Electrosteel Steels. Not Rated. Plant visit note. CMP Target Price - Plant visit note Steel. Investment Period -

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1 Plant visit note Steel October 11, 2012 Electrosteel Steels Plant visit note We visited Electrosteel Castings (ECL) associate Electrosteel Steels (ESL) upcoming 2.51mn tonne steel plant in Bokaro, Jharkhand. The construction work of the full plant is near completion stage; some of the facilities such as blast furnace, coke oven and sinter plant are up and running smoothly. ESL s product mix will primarily constitute long products including wire rod, TMT bars, ductile iron (DI) pipes, billets and pig iron. Low capex per tonne compared to global standards: ESL has imported approximately 95% of equipments from China (mainly from Shandong Province Metallurgical Engineering) and its construction work has been assigned to China First Metallurgical Construction Group and Ershisanye Construction Group. This has resulted in lower capex per tonne of `3,825, compared to global benchmark of `4,500-5,000/tonne for a greenfield steel plant. Although we appreciate the lower capex per tonne, however, the benefits of lower capex will be known once all the facilities are synchronized and the plant is fully operational. Currently, one blast furnace, coke oven batteries, sinter plant etc are running satisfactorily. The company has acquired land of 2,185 acres which provides it with an option to expand its capacity by at least another 0.5mn tonne without further land acquisition (in the future). ESL expects 80% utilization levels during FY2014: ESL expects to produce only 0.2mn tonne of steel in FY2013. Nevertheless, it expects to reach 80% utilization and 100% utilization in FY2014 and FY2015, respectively. We believe it could be challenging for the company to operate at 80% utilization levels from the beginning of FY2013. Update on mining projects: ESL is currently producing small quantities (150,000 tonne in FY2012) of coking coal from its coking coal mine. ESL stated that it will spend a total of `950cr (already spent `650cr) to develop its coking coal mine. For iron ore, it is still awaiting a Forest stage-ii clearance. ESL stated that it will start production from the mine within three to six months of signing a mining lease after it gets all clearances and signs a mining lease with the state government. Although the company was hopeful to start production from March 2013, we believe it is currently challenging to estimate the timelines for completion of clearance formalities. In the past, we have witnessed significantly higher-than-estimated time being taken for getting regulatory approvals for captive mines. Key parameters to monitor: The stock price performance of ESL is likely to be determined by timely ramp-up of remaining facilities at its plant and efficiency of the plant. Further, receipt of stage-ii clearance, signing of mining lease and production from its iron ore mine would be significant milestones for ESL. Currently, we do not have coverage on the stock. Not Rated CMP `9 Target Price - Investment Period - Stock Info Sector Market Cap (` cr) Steel 1,918 Net Debt (` cr) 6,022 Beta Week High / Low 9/4 Avg. Daily Volume 458,173 Face Value (`) 10 BSE Sensex 18,805 Nifty 5,708 Reuters Code ELES.BO Bloomberg Code ELSS@IN Shareholding Pattern (%) Promoters 34.8 MF / Banks / Indian Fls 1.5 FII / NRIs / OCBs 0.6 Indian Public / Others 63.1 Abs.(%) 3m 1yr 3yr Sensex Voltas Note: Electrosteel steels was listed on Oct 7, 2010 Bhavesh Chauhan Tel: Ext: 6821 bhaveshu.chauhan@angelbroking.com Vinay Rachh Tel: Ext: 6841 vinay.rachh@angelbroking.com Please refer to important disclosures at the end of this report 1

2 ESL setting up a 2.51mn tonne integrated steel plant: We visited ESL s upcoming 2.51mn tonne steel plant in Bokaro, Jharkhand. The construction work for the full plant is near completion stage; some of the facilities such as blast furnace, 220KV sub-station, air compressor station, pig casting machine, coke oven and sinter plant are up and running smoothly. ESL s product mix will primarily constitute long products including wire rod (0.6mn tonne), TMT bars (0.85mn tonne), DI pipes (0.33mn tonne), billets (0.33mn tonne) and pig iron (0.40mn tonne). Exhibit 1: Project details Project Details Location Land Status Siyoljori village in Bokaro district of Jharkhand. The site is 22 kms from Bokaro and 52 kms from Dhanbad The company has 2185 acres of land under possession. The company would use around 900 acres for the current 2.51 MTPA plant while the rest will be used for future expansion Raw Materials Procurement Iron Ore To be procured from ECL mines in Kodolibad which is 230 kms away Coking Coal 30% of the requirements to be procured from ECL owned mines situated in Parbatpur which is 6 kms from site. Limestone Would be procured locally and from Dubai and Thailand Dolomite Would be procured from Birmitrapur region Technology The company has adopted Chinese technology and Shandong Metallurgical Design Institute (SDM) has been entrusted with basic and detail design & engineering. SDM is the associated design company of Laiwu Steel & Jinan Steel, who produces about 20 MTPA steel in China Water Source Damodar River which is 8 km from the plant Power Captive 120 MW and balance from DVC in Dhanbad which is located 52 kms from the plant Railway Station Telgharia Station which is 6 kms away from the plant Talent Pool Sourced from nearby areas such as Jamshedpur, Durgapur, Bhubaneswar & Raipur Source: Company, Angel Research Low capex per tonne compared to global standards: ESL has imported approximately 95% of equipments from China (mainly from Shandong Province Metallurgical Engineering) and its construction work has been assigned to China First Metallurgical Construction Corporation and Ershisanye Construction Group. This has resulted in lower capex per tonne of `3,825, compared to global benchmark of `4,500-5,000/tonne for a greenfield steel plant. Although we appreciate the lower capex per tonne, however, the benefits of the lower capex will be known once all the facilities are synchronized and the plant is fully operational. Currently, one blast furnace, coke oven batteries and sinter facilities are running satisfactorily. The company has acquired 2,185 acres of land; thus, it could expand its capacity by at least another 0.5mn tonne without further land acquisition (in the future). October 11,

3 ESL expects 80% utilization levels during FY2014: The company expects to produce only 0.2mn tonne of steel in FY2013. Nevertheless, it expects to reach 80% utilization and 100% utilization in FY2014 and FY2015, respectively. We believe it could be challenging for the company to operate at 80% utilization levels from the beginning of FY2013. Update on mining projects: ESL had entered into a 20-year agreement with ECL on July 21, 2008, for the supply of iron ore and coking coal on a cost plus 20% basis. The cost for ESL would include cost of production, interest on capex spent by ECL and depreciation plus 20%. The company expects to meet its 30% coking coal and 100% iron ore requirement from ECL-owned mines located at Parbatpur (6 km away from the plant) and Kodolibad (230 km away from the plant), respectively. The company is currently producing small quantities (150,000 tonne in FY2012) of coking coal from its coking coal mine. ESL stated that it will spend a total of `950cr (already spent `650cr) to develop its coking coal mine. For iron ore, it is still awaiting a Forest stage-ii clearance. ESL stated that it will start production from the mine within three to six months of signing mining lease after it gets all clearances and signs mining lease with the state government. Although the company was hopeful to start production from March 2013, we believe it is currently challenging to estimate the timelines for completion of clearance formalities. In the past, we have witnessed significantly higher-than-expected time for getting regulatory approvals for captive mines. Exhibit 2: Details of captive mines Raw material integration Coking Coal Mine Iron Ore Mine Location Geological Reserves Parbatpur, Jharkhand (Jharia Coalfield Belt) 231 mn MT Kodolibad, Jharkhand (Near Chiria Mine) 91 mn MT Type of Mining Mainly Underground Open Cast Status Updates Final statutory clearances received; Coal Production from few Local Seams has started; Full production from FY2014 Forest Clearance stage I received. Company expects stage 2 FC in 8 months and Full production 3-6 months after clearances Source: Company, Angel Research October 11,

4 Exhibit 3: Details on mine clearances by ESL Clearance formalities nearing completion Permit Approving Authority Coking Coal Iron Ore Mine Allocation Ministry of Coal Approval of Mining Plan Ministry of Coal SPCB Clearance JSPCB Environmental Clearance MoEF Renewal of earlier clearance under way Railway Transport Clearance Railway Board Forest Clearance (FC) MoEF NA Stage 1 cleared Signing of Mining Lease State Govt of Jharkhand Expected shortly Source: Company, Angel Research Tie-up with Stemcor to market its products: ESL has entered into a delivery and marketing agreement with Stemcor. Stemcor is a world leading marketing company with presence in 45 countries; it has 18.33% stake in ESL. ESL has a strategic tie-up with Stemcor, wherein Stemcor will purchase and market its pig iron and DI pipes from ESL for a period of three years at the prevailing market price. ECL raises stake in ESL: ECL has raised its stake to 39.33% in ESL from 34.80% recently via preferential allotment at a price of `10/share. This would be mainly to improve ESL s debt equity position in order to raise further debt for the project, in our view. Multiple catalysts for the stock: The stock price performance of ESL will be determined by timely ramp-up of the remaining facilities at its plant and efficiencies of the plant. Further, receipt of stage-ii clearance, signing of mining lease and production from its iron ore mine would be very significant milestones for ESL. Currently, we do not have coverage on the stock. Company overview ESL is promoted by Electrosteel Group. The company was incorporated in December ESL, in a technical-financial collaboration with UK-based Stemcor, is setting up a 2.5mn tonne greenfield steel plant along with a 120MW captive power plant and a railway siding. The project was originally conceptualized as a 1.30mn tonne steel and ductile iron (DI) plant. However, given the benefit of economies of scale, ESL decided to set up a 2.51mn tonne steel plant at Siyaljori, Jharkhand. The company has entered into a 20-year long-term agreement with ECL-owned mines for raw-material supply. October 11,

5 Profit & Loss statement (Standalone) Y/E March (` cr) FY2011 FY2012 Gross sales 8 67 Less: Excise duty 1 6 Net Sales 7 61 Other operating income Total operating income 8 61 % chg Total Expenditure Net Raw Materials Other Mfg costs 1 24 Personnel EBITDA (4) (46) (% of Net Sales) - - Depreciation& Amortisation 1 24 EBIT (5) (70) (% of Net Sales) - - Interest & other Charges 2 80 Other Income - - Recurring PBT (6) (150) Extraordinary Expense/(Inc.) PBT (reported) (6) (150) Tax (% of PBT) - - PAT (reported) (6) (150) Add: Share of earnings of associate - - Less: Minority interest (MI) - - Extraordinary Expense/(Inc.) - - PAT after MI (reported) (6) (150) ADJ. PAT (6) (150) (% of Net Sales) - - Basic EPS (`) - - Fully Diluted EPS (`) - - October 11,

6 Balance Sheet (Standalone) Y/E March (` cr) FY2011 FY2012 SOURCES OF FUNDS Equity Share Capital 2,035 2,035 Reserves& Surplus 34 (116) Shareholders Funds 2,069 1,919 Share Warrants - - Minority Interest - - Total Loans 4,110 6,141 Deferred Tax Liability (Net) - - Other non-current liabilities Total Liabilities 6,307 8,462 APPLICATION OF FUNDS Gross Block 674 1,539 Less: Acc. Depreciation 5 35 Net Block 669 1,505 Capital Work-in-Progress 5,243 6,730 Goodwill - - Investments Other Non-current assets Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets (141) (133) Mis. Exp. not written off - - Total Assets 6,307 8,462 October 11,

7 Cash Flow statement (Standalone) Y/E March (` cr) FY2011 FY2012 Profit before tax (6) (150) Depreciation 1 24 Change in Working Capital (67) 474 Less: Others 1 80 Direct taxes paid 0 0 Cash Flow from Operations (71) 428 (Inc.)/ Dec. in Fixed Assets (1,748) (2,346) (Inc.)/ Dec. in Investments (Inc.)/ Dec. in loans and advances - - Other income - - Cash Flow from Investing (1,654) (2,302) Issue of Equity Inc./(Dec.) in loans 1,640 1,949 Dividend Paid (Incl. Tax) - - Others (335) (80) Cash Flow from Financing 1,306 1,869 Inc./(Dec.) in Cash (11) (4) Opening Cash balances Closing Cash balances October 11,

8 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavors to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement Electrosteel Steels 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to -15%) Sell (< -15%) October 11,