold to Blackstone Amount for 12.5% stake Value assigned to Monnet Power MISP's 87.5% stake value No. of shares Value per share (Rs)
(Rs mn) 12.5% 2,750 22,000 19,250 67 287
3.0 0.63 1% 15%
Monnet Power: DCF Valuation

(Rs mn) Installed Capacity (MW) Power Unit Sales (mn kwhr) Blended power tariff (Rs/kwhr) Cost (Rs/kwhr) EBITDA (Rs/kwhr) DCF PAT Depreciation Change in WC Capex Net Borrowing/(repayment) FCFE NPV Value of MISP's 87.5% stake
FY11
FY12E
FY13E
FY14E 1,050 2,552 3.0 0.70 2.27 FY14E 1,022 2,958 (2,280) 5,105 5,105 1,700 372
FY15E 1,050 6,807 3.0 0.72 2.30 FY15E 6,915 2,958 (3,890) (2,102) 3,880
FY16E 1,050 6,807 3.0 0.73 2.28 FY16E 6,961 2,958 19 (2,102) 7,836
FY17E 1,050 6,807 3.0 0.75 2.26 FY17E 7,007 2,958 18 (2,102) 7,881
FY 18E 1,050 6,807 3.0 0.76 2.23 FY 18E 7,052 2,958 17 (2,102) 7,925
. FY25E 1,050 6,807 2.9 0.89 2.06 . FY25E 7,280 1,275 12 (2,102) 6,465
. FY31E 1,050 6,807 2.9 1.01 1.91 . FY31E 7,507 1,275 (2,102) 6,680
FY11
FY12E
FY13E
6,700 5,700 (1,000) 28,528 24,962
18,000 10,750 (7,250)
16,500 16,500 Value/Sh. (Rs)
Monnet Ispats 87.5% stake in Monnet Power valued at Rs287/sh as per Blackstone deal, vis--vis our DCF value of Rs372/sh
75
Monnet Ispat and Energy: Valuation

SOTP valuation
Business Steel Commercial power Total
Company MISP Monnet Power
Equity value 23,032 19,250 42,282
Value Comment 343 6x FY12E EV/ EBITDA 287 Valuation by Blackstone 630
1-yr forward PE: Avg of 8.4x

20 15 10 5 0 Apr-06 P/E Av g + 1std Av . P/E Av g - 1std
MISP (S) TP: Sensitivity to steel price and target multiple

(Rs) 342.9 5.0 EV/EBITDA (x) Steel: FY12 5.5 6.0 6.5 7.0
FY12 Benchmark HRC price estimate (USD/tonne) 700 183 221 258 295 332 740 220 260 300 341 381 780 256 300 343 386 430 820 292 339 386 432 479 860 329 378 428 478 528
Aug-07
Nov -08
Feb-10
Jun-11
Monnet Power DCF value: Sensitivity analysis

(Rs) 371.7 Monnet Power: Discount rate (%) 13.0% 14.0% 15.0% 16.0% 17.0% 3.0 364 336 311 288 268 FY14E merchant power tariff (Rs/unit) 3.5 399 369 341 316 294 4.0 435 402 372 345 320 4.5 470 434 402 373 347 5.0 506 467 433 401 373
1-yr Forward EV/EBITDA: Avg of 6.3x

EV/EBITDA 12 9 6 3 0 Apr-06 Av g + 1std Av . EV/EBITDA Av g - 1std
Aug-07
Nov -08
Feb-10
Jun-11
76
Company Financials
(Rs mn)
Income Statement Net sales FY09 15,487 FY10 14,807 FY11 15,737 FY12E 21,823 FY13E 37,469 Cash Flow Statement FY09 FY10 FY11 FY12E FY13E
2,677 653 (550) (2,800) (90)

(110)
3,483 717 (604) 760 1,463

5,819
3,647 735 (796) (4,325) 518

(221)
4,093 1,022 (491) 644 715

5,983
5,505 1,653 (661) (1,563) 1,463

6,398
Grow th (%)
Operating Profit
33.6
3,747
(4.4)
4,640
6.3
4,655
38.7
5,830
71.7
8,622
Other income EBITDA Grow th (%) Depreciation

EBIT
289 4,036 34.4 653

3,383
176 4,816 19.3 717

4,099
225 4,879 1.3 735

4,144
269 6,099 25.0 1,022

5,077
269 8,891 45.8 1,653

7,238
(1,979) (729) 320

(2,388) (2,499)
(4,842) (2,713) 6
(7,549) (1,730)
(8,170) (429) 225

(8,375) (8,597)
(12,000) (5,500) 269

(17,231) (11,248)
(10,000) (1,667) 269

(11,398) (5,000)
Interest Paid PBT (before E/o) Tax Prov ision

Adjusted Net Profit
706 2,677 550

2,127 33
616 3,483 604

2,879 (188)
498 3,647 796

2,851 -
984 4,093 819

3,275 -
1,733 5,505 1,101

4,404 -
Equity raised/(repaid) Debt raised/(repaid) Div idend (incl. Tax ) Other financing activ ities
Cash flow from fin (c) Net chg in cash (a+b+c)
5 2,271 (281) (706)

1,290 (1,209)
1,165 1,698 (334) (616)

1,912 182
2,163 11,805 (430) (498)

13,041 4,444
525 8,000 (430) (984)

7,111 (4,137)
7,500 (430) (1,733)

5,337 337
E/o income/ (loss) Reported Net Profit Grow th (%)

Diluted EPS (Rs)
2,160 30.0
43.0
2,691 24.6
42.6
2,851 5.9
42.4
3,275 14.9
48.8
4,404 34.5
65.6
EPS Grow th (%)
10.2
(1.0)
(0.4)
14.9
34.5
Balance Sheet
FY09
FY10
FY11
FY12E
FY13E
Key Ratios
FY09
FY10
FY11
FY12E
FY13E

Shareholders' funds
480 11,557
12,037
545 16,001
16,546
644 20,671
21,314
672 24,012
24,684
672 27,987
28,658
OPM (%) Net Margin (%) Yield (%) Net debt/Equity (x ) Working Capital Day s
RoCE (%)
24.2 13.8 1.4 0.8 50 11.2 17.9 1.4 6.0 7.9 6.1 1.3
31.3 19.3 1.7 0.7 51 12.5 19.3 0.6 2.0 0.9 0.7 0.1
29.6 18.1 1.1 0.9 68 8.9 15.0 0.9 3.0 4.9 3.9 0.6
26.7 15.0 1.1 1.2 55 8.8 14.2 1.1 4.1 4.2 3.2 0.6
23.0 11.8 1.1 1.3 50.0 10.9 16.5 0.9 4.0 3.1 2.3 0.5
Total Debt Deferred tax liability

Capital Employed
13,252 1,140
26,428
14,950 1,196
32,692
26,755 1,256
49,325
34,755 1,583
61,023
42,255 2,024
72,937
Net fix ed assets Inv estments Net w orking capital Cash & Cash Eq. Net other current assets
Total Assets
14,365 1,149 1,505 3,463 5,945

26,428
18,495 3,861 1,976 3,645 4,714

32,692
25,931 4,291 3,064 8,089 7,951

49,326
36,909 9,791 2,835 3,952 7,536

61,023
45,256 11,458 4,458 4,290 7,476

72,937
RoE (%) EV/Net Sales (x ) EV/EBITDA (x )

PER (x) PCE (x)
Price/BV (x )
77
Usha Martin
Company Update
Reco: HOLD Upside: 34%

High on potential but concerns on delivery
Usha Martin 125 105 85 65 45 Jun-10 BSE (Rebased)
Sep-10
Dec-10
Mar-11
Jun-11

Key Financials (Rs mn) Net Rev enues YoY Gr.(%) Op. Profit Adj. Net Profit YoY Gr.(%) Dil. EPS (Rs) OPM.(%) ROCE (%) RoE (%) PER (x) P/ BV (x ) EV/ EBITDA (x) FY09 29,619 27.8 5,258 1,853 5.7 7.4 17.8 11.2 17.6 8.8 1.4 4.2 FY10 25,344 (14.4) 4,895 1,686 (9.0) 5.5 19.3 8.2 11.9 11.7 1.2 6.3 FY11 30,626 20.8 5,827 1,371 (18.7) 4.5 19.0 7.2 7.9 11.3 0.9 5.5 FY12E 39,251 28.2 7,719 2,397 74.8 7.8 19.7 9.2 12.7 6.5 0.8 3.8 FY13E 40,647 3.6 8,124 2,434 1.5 8.0 20.0 9.0 11.6 6.4 0.7 4.1
Key Stock Data Market cap (Rs mn) BV(Rs/share) Shares O/S (FV Rs 1 ) Free Float (% ) 6-mth avg trade value(Rs mn) 52 week High/Low Bloomberg Code Reuters Code
15,470 58 305 mn 61.6 23 Rs97/49 USM IN USBL.BO
Other Institution 28.4
Public 12.14
FII 21.08
Promoter 38.38
Source: Bloomberg, PINC Research; Note: EV based valuation ratios and TP adjusted for CWIP at 10% disc. to BV
78
Volume growth on expansion; Integration benefits

Expanded capacities to boost sales volume at a CAGR of 17% over FY11-13E along with improvement in sales mix
VAP to comprise 40% of total sales in FY12E vs. 36% in FY11
Level of integration increased over time
Fully integrated from captive RMs to value added products

0.4mntpa BF commissioned in Q2FY11 to aid in meeting metallics requirement for billets captively and reduce dependence on scrap Further, with commencement of Kathuria coal mine in Q4FY10, Usha Martin has become fully integrated except for coking coal
2010 - Coal mine, Blast furnace, Sinter plant operational 2009 - SMS III, Bloom rolling Mill and DRI III kiln commissioned 2009 - WRM capacity upgradation, 30 MW CPP and DRI II kilns commissioned
We expect consol. EBITDA and EPS CAGR of 18% and 33% respectively over FY11-13E on volume growth, integration benefits
2005 - Iron ore mine got operational 2004 - Commissioned DRI and WHRB power plant at steel division in Jamshedpur
Higher volume and increasing share of VAP to lead to EBITDA growth

Steel sales (mnt) 0.8 0.6 0.4 5,000 0.2 FY08
Value added products (mnt)
Consol. EBITDA (Rs mn) - RHS 10,000
Current capacity
Capacities
Pig iron Sponge iron Semi-steel (Billets) Finished Steel Value added products Pow er (MW)* Captiv e iron ore (ktpa)
Next phase of expansion

(mn tpa)
0.60 0.30 1.00 0.80 0.3 78 2,500 500
Phase-II (Rs12bn capex)

Coke Ov en Pellet DRI DRI Pow er Plant (MW) - I Pow er Plant (MW) - II Value added products Ore Beneficiation facilities
mnt
0.40 1.20 0.13 0.13 30 30 0.05
Timeline
Apr-12 Sep-12 Oct-11 Apr-12 Oct-11 Apr-12 FY12-13
7,500
2,500 FY09 FY10 FY11 FY12E FY13E
Captiv e coal (ktpa)
Source: Company, PINC Research; Note: * 20MW coal-based project to be commissioned by Q1FY12
79
Concerns galore
The companys quarterly results have been below expectations for last 2 quarters.
In Q3FY11 it faced one time issues of blade failure in power plant, logistic problems in transportation of captive coal However, in Q4FY11, despite revenue growth on resolution of one off issues and benefits of integration, profitability remained below expectations as OPM expansion remained subdued. Operational concerns remain: Company has faced output loss of ~15kt in the ongoing qtr (Q1FY12) as operation of CC-3 was impacted due to fire in the control room
Key concerns Underperformance and lack of margin expansion despite integration
2000 1600 1200 800 400 0
Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11
PINC EBITDA est. (Rs mn) PINC OPM est. (%) - RHS
Actual EBITDA (Rs mn) Actual OPM (%) - RHS
24.0 21.0 18.0 15.0 12.0 9.0
Despite increasing level of integration since FY06 (captive iron ore, captive coal, sinter plant, reduced dependence on scrap) and capacity expansion, OPM expansion has been restrained
EPS CAGR of 3% over FY06-11 with RoE contracting by 850bps
Despite integration and capex, OPM expansion subdued, RoE contracts

10.0 8.0 6.0 4.0 2.0 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
30 MW CPP operational Iron ore mine operational
FY12E volume guidance of 680kt (68% CU) leaves a lot to desire on the asset utilisation front and may surprise on the downside if the one-offs continue to impact performance Exposure to Europe: Europe accounts for 10% of total revenue
EPS (Rs)
RoE (%) - RHS

Coal mine operational
OPM (%) - RHS

BF, Sinter, SMS commissioned
25 20 15 10 5 -
80
Valuations
Although Usha Martin looks attractive at 3.8x FY12E EV/EBITDA, with fully integrated business model and volume growth, we maintain our cautious outlook on the stock given inability to benefit from increased capacity and integration amidst various one-offs impacting performance We would like to wait and watch for benefits of integration to flow resulting in margin expansion and volume growth Maintain HOLD with a revised target price of Rs68 (4.5x FY12E EV/EBITDA)
1-yr Forward P/E: Avg of 10.0x
30 24 18 12 6 0 Apr-06 P/E Av g+1std dev Av . P/E Av g-1std dev
Aug-07
Nov -08
Feb-10
Jun-11

(Rs) 68 FY12 EV/EBITDA (x) 4.0 4.5 5.0 5.5 6.0 660 0 6 13 20 26 FY12E Benchmark HRC price estimate (USD/t) 710 23 32 41 50 59 780 55 68 80 93 106 810 69 83 97 111 125 860 92 108 125 142 159
1-yr Forward EV/EBITDA: Avg of 5.1x

EV/EBITDA Av g+1std dev 9 7 5 3 1 Apr-06 Av . EV/EBITDA Av g-1std dev
Aug-07
Nov -08
Feb-10
Jun-11
81

(Rs mn)
Income Statement Net Revenue Grow th (%) Operating Profit Other income EBITDA Grow th (%) Depreciation EBIT Interest Paid PBT (before E/o items) Tax Prov ision Minority Interest Adjusted Net Profit E/o loss/(income) Reported Net profit Grow th (%) Diluted EPS (Rs) Diluted EPS Grow th (%) Balance Sheet Equity Share Capital Reserv es & surplus Shareholders' funds Minorities interests Total Debt Capital Employed Net fix ed assets Cash & Cash Eq. Net Other current assets Inv estments Net Deferred tax Assets Total Assets FY09 29,619 27.8 5,258 56 5,314 19.4 1,086 4,227 1,422 2,806 922 30 1,853 1,853 5.7 7.4 5.7 FY09 251 11,111 11,362 168 17,891 29,421 26,232 1,088 3,388 4 (1,291) 29,421 1,686 (9.0) 5.5 (25.3) FY10 305 16,570 16,875 162 17,166 34,203 31,777 476 3,731 4 (1,784) 34,203 FY10 25,344 (14.4) 4,895 55 4,950 (6.8) 1,295 3,655 1,255 2,400 685 29 1,686 FY11 30,626 20.8 5,827 46 5,873 18.6 2,010 3,864 1,823 2,041 640 29 1,371 1,371 (18.7) 4.5 (18.7) FY11 305 17,538 17,843 175 21,523 39,541 34,393 1,478 5,903 4 (2,237) 39,541 FY12E 39,251 28.2 7,719 79 7,797 32.8 2,243 5,554 1,982 3,572 1,143 32 2,397 2,397 74.8 7.8 74.8 FY12E 305 19,579 19,884 207 22,523 42,614 38,650 886 5,311 4 (2,237) 42,614 2,434 1.5 8.0 1.5 FY13E 305 21,656 21,961 243 21,523 43,728 40,170 1,139 4,652 4 (2,237) 43,728 FY13E 40,647 3.6 8,124 81 8,205 5.2 2,480 5,725 2,092 3,633 1,162 37 2,434 Cash Flow Statement Pre-tax profit Depreciation Total Tax Paid Chg in w orking capital Other CFO adjustments Cash flow from oper (a) Capital Ex penditure Chg in inv estments Other inv esting activ ities Cash flow from inv.(b) Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Change in MI Div idend (incl. Tax ) Other financing activ ities Cash flow from fin (c) Net chg in cash (a+b+c) Key Ratios OPM (%) Net Margin (%) Yield (%) Net debt/Equity (x ) Working Capital Day s RoCE (%) RoE (%) EV/Net Sales (x ) EV/EBITDA (x ) PER (x ) PCE (x ) Price/BV (x ) FY09 2,806 1,086 (922) 1,180 1,307 5,456 (9,947) 56 (9,891) (4,435) 6,517 (294) (1,422) 4,801 367 FY09 17.8 6.3 1.5 1.5 96 11.2 17.6 0.8 4.2 8.8 5.5 1.4 FY10 2,400 1,295 (685) (343) 1,079 3,746 (6,654) 55 (6,599) (2,853) 4,577 (726) (356) (1,255) 2,241 (612) FY10 19.3 6.7 1.5 1.0 112 8.2 11.9 1.2 6.3 11.7 6.6 1.2 FY11 2,041 2,010 (640) (2,172) 2,168 3,405 (4,626) 46 (4,580) (1,175) 4,357 (356) (1,823) 2,178 1,003 FY11 19.0 4.5 2.0 1.1 113 7.2 7.9 1.0 5.5 11.3 4.6 0.9 FY12E 3,572 2,243 (1,143) 592 1,904 7,167 (6,500) 79 (6,421) 746 1,000 (356) (1,982) (1,338) (593) FY12E 19.7 6.1 2.0 1.1 107 9.2 12.7 0.8 3.8 6.5 3.3 0.8 FY13E 3,633 2,480 (1,162) 659 2,011 7,620 (4,000) 81 (3,919) 3,702 (1,000) (356) (2,092) (3,449) 253 FY13E 20.0 6.0 2.0 0.9 97 9.0 11.6 0.8 4.1 6.4 3.1 0.7
82
Bhushan Steel
Company Update
Reco: SELL Upside: (11)%

Concerns galore overshadow growth prospects
Bhushan Steel 600 500 400 300 200 Jun-10 BSE (Rebased)
Sep-10
Dec-10
Mar-11
Jun-11
Financial Summary
Key Financials (Rs mn) Net Revenues YoY Gr.(% ) Op. Profit Adj. Net Profit YoY Gr. (% ) Dil. EPS (Rs) OPM (% ) ROCE (% ) RoE (% ) PER (x) P/ BV (x) EV/ EBDITA (x) FY09 49,575 17.9 10,293 4,213 7.9 19.8 20.8 6.8 23.0 6.2 1.3 3.4 FY10 56,404 13.8 14,527 7,600 80.4 35.8 25.8 7.0 30.9 6.2 1.6 4.0 FY11 70,005 24.1 20,372 10,011 31.7 47.1 29.1 7.1 29.4 9.3 2.4 9.0 FY12E 93,061 32.9 27,474 10,091 0.8 47.5 29.5 7.1 22.9 9.2 1.9 6.4 FY13E 86,643 (6.9) 28,837 8,311 (17.6) 39.1 33.3 6.3 15.6 11.2 1.6 5.9 Key Stock Data Market cap (Rs mn) BV (Rs/share) Shares O/S (FV Rs 2) Free Float (% ) 6-mth avg trade value (Rs mn) 52 week High/Low Bloomberg Code Reuters Code
93,013 184 212 mn 30.9 280 Rs 545/276 BHUS IN BSSL.BO
Public 28% Prom. 69% Other Inst. 1% FII 2%
Source: Company, PINC Research; Note: EV based valuation ratios and TP adjusted for CWIP at BV
83
Why we differ from consensus BUY call on Bhushan?

Despite considering volume growth and margin expansion in FY12E and FY13E on higher contribution from Odisha phase-II, our estimates are conservative vis--vis consensus
For FY13, we have not considered contribution from the ongoing expansion projects (Odisha phase-III, CRC mill, pipe mill)
Bhushan Steel: PINC Research vs. bloom consensus

PINC Estimates FY12E FY13E Revenue EBITDA OPM (% ) Capital expense* PBT PAT EPS (Rs) YoY growth (% ) Reco
Note: * Interest + Depreciation
Source: Company, PINC Research; Note: * Capital expense includes interest and depreciation
Bloomberg Consensus FY12E FY13E 85,301 27,285 32.0 11,181 16,104 12,141 55.2 17.1 BUY 106,622 35,938 33.7 14,494 21,444 14,481 69.2 25.4
Var (%) FY12E FY13E 9.1 0.7 (246)bps 23.8 (15.3) (16.9) (13.9) (18.7) (19.8) (42)bps 19.3 (46.2) (42.6) (43.5)
93,061 27,474 29.5 13,838 13,636 10,091 47.5 0.8 SELL
86,643 28,837 33.3 17,294 11,543 8,311 39.1 (17.6)
We expect margin expansion to be lower than consensus

Despite lack of captive raw material (or even captive HRC until FY10), Bhushans OPM is one of the highest in India as the company could keep HRC purchase cost low by exploiting arbitrage opportunities. We believe that extent of margin expansion on higher share of captive HRC would be capped as arbitrage benefits decline and high RM cost squeeze margin.
Bhushans HRC procurement cost at a steep discount to market price (USD/t)

Bhushan's av g. HRC cost 1,000 800 600 400 200 FY04
Bhushans OPM (%) one of the highest in India despite backward integration lacking
Tata Steel 50 40 30 20 10 SAIL JSW Bhushan Steel Usha Martin
Domestic HRC
HRC Landed - CIS Black sea
FY05
FY06
FY07
FY08
FY09
FY10
FY08
FY09
FY10
FY11
84
EPS likely to decline despite EBITDA growth

Despite 35% and 5% YoY growth in EBITDA for FY12E and FY13E respectively, we expect EPS to grow only 1% in FY12E and decline by 18% in FY13E on high base and increased capital charges
High EPS base in FY11: While trial production at Orissa phase-II (HRC output of 0.8mnt) contributed ~Rs5.5bn to EBITDA in FY11, lower interest, depreciation cost (as the project was capitalised in Mar11 only) resulted in 32% EPS growth for FY11. We believe that increase in capital charges for FY12E and FY13E would be disproportionately higher compared to EBITDA growth, resulting in flat EPS in FY12E and 18% decline in FY13E. Our interest, depreciation estimates are higher than management guidance Depreciation guidance of Rs4.5bn for FY12E indicates very low depreciation rate of 2.5% on projects capitalised in FY11.
Bhushans EPS likely to decline despite EBITDA growth on higher capital charges *
EBITDA (Rs bn) 36 50 30 24 18 12 6 FY08 FY09 FY10 FY11 FY12E FY13E 40 30 20 10 EPS (Rs) - RHS
Source: Company, PINC Research; Note: * Capital cost includes interest and depreciation cost
High financial leverage Equity dilution the only way forward

Bhushan has a capex requirement of ~Rs100bn in the near future (Odisha phase-III, 1.8mn tpa CRC mill, 197MW CPP in Odisha, 0.5mn tpa pipe mill in Khopoli amongst others) FCF to remain ve until FY13E. High financial leverage (net D/E of 4.3x, net D/EBITDA of 8.2x in FY11) restricts companys ability to leverage balance sheet any further Equity dilution is the only way forward for the company. The company has already planned equity dilution of USD1.0bn. We have not factored this in our estimates yet.
Large funding requirement and high leverage Equity dilution need of the hour
Free cash flow (Rs bn) (50) (40) (30) (20) (10) FY07 FY08 FY09 FY10 FY11 FY12E FY13E CFO/interest (x ) - RHS Net D/E (x ) - RHS Net D/EBITDA (x ) - RHS Interest cov er (x ) - RHS 10 8 6 4 2 -
85
Valuation Expensive at 6.4x FY12E EV/EBITDA

Bhushan steel is trading at 6.4x FY12E and 5.9x FY13E EV/EBITDA respectively, most expensive ferrous stock Given very high exposure to steel cyclicality (lack of resource integration, high leverage), we find the stock expensive. We maintain SELL with a TP of Rs389 (6.0x FY12E EV/EBITDA)
Valuation: Most expensive ferrous stock in our coverage (based on FY12E EV/EBITDA)
7.5 6.0 4.5 3.0 1.5 USM
FY12E
FY13E
Risks to our SELL call

Raw material integration: Bhushan has been allotted iron ore and coal mines in Odisha, WB and MP; owns 60% stake in Bowen energy, Australia. We have not factored these in our estimates.
Benefits of captive raw materials to come only in H2FY13, in the best case scenario
Mines
Iron Ore - Marsua Tirba Coal Coal - Andal East ( JV) Coking Coal - Urtan North Coking Coal - Bow en Energy
GPIL
BHUS
MISP
TATA
SAIL
JSW
SESA
Location
Keonjhar, Orissa Pakatpara, Orissa West Bengal Madhy a pradesh Australia
Reserves
70 650 235 55 80.4
Stake
100% 50% NA 100% 60%
Expected
Sep-12 Sep-12 Sep-12 Mar-14 May -15 6 4 2 Apr-06 Aug-07 Nov -08 Feb-10 Jun-11 8
Also trading near all-time high valuations (EV/EBITDA band chart)

EV/EBITDA Av g+1std dev Av . EV/EBITDA Av g-1std dev
Better-than-expected steel margin expansion augurs well for a highly leveraged player like Bhushan. Growth projects: Ramp-up of Odisha phase-II, timely completion of growth projects (Odisha phase-III, CRC mill, pipe mill) Collaboration with Sumitomo, Japan: Could lose out to Tata Steel post Sumitomo Nippon merger.
86
Company Financials
(Rs mn)
Income Statement Total Revenues
Grow th (%)
FY09 49,575
17.9
FY10 56,404
13.8
FY11 70,005
24.1
FY12E 93,061
32.9
FY13E 86,643
(6.9)
Cash Flow Statement

Pre-tax profit Depreciation Total Tax Paid Chg in w orking capital Other CFO adjustments
FY09
5,608 2,344 (1,395) (958) 2,709
FY10
10,656 2,091 (3,056) (8,235) 2,925
FY11
14,237 2,325 (4,226) 8,421 3,810
FY12E
13,636 5,920 (3,545) (958) 7,918
FY13E
11,543 6,233 (3,232) (541) 11,061
Operating Profit
Grow th (%) Other income EBITDA Depreciation EBIT Interest Ex pense PBT (before E/o items) Tax Prov ision
10,293
23.2 181 10,473 2,344 8,129 2,521 5,608 1,395
14,527
41.1 322 14,850 2,091 12,758 2,102 10,656 3,056
20,372
40.2 331 20,703 2,325 18,377 4,140 14,237 4,226
27,474
34.9 364 27,838 5,920 21,918 8,282 13,636 3,545
28,837
5.0 437 29,274 6,233 23,041 11,498 11,543 3,232

Capital Ex penditure Chg in inv etments Other inv esting activ ities
8,309
(31,869) (493) 181
4,381
(41,132) (1,123) 1,180
24,567
(65,000) 651
22,971
(45,000) 364
25,064
(32,000) 437

Equity raised/(repaid) Debt raised/(repaid) Ch. in minority interest Div idend (incl. Tax ) Other financing activ ities
(32,181) (23,873)
27,485 (124) (2,521)
(41,075) (36,694)
40,379 (124) (2,102)
(64,349) (39,783)
44,000 (124) (4,140)
(44,636) (21,665)
30,000 (124) (8,282)
(31,563) (6,500)
20,000 (124) (11,498)
Adjusted Net Profit

Grow th (%) E/o income/(loss)
4,213
7.9 4,213 (0.6)
7,600
80.4 858 8,458 100.8
10,011
31.7 320 10,331 22.1
10,091
0.8 10,091 (2.3)
8,311
(17.6) 8,311 (17.6)
Reported Net Profit

Grow th (%)
Diluted Adj. EPS (Rs)

19.8
7.9
35.8
80.4
47.1
31.7
47.5
0.8
39.1
(17.6)
Cash flow from fin (c) Net chg in cash (a+b+c) Key Ratios
OPM (%) Net Margin (%) Yield (%) Net debt/Equity (x ) Working Capital Day s RoCE (%) RoE (%) EV/Net Sales (x ) EV/EBITDA (x ) PER (x ) PCE (x ) Price/BV (x )
24,840 967 FY09

20.8 8.5 0.4 4.1 68 6.8 23.0 0.7 3.4 6.2 4.0 1.3
38,152 1,459 FY10

25.8 13.5 0.2 4.2 100 7.0 30.9 1.0 4.0 6.2 4.9 1.6
39,735 (47) FY11

29.1 14.3 0.1 4.2 80 7.1 29.4 2.6 9.0 9.3 7.5 2.4
21,594 (72) FY12E

29.5 10.8 0.1 4.0 75 7.1 22.9 1.9 6.4 9.2 5.8 1.9
8,378 1,879 FY13E

33.3 9.6 0.1 3.7 75 6.3 15.6 2.0 5.9 11.2 6.4 1.6
Balance Sheet
FY09
425 19,917
FY10
425 28,487
FY11
425 38,694
FY12E
425 48,660
FY13E
425 56,847
Shareholders' funds
Minorities interests Total Debt
20,342
84,667
28,912
125,046
39,118
169,046
49,085
199,046
57,272
219,046
Capital Employed
Net fix ed assets Cash & Cash Eq. Net Other current assets Inv estments Net Deferred tax Assets
105,009
92,861 1,491 12,229 830 (2,402)
153,958
131,886 2,950 20,464 1,953 (3,295)
208,164
194,561 2,903 12,043 1,953 (3,295)
248,131
233,641 2,831 13,001 1,953 (3,295)
276,318
259,408 4,710 13,543 1,953 (3,295)
Total Assets
105,009
153,958
208,164
248,131
276,318
87
Sesa Goa
Company Update

Multitude of concerns, but factored in the price

While underscoring strong free cash flow
Sesa Goa 530 460 390 320 250 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sensex Rebased
Financial Summary
Key Financials (Rs mn) Net Revenue YoY Gr.(% ) Op. Profit Adj. Net Profit YoY Gr.(% ) Dil. EPS (Rs) Op. Marg.(% ) ROCE (% ) RoE (% ) PER (x) P/BV (x) EV /EBDITA (x) FY09 49,591 29.7 27,062 21,522 39.6 27.3 54.6 55.1 51.9 7.5 3.4 4.4 FY10 58,583 18.1 31,486 25,072 16.5 28.2 53.7 34.6 41.6 10.0 3.0 5.5 FY11 92,051 57.1 52,031 42,712 70.4 47.5 56.5 35.6 40.3 5.6 1.8 2.7 FY12E 115,143 25.1 61,249 55,679 30.4 61.9 53.2 21.9 34.5 4.3 1.3 2.2 FY13E 115,020 (0.1) 57,225 54,703 (1.8) 60.8 49.8 14.3 25.3 4.4 1.0 1.8
Key stock data Market cap (Rs mn) BV (Rs/ share) Shares O/S (F.V. Rs1) Free Float (% ) 6-mth avg trade value (Rs mn) 52 week High/Low Bloomberg Code Reuters Code
241,041 145 899 mn 44.9 975 Rs388/221 SESA IN SESA.BO
Other Inst. 4%
Public 14%
FII 32%
Prom. 50%
Source: Company, PINC Research; EV/EBITDA also adjusted by valuing CWIP at book value
88
Multitude of concerns
Sesa Goa has been grappling with many issues in last one year: Volume growth slowdown: Compared to a volume CAGR of 21% over FY06-FY10, FY11 sales volume declined by 1.4% YoY
Export ban from Karnataka, termination of third party mining in Orissa and issues in Goa (logistics, ban on import of low grade ore by China)
Volume growth halted in FY11 on multitude of concerns
Sales v olume (mn dmt) 20 16 12 8 4 FY06 FY07 FY08 FY09 FY10 FY11 % YoY - RHS 40% 30% 20% 10% 0% -10%
Rising operating cost: Operating cost rose by 70% YoY in FY11 to USD44/dmt on increased royalty & export duty, energy cost
We expect further 20% rise in operating cost to USD53/dmt as impact of export duty hike (to uniform 20% since March11) comes in
Investment in Cairn: Sesa has acquired 18.5% stake (10.4% from Petronas, 8.1% in open offer) for ~USD2.7bn in Cairn India as part of parent Vedantas bid to acquire controlling stake in Cairn
Purchase of 40% stake by Vedanta from Cairns promoters delayed over royalty payments with ONGC Clarity expected soon Sesa has turned net debt company (post 18.5% stake purchase in Cairn for USD2.7bn) from net cash of ~USD2.2bn as on FY11
Geographical share in Sesas iron ore dispatch (mn wmt)
Goa FY11 FY10 0% 20% 16.3 14.7 40% 60% 4.0 80% Karnataka Orissa 2.5 1.6
Source: Company, PINC Research; Note: dmt Dry metric tonnes
Operating cost rise mainly on royalty and export duty hike (USD/dmt)
60 Ex port Duty Roy alty Freight Other costs
45 30
15
1.9
-
100%
FY07
FY08
FY09
FY10
FY11
FY12E
FY13E
Source: Company, PINC Research; Note: wmt Wet metric tonnes
Source: Company, PINC Research; Note: dmt Dry metric tonnes
89
But stock price factors in the concerns

However, we believe that these concerns are factored in the price
Sesa Goa has underperformed BSE Sensex by 42% and BSE Metals by 21% since Apr10..
While underscoring strong free cash flow generation mainly due to strength in iron ore prices
Stock performance : Concerns are factored in the price.
550
475
Karnataka bans ex ports of Iron ore
Sesa Goa announces intention to acquire 20% stake in Cairn
Sesa Goa reduces v olume guidance grow th
400
Sesa Goa closes operations at Orissa mine
Hike in export duty to uniform 20%
Ban on export from Karnataka lifted by Supreme court SFIO probe Sesa Goa for illegal mining and tax inconsistency
325
250 Mar-10
Apr-10
Jun-10
Jul-10
Sep-10
Oct-10
Dec-10
Jan-11
Mar-11
Apr-11
Jun-11
90
While underscoring volume revival and cash flow

Volume growth to return, slowly but surely: To be aided by revival of exports from Karnataka, as ordered by Supreme court
Although there is a delay in granting of export permits, exports from Karnataka are expected to revive post monsoon For Sesa Goa, we have assumed volume growth of 9%, 12% in FY12E, FY13E respectively (compared to managements guidance of 15-20%).
FY12 volumes to improve with elimination of Karnataka export ban
24 20 16 12 8 4 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E 10% 0% -10% Sales v olume (mn dmt) % YoY - RHS 40% 30% 20%
Exploration success to increase mine life: The company has added 53mnt gross R&R in FY11 taking the total to 306mnt (net of Orissa)
Assuming another 190mnt of gross addition to reserves and resources thru continuous exploration, we expect mine life of 18yrs
Strong iron ore prices to result in significant operating cash flow: In spite of higher operating cost, we expect EBITDA/t to expand by 11% to USD66/t in FY12E on strong iron ore prices
Based on our iron ore spot price (63.5% grade, CFR China) assumption of USD175 and USD157 for FY12E and FY13E respectively, we estimate Sesas operating cash flow for FY12E and FY13E at Rs41.2bn and Rs38.1bn respectively We expect Sesa Goa to turn net cash +ve by FY12E end
Strong iron ore prices to result in EBITDA/t expansion despite higher operating cost
Blended realisation (USD/dmt) 150 120 90 60 30 FY07 FY08 FY09 FY10 FY11 FY12E FY13E EBITDA (USD/dmt) CFO (Rs bn) - RHS 50 40 30 20 10 -
Cairn deal expected to resolve soon; to reduce overhang Capacity expansion of 375ktpa of pig iron, 280ktpa of met coke at a capex of Rs6.1bn by Q3FY12E To result in volume CAGR of 49% for pig iron, 33% for met coke over FY11-13E
Source: Company, PINC Research; Note: dmt Dry metric tonne, CFO Cash flow from operations
91
DCF valuation
DCF (In Rs mn) USD INR exchange rate Iron ore sales volume (in mn DMT) Sesa's blended realisation - Iron Ore Revenues - Iron Ore YoY growth (% ) Consolidated revenue (Rs mn) Iron ore cost (Rs/tonne) Iron ore EBITDA (USD/tonne) Iron ore EBITDA (Rs mn) Operating Profit (Rs mn) PAT ( excl Cairn India) Free cash flow to Firm PAT (excl Cairn India) Less: Other income * (1-t) Add: Depreciation Add: Interest * (1-t) Less: Capex Less: Inc in working capital FCFF (Rs mn) Discount rate - WACC (% ) Discounted value Firm value (Rs mn) Value of 18.5% stake in Cairn India Less: Net debt Residual equity value (Rs mn) Target price (Rs)
Source: Company, PINC Research; Note: dmt Dry metric tonne
FY11 45.6 18.1 103.9 85,937 64% 92,051 2,002 60 49,623 52,031 42,712 FY11 42,712 4,112 964 290 (5,500) (4,680) 29,675
FY12E 45.0 19.8 119.3 106,495 24% 115,143 2,380 66 59,275 61,249 41,100 FY12E 41,100 2,307 1,190 4,450 (11,250) (3,418) 29,765 18.0% 29,765 216,615 98,167 (10,070) 324,852 361
FY13E 43.5 22.2 106.2 102,751 -4% 115,020 2,196 56 53,885 57,225 37,333 FY13E 37,333 3,408 1,574 3,360 (3,500) 280 35,640 30,203
FY14E 42.0 25.0 88.0 92,558 -10% 105,768 1,867 44 45,805 50,201 33,874 FY14E 33,874 3,691 1,685 2,323 (3,000) 571 31,761 22,810
FY15E 41.6 28.1 88.0 102,731 11% 116,459 1,876 43 50,053 54,666 38,159 FY15E 38,159 3,964 1,787 1,234 (3,000) (1,136) 33,080 20,133
FY20E FY25E 40.0 31.4 88.0 110,686 0% 126,279 1,924 40 50,198 55,855 46,251 46,251 10,208 2,059 (1,000) (7) 37,094 9,869 40.0 31.4 88.0 110,686 0% 126,740 1,972 39 48,670 54,282 54,159 54,159 19,283 2,229 (1,000) (8) 36,097 4,198
FY29E 40.0 21.0 88.0 73,922 -33% 90,353 2,012 38 31,670 37,235 51,249 FY29E 51,249 27,852 2,314 13,636 39,347 2,360
FY20E FY25E
Iron ore business valued on DCF 18.5% stake in Cairn @ 10% disc to CMP.
We have increased discount rate to 18% (16% earlier) to account for price-led growth
92
Valuations
We expect Sesa Goa to benefit from revival of volume growth, albeit at a slow pace, 50%+ OPM on better realizations despite increasing cost, resulting in strong operating cash flow. At CMP of Rs268, the stock is attractively valued at 2.2x FY12E EV/EBITDA. We maintain BUY on the stock with a target price of Rs361.
TP sensitivity to tax on mining profits
MMDRA - Tax on mining profit (%) 361 Discount rate WACC (%) 14% 16% 18% 20% 22% 0% 408 383 361 343 327 10% 373 351 332 316 303 15% 355 334 317 303 290 20% 337 318 303 289 278 26% 316 299 285 273 263
13 10 8
EV/EBITDA (x): 1-yr rolling forward

EV/EBITDA Av g+1std 5 4 3 2 1 (1) Aug-06 Oct-07 Jan-09 Mar-10 Jun-11 Av . EV/EBITDA Av g-1std
P/E (x): 1-yr rolling forward

P/E Av g+1std Av . P/E Av g-1std
TP sensitivity to Iron ore prices

Long term iron ore price (USD/t) - FY14 onwards 361 Discount rate 14% WACC (%) 16% 18% 20% 22% 90 366 345 328 313 300 100 387 364 344 328 314 110 408 383 361 343 327 120 429 402 378 358 341 130 450 420 395 374 355
-
5 3
Aug-06
Oct-07
Jan-09
Mar-10
Jun-11
93
Company financials (Consol.)

(Rs mn)
Income Statement Net Revenue
Grow th (%)
FY09 49,591
29.7
FY10 58,583
18.1
FY11 92,051
57.1
FY12E 115,143
25.1
FY13E 115,020
(0.1)
Cash Flow Statement

FY09
28,743 517 (7,108) 3,229 (1,733)
FY10
33,227 745 (8,012) 1,324 (217)
FY11
56,085 964 (13,372) (5,079) (5,018)
FY12E
57,084 1,190 (15,983) (4,066) 2,976
FY13E
55,722 1,574 (18,388) (772) (71)
Operating Profit
Other Income EBITDA Depreciation EBIT Interest Paid PBT (before E/o items) Tax Prov ision Minority Interest
27,062
2,240.3 29,302 517 28,785 43 28,743 7,153 68
31,486
3,040.6 34,527 745 33,782 555 33,227 8,056 99
52,031
5,398.9 57,430 964 56,466 381 56,085 13,372 -
61,249
3,204.5 64,453 1,190 63,264 6,180 57,084 15,983 -
57,225
5,085.8 62,310 1,574 60,736 5,015 55,722 18,388 -

23,647
(1,442) 599
27,067
(18,945) 4,260
33,579
(5,500) (5,019) 4,911
41,199
(11,250) (120,161) 3,204
38,064
(3,500) 5,086

Equity raised/(repaid) Debt raised/(repaid) Change in MI Div idend (incl. Tax ) Other financing activ ities
(842) 22,805
19 (2,072) (43)
(14,685) 12,382
8,797 19,587 (2,072) (555)
(5,608) 27,971
12,775 (9,955) (3,160) (381)
(128,207) (87,008)
9,650 72,750 (3,559) (6,180)
1,586 39,650
(31,075) (4,208) (5,015)
Share of profit in Assc.

Adjusted Net Profit Grow th (%)
21,522.4 40 (1,641) 19,881.3
25,072.3 16 1,219 26,291.4
42,712.4 70 (488) 42,224.6
14,578
55,678.5 30 55,678.5
17,370
54,703.1 (2) 54,703.1
E/o loss/(income)
Reported Net profit
Diluted EPS (Rs)

27.3
39.6
28.2
3.1
47.5
68.6
61.9
30.4
60.8
(1.8)
Cash flow from fin (c) Net chg in cash (a+b+c) Key Ratios OPM (%)
Net Margin (%)
(2,096) 20,709 FY09 54.6

40.1
25,756 38,138 FY10 53.7

44.9
(721) 27,249 FY11 56.5

45.9
72,661 (14,347) FY12E 53.2

48.4
(40,297) (647) FY13E 49.8

47.6
Balance Sheet Equity Share Capital

Reserv es & surplus
FY09 787
46,370.2
FY10 831
78,346.1
FY11 869
129,748.6
FY12E 899
190,839.7
FY13E 899
240,283.2
Shareholders' funds
Minoritiy interest Total Debt Capital Employ ed Net fix ed assets Cash & Cash Eq. Net Other current assets Inv estments Net Deferred tax Assets
47,157
333.8 19 47,510 5,930 41,429 815 (664)
79,177
432.9 19,606 99,216 22,557 79,567 (2,158) (750)
130,618
432.9 9,650 140,701 27,093 106,816 2,522 5,019 (750)
191,739
432.9 82,400 274,572 37,154 92,470 5,940 139,759 (750)
241,182
432.9 51,325 292,940 39,080 91,823 5,660 157,129 (750)
Yield (%)
Net debt/Equity (x ) Working Capital Day s RoCE (%) RoE (%) EV/Net Sales (x ) EV/EBITDA (x ) PER (x ) PCE (x )
1.1
(0.9) 32 55.1 51.9 2.4 4.4 7.5 7.9
1.2
(0.8) (7) 34.6 41.6 3.0 5.5 10.0 9.3
1.3
(0.7) 13 35.6 40.3 1.5 2.7 5.6 5.6
1.5
(0.1) 28 21.9 34.5 1.1 2.2 4.3 4.2
1.9
(0.2) 30 14.3 25.3 0.9 1.8 4.4 4.3
Total Assets
47,510
99,216
140,701
274,572
292,940
Price/BV (x)
3.4
3.0
1.8
1.3
1.0
94
Equity Desk
EquityDesk
Sadanand Raje Head InstitutionalSales TechnicalAnalyst
TEAM
sadanand.raje@pinc.co.in 912266186366
Research
VineetHetamasaria,CFA NikhilDeshpande TasmaiAnilMerchant VinodNair AnkitBabel HitulGutka SubramaniamYadav MadhuraJoshi SatishMishra UrvashiBiyani NaveenTrivedi RohitKumarAnand RonakBakshi NamrataSharma SaksheeChhabra BikashBhalotia HarleenBabber DiptiVijaywargi SushantDalmia,CFA SumanMemani AbhishekKumar CKrishnamurthy HeadofResearch,Auto,Cement Auto,AutoAncillary,Cement Auto,AutoAncillary,Cement Construction,Power,CapitalGoods CapitalGoods Power Construction Power Fertiliser,NaturalGas,Engineering Fertiliser,NaturalGas,Engineering FMCG ITServices ITServices Media Media Metals,Mining Metals,Mining Metals,Mining Pharma RealEstate,Midcaps RealEstate,Midcaps TechnicalAnalyst Equities Equities Equities Derivatives Derivatives Head SalesTrading CoHead SalesTrading vineet.hetamasaria@pinc.co.in nikhil.deshpande@pinc.co.in tasmai.merchant@pinc.co.in vinod.nair@pinc.co.in ankit.b@pinc.co.in hitul.gutka@pinc.co.in subramaniam.yadav@pinc.co.in madhura.joshi@pinc.co.in satish.mishra@pinc.co.in urvashi.biyani@pinc.co.in naveent@pinc.co.in rohit.anand@pinc.co.in ronak.bakshi@pinc.co.in namrata.sharma@pinc.co.in sakshee.chhabra@pinc.co.in bikash.bhalotia@pinc.co.in harleen.babber@pinc.co.in dipti.vijaywargi @pinc.co.in sushant.dalmia@pinc.co.in suman.memani@pinc.co.in abhishek.kumar@pinc.co.in krishnamurthy.c@pinc.co.in rajeev.gupta@pinc.co.in ankur.varman@pinc.co.in himanshu.varia@pinc.co.in shaileshk@pinc.co.in ganeshg@pinc.co.in mehul.desai@pinc.co.in naresh.panjnani@pinc.co.in amar.margaje@pinc.co.in ashok.savla@pinc.co.in sajjid.lala@pinc.co.in rajub@pinc.co.in kinjal.mehta@pinc.co.in chandani.bhatia@pinc.co.in hasmukhp@pinc.co.in kamlesh.purohit@pinc.co.in amul.shah@sg.pinc.co.in gaurangg@pinc.co.in hemangg@pinc.co.in ketang@pinc.co.in
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SALES
RajeevGupta AnkurVarman HimanshuVaria Shailesh Kadam Ganesh Gokhale
DEALING
Mehul Desai Naresh Panjnani Amar Margaje AshokSavla Sajjid Lala RajuBhavsar Kinjal Mehta Chandani Bhatia Hasmukh D.Prajapati Kamlesh Purohit
SINGAPOREDESK
Amul Shah
DIRECTORS
GaurangGandhi HemangGandhi Ketan Gandhi
COMPLIANCE bikash.bhalotia@pinc.co.in Rakesh Bhatia
HeadCompliance
rakeshb@pinc.co.in
bright thinking
Infinity.com
Financial Securities Ltd
Small World, Infinite Opportunities
Member : Bombay Stock Exchange & National Stock Exchange of India Ltd. : Sebi Reg No: INB 010989331. Clearing No : 211 1216, Maker Chambers V, Nariman Point, Mumbai - 400 021; Tel.: 91-22-66186633/6400 Fax : 91-22-22049195
Disclaimer: This document has been prepared by the Research Desk of M/s Infinity.com Financial Securities Ltd. (PINC) and is meant for use of the recipient only and is not for public circulation. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors The information contained herein is obtained and collated from sources believed reliable and PINC has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The opinion expressed or estimates made are as per the best judgement as applicable at that point of time and PINC reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval PINC, its affiliates, their directors, employees and their dependant family members may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of PINC. The views expressed are those of analyst and the PINC may or may not subscribe to all the views expressed therein This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. Neither this document nor any copy of it may be taken or transmitted into the United State (to U.S.Persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions Neither PINC, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Copyright in this document vests exclusively with PINC and this document is not to be reported or circulated or copied or made available to others.
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SteelSector

Demand drivers intact

Greenfield expansions lagging

Sensex: 17,551 Sector View: Positive

bikash.bhalotia@pinc.co.in June 22, 2011

Infinity.Com Financial Securities Ltd.

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Steel: Margins unsustainably low; improvement likely

RM cost exceed pre-crisis levels, steel prices yet to catch up

Source: Bloomberg, PINC Research

HRC - CoP (Q1FY12)

HRC Price (Current)

HRC - CoP (2010)

China incurring losses at operating levels

700 600 500

Source: Industry, PINC Research

Infinity.Com Financial Securities Ltd.

Steel: Margin declines despite higher steel prices

However, profitability has suffered as miners benefit on higher RM cost hike

Mining OPM (%)

Steel OPM (%)

Low level of profitability unsustainable, improvement likely

350 150 (50)

Infinity.Com Financial Securities Ltd.

Steel demand improvement likely led by China, India

Steel inv entory - RHS

Source: Bloomberg, PINC Research

Net imports (RHS)

4.5 3.0 1.5 (1.5) (3.0) (4.5)

Infinity.Com Financial Securities Ltd.

PINC: Price assumptions and recommendations

807 167 330 3 44.8

Top BUY Tata Steel

Source: PINC Research

Top SELL Bhushan Steel

Source: PINC Research

Infinity.Com Financial Securities Ltd.

PINC revised estimates

FY13E Var (%)

JSW Steel (C)*

Godaw ari Pow er & Ispat (C)*

Usha Martin (C)*

Source: Company, PINC Research; Note: * C - Consolidated

Infinity.Com Financial Securities Ltd.

Comparative fundamentals and valuations

Infinity.Com Financial Securities Ltd.

Indian ferrous comparative fundamentals

Financial leverage Net D/E (x)

0 USM GPIL BHUS MISP TATA SAIL JSW SESA

Source: Company,, PINC Research

Valuation ratios FY12E

Sales volume growth (CAGR %)

USM GPIL BHUS MISP TATA SAIL JSW SESA

0 USM GPIL* BHUS MISP TATA SAIL JSW SESA

Source: Company, PINC Research; Note: * Includes pellet sales volume

Infinity.Com Financial Securities Ltd.

Monnet Ispat 30% EBITDA FY11-13E CAGR (%) JSW Steel

Godawari Power 20%

SAIL Usha M artin

Size of the bubble represents current market cap

Infinity.Com Financial Securities Ltd.

Global peer comparison : Indian steel companies at attractive valuation