Monnet Ispat And Energy Ltd

Transcription

1 B U Y 04 Nov, 2010 Key Data (`) CMP 616 Target Price 686 Key Data Bloomberg Code MISP IN Reuters Code MNET.BO BSE Code NSE Code MONNETISPA Face Value (`) 10 Market Cap. (` Mn.) Week High (`) Week Low (`) 343 Avg. Daily Volume (6m) Beta (Sensex) 0.55 Shareholding % Promoters 44.3 Foreign Institutional Investors 31.6 Domestic Institutional Investors 7.1 Non Institutions 17.0 Total (` Mn) FY10 FY11E FY12E Revenues 15,022 16,388 19,854 EBIDTA 4,665 4,929 6,842 EBIDTA Margin (%) 31.5% 30.8% 35.2% PAT 2,659 2,607 3,358 PAT Margin (%) 18.0% 16.3% 17.3% EPS (`) Monnet Ispat And Energy Ltd Expansion plans in place, its time for execution We initiate coverage on Monnet Ispat and Energy Ltd (MIEL) with a BUY recommendation and a price target of `686 based on SOTP valuation. MIEL is the second largest sponge iron manufacturer in the country with the capacity of 0.8 MTPA. It also has operations in steel, power and mining. It plans to add substantially to its existing capacities in sponge, steel, power and mining by FY13. Backed by substantial coal assets, its cost of generation of power is likely to be one of the lowest in the country. However, past delays in getting its mining assets operational remains a major concern. Successful execution will catapult MIEL into bigger league of major steel and power companies as it plans significant capacity addition. MIEL currently trades at a CMP of ` 616, which we believe is at discount to its fair value of ` 686. Sum of the parts valuation Segment Operations Methodology Multiple on FY12 earnings Per share valuation in ` MIEL (Stand Alone) PE Monnet Power Company Ltd NPV 292 Total 686 Investment Rationale Significant capacity addition in power and steel to drive future growth MIEL plans substantial increase in its existing capacity as it moves from being sponge iron manufacturer to integrated steel player. It is undertaking Greenfield expansion at Raigarh, Chattisgarh by setting 1.5 MTPA integrated steel plant. This will result in substantial increase in revenue contribution from higher margin steel business. With forward (Bar mill, Plate mill) and backward (Coal mining, captive power, blast furnace, coke oven, pellet plant) integration it stands to reap dual benefits of better prices and lower cost. Capacity Expansion Table Current capacity Capacity post expansion Expected Commissioning date Sponge Iron 0.8 MTPA 1.03 MTPA Q3 FY12 Mild Steel 0.3 MTPA 1.8 MTPA Q1FY12 (1st EAF Unit)Q3FY12 (2nd EAF Unit) Power 150 MW 230 MW Q1 FY12 Blast Furnace 0.6 MTPA Q1FY12 Coke oven plant 0.4 MTPA Q3FY13 Pellet plant 1.2 MTPA Q3FY13 Bar Mill Plate Mill Source: ACMIIL Research, Company Q2FY12 Q3FY12 Note: Above table excludes Monnet Power 1050 MW power plant where expected commissioning date is July 2012 and September 2012 for the first and second unit of 525 MW each respectively. Analyst Pavas Pethia research@acm.co.in Tel: (022)

2 Mining Assets 1050 MW power plant to add significant value Monnet Power Company Ltd. (MPCL), a subsidiary of MIEL is setting up 1,050 MW power plant at Angul in Orissa. On completion, the plant will be one of the low cost power-generating unit in the country as it is backed by pithead captive coal mines. Its Utkal B2 and Mandakini coal block in Angul, Orissa will supply coal for the project. MIEL has 87.5% ownership in MPCL, which we have valued at ` 292 per share. Recent Blackstone group acquisition of 12.5% stake in the MPCL lends further credibility to the entire project valuation. Huge mining assets to support expansion but past delay remain a major concern MIEL has 342 MT of coal mining assets spread across five coal blocks in the country. Its mining assets are more than sufficient to support both steel and power business expansion. This augurs well for the company, as coal is one of the key input in sponge and steel making as well as the major cost component of power generation. Out of the five blocks, Gare-Palma block in Raigarh is already operational with current output rate of 1 MTPA. It is the largest underground mining operation in the country. On the other hand, Utkal B2 coal block has been marred with delays in the past. Land acquisition remains a major hurdle (about 50% of the land acquired so far). Recent notice by Coal ministry to MIEL asking for explanation regarding the delay doesn t augur well for the company. Management believes that they will be able to start mining operations in the second half of FY12 along with its 1050 MW power plant. We believe that success in scheduled commencement of mining operations could be the next big trigger for the company. Mandakini coal block is also expected to commence operations in FY12. Urtan North with coking coal grade coal, will be used to provide raw material for its coke owen plant. Both Rajgamar and Urtan North coal blocks are comparatively new in terms of date of allocation and are expected to be operational in FY14. Block Coal Field State Grade of coal Reserves (MT) Status Gare-Palma Mand Raigarh Chhattisgarh B, C and D 86 Currently operational with output of 1mtpa Utkal B2 Talcher Orissa E and F 86 Land acquisition so far has been 50% out of 295 acres required. Stage II forest clearance and mining lease deed is awaited while environment clearance has been issued. Expected to commence mining by FY12. Mandakini Talcher Orissa D, E and F 96.8 Expected to commence mining by FY12 R a j g a m a r Dipside Korba Chhattisgarh B, C, D and E 49.9 Expected to commence mining by FY14 Urtan North Sohagpur Madhya Pradesh Source: Company, Ministry of Coal Source: Company, ACMIIL Research Coking coal 23.3 Expected to commence mining by FY14

3 About the company Monnet Ispat & Energy Ltd is the second largest manufacturer of sponge iron in the country. It also has business interest in steel and power. It currently manages manufacturing units for Sponge iron, Steel melting & rolling mill, Ferro- alloys plant, Power generation units, Mining & mineral beneficiation of coal, Iron ore and other minerals. It is also engaged in mining of mineral assets like coal & iron ore and also offers consulting services in coal. Monnet has a combined capacity of 0.8 million TPA of Sponge Iron, 0.3 million TPA of Steel, 0.06 million TPA of Ferro Alloys and power generation facility of 150MW besides running the largest underground coalmine in India. It also has coal washery having a throughput capacity 4.2 MTA. Its manufacturing facilities are currently located in Raipur and Raigarh in Chhattisgarh. Installed capacity at Raipur Product Sponge iron Ingots and Billets Structural Steel Ferro Alloys Power Source: Company Installed capacity at Raigarh Capacity 300,000 TPA 300,000 TPA 200,000 TPA 58,400 TPA 60 MW Product Sponge iron Power Source: Company Merger Capacity 500,000 TPA 90 MW MIEL is in the process of merging Mounteverest Trading & Investment Ltd with itself. The swap ratio for the proposed merger will be two shares of Monnet Ispat & Energy for every five stocks of Mounteverest Trading & Investment. We await further details regarding the merger and haven t considered it in our valuation. Subsidiaries MIEL has following subsidiaries Name of the subsidiary Proporation of ownership interest Country of incorporation Main activities Monnet Overseas Ltd 100% U.A.E Investments Monnet Global Ltd 100% U.A.E Investments Monnet Daniels Coal Washeries Pvt. Ltd 51.64% India Coal washery Monnet Power Company Ltd 87.5% India Power generation Monnet Cement Ltd 98.8% India Cement Rameshwaram Steel & Power Private Ltd % India Sponge iron Source: Company

4 Monnet Power Company Ltd. Monnet Power Company Ltd. is setting up 1,050 MW power plant at Angul in Orissa. The cost of power from the project is expected to be one of the lowest as it is backed by pithead captive coal mine. It will have two turbines of 525 MW. First unit will be commissioned by June 2012 and the second unit will be commissioned by September It has already tied up funds approximating ` 38,000 millions with the consortium of lenders led by Infrastructure Development Finance Company (IDFC). Recently Blackstone Group has invested ` 2750 million for 12.5% equity stake in Monnet Power Company ltd. Monnet Power is expected to launch an IPO in FY13 as it will need funds for its other power projects totaling 2000 MW under development. MPCL has signed Power Purchase Agreement (PPA) for sale of 850 MW power for its 1050 MW power project with Power Trading Corporation (PTC) and Grid Corporation of Orissa Limited (GRIDCO). Rest of the power is free to be sold as merchant power in the open market. PPA details Capacity (MW) GRIDCO 250 ` 2.85* per Kwh Rates PTC 400 Min rate ` 2.3 per Kwh + 90% share of incremental revenue PTC 200 Min rate 2.55 per Kwh + 90% share of incremental revenue Source: Company, *Tentative rates MPCL VALUATION 200 Open market We have valued its 87.5% stake in MPCL at the rate of ` 292 per share based on NPV of ` 19,911 million. This is at discount to the valuation given by the Blackstone group i.e. ` 22,000 million. Key Assumption for NPV valuation Expected project life Commissioning date 25 years Sep 2012 (First unit), Dec 2012 (Second unit) taking 3 months delay from the scheduled date Cost of debt 11.83% Cost of equity 14.13% PLF (net of auxiliary consumption) 86.25% Average Realizations FY13 FY14 FY15 FY16 Rate per KWH Source: ACMIIL Research NPV Calculation FY10 FY11E FY12E FY13E FY14E FY15E Revenues from power 10, , ,235.8 Expenditure 3, , ,853.1 EBIDTA 6, , ,382.7 Depreciation 1, , ,756.6 EBIT 5, , ,626.1 Interest 4, , ,366.5 PBT , ,259.6 PAT , ,781.8 Debt 18, , , , ,900.0 Capex (Including maintenance) 3, , , , WC FCFE -3, , , , ,020.5 NPV 19,911.4 Per Share Value (87.5% stake) Source: ACMIIL Research, Note: Figures beyond FY15 are not shown in the table due to page size limitation

5 Industry Outlook Sponge Iron India is the largest producer of sponge iron in the world commanding 36% share in overall production for 2010 (till date). It has number of coal-based units, located in the mineral-rich states of the country. Capacity in sponge iron making has increased substantially over the years and currently stands at 32 million tonne. This production growth was backed by robust demand growth in the long products segment (major consumer of sponge iron) and reduced use of scrap in steel making due to uncertainty in availability and prices. Sponge Iron Domestic Production Year (April-Dec) Total Production Source: Annual Report, Ministry of Steel, * Figures in million tonne Sponge iron prices usually follow international scrap prices with scrap prices acting as a ceiling for sponge iron prices. Sponge iron and Scrap price graph Source: Crisil *Figures in ` per tonne

6 Price Outlook Infrastructure construction, irrigation, urban infrastructure, housing and ports sectors are the primary growth drivers for long steel demand growth. An improvement in the sponge iron prices in the second half of FY10 was the result of demand revival for long products from above-mentioned sectors. Going ahead, sponge prices are expected to increase marginally on the backdrop of healthy domestic demand and cost side pressures from iron ore. Iron ore production has declined in past few months putting upward pressure on prices. Decline in production is on the account of ban on export of iron ore by the Karnataka government, to curb the ongoing illegal iron ore mining activities within the state and continuous heavy rainfall in South, which resulted into temporary stoppage of mining activities. Although we expect sponge iron prices to improve from current levels but have conservatively taken ` per tonne for FY11 and FY12 in our valuation. Source: ACMIIL Reseach, IMF, World Steel Organization Steel Industry has got a high degree of correlation with the economic performance as a whole. Above charts show the growth in output of crude steel against the world GDP. Any spike in the world GDP is mirrored in crude steel production growth rate. The correlation between world GDP and Crude steel production growth rate stands high at 0.86 for the period With global economic recovery in place, steel industry has also shown the uptrend. The production levels has touched precrisis level and we believe that this uptrend will continue.we believe that demand from developing nations like India, Brazil and China will be the major driver for the improving crude steel production numbers. In 2009 India emerged as the fifth largest producer of crude steel in 2009 and recorded a growth of 2.7 per cent as compared to China was the largest crude steel producer in the world with production reaching million tonne, a growth of 13.5 per cent over India and China were the only countries in the top-ten bracket to register a positive growth during World Steel Production 2009 Country Production (million tonne) China Japan 87.5 Russia 59.9 US 58.1 India 56.6 South Korea 48.6 Germany 32.7 Ukraine 29.8 Brazil 26.5 Turkey 25.3 Source: Annual Report, Ministry of Steel

7 Domestic Crude Steel Capacity and Production Year Capacity (In thousand tonnes) Production (In thousand tonnes) Utilisation % Apr-Dec Source: Annual Report, Ministry of Steel Crude steel production in India grew at a CAGR of 8.6 per cent during the five years, to The growth was supported by capacity expansion from million tonne per annum (mtpa) in to mtpa in (upto December 2009). Production for sale of total finished steel at million tonne during as against million tonne in at average annual growth rate of 7%. Prices Outlook Steel prices have started to recover after a brief slump during May-Aug 10 period. Dumping by Chinese companies before the expiry of export rebate was the major reason for the slump. Prices have started to show an uptrend with the pick-up in construction activity at the end of monsoon season. Prices are supported by the withdrawal of export rebate (9%) and closing down of inefficient steel mills by China. China steel production has declined by 10% in last three months as seen in the graph below. Supported by construction activities and automobile sector demand we expect prices to increase from current levels. Source: World Steel Organization * Figure in 1000 tonnes Source: Crisil, *Figures in INR per tonne

8 Power India is the fifth largest producer of electricity in the world and according to the Planning Commission, while the State Governments account for 51.5% of the total generation capacity, the central sector and the private sector account for 33.1% and 15.4% of the generation capacity respectively. India power sector can be divided into six regions namely Northern, Western, Southern, Eastern, North Eastern and Islands. Northern and Western region have historically higher deficit as compared to Southern and Eastern region. Source wise India power generation is skewed in favor of coal based power plant, which accounts for 52% of total generation capacity. Source: ACMIIL Research, RBI, CEA Power Scenario Region Capacity in MW ( ) NORTHERN 42, WESTERN 50, SOUTHERN 43,300.5 EASTERN 21, N.EASTERN 2,288.9 ISLANDS ALL-INDIA 159,398.5 Source: Power Sector at a Glance April 2010, CEA Source: Power Sector at a Glance April 2010, CEA

9 Power Supply Position for Power Deficit Scenario India is a power deficit nation with average deficit of energy to be around 10% and peak deficit to be around 13.78% in FY10. The power deficit situation is improving after peak power deficit touched 16.6% in FY08 and average energy deficit touching high of 11% in FY09. The government has revised its initial capacity addition target for 11th plan from 78,000 MW downwards to 68,504 MW. Although private and state sectors have achieved its targeted capacity addition by FY09 but there is considerable slippage with respect to Central sector figures. Region wise Peak Demand MW Peak Met MW Peak Deficit/Surplus % Energy Requirement MU Energy Availability MU Energy % NORTHERN 37,159 31, , , WESTERN 39,609 32, , , SOUTHERN 32,082 29, , , EASTERN 13,963 12, ,040 84, NORTH-EASTERN 1,760 1, ,349 8, Source: Power Sector at a Glance April 2010, CEA Power Deficit Source: Power Sector at a Glance April 2010, CEA The government through Electricity Act 2003 tried to encourage private participation in power sector. The Act provides for National Electricity Policy, Rural Electrification, Open access in transmission, phased open access in distribution, license free generation and distribution, power trading, mandatory metering and stringent penalties for theft of electricity. This drew significant attention from private sector. Since, 2003, 30 private power projects with a total capacity addition of 22,038 MW have achieved financial closure. In private sector has contributed 883 MW of total capacity addition of 3,454 MW. In terms of efficiency improvements, private thermal power plants have realized improvements in their Plant Load Factor (PLF) from 68.9% in to 95.1% in , which compares favorably against 71.2% and 84.3% achieved by the States and Central power plants respectively. Going forward we expect demand supply mismatch to ease due to significant capacity addition by the private players.

10 Demand Elasticity of Electricity Generation with respect to GDP tends to decrease as economy moves from being developing to developed economy. This is the result of use of more efficient technologies, movement from traditional manufacturing to service industry, inter-fuel substitution with more efficient alternatives, efficient conversion process and use of efficient devices. India electricity elasticity to GDP has decreased from 2.3 in early 70s to.77 at present. An 8% target GDP growth for next 5 years will need about 6.1% growth in electricity generation. This will translate into 79.4 GW of new capacity requirement in next five years to achieve zero deficit scenario. The capacity addition in 11th plan is expected to be 57.6 GW against the revised target of 68.5 GW. This will mean total capacity of 190GW by Another 38 GW is expected to be commissioned by 2015 based on conservative estimates taking 12th plan likely target of 100 GW and past variation in planned vs. actual achievement into account. This will translate into total generation capacity of 228 GW against requirement of GW. Therefore we expect energy deficit to be 4.4% by 2015 against current deficit of 10.1%. Source: ACMIIL Research, RBI, CEA Merchant Power Rates Outlook We expect merchant rates to decline further to ` rupees by 2015 on account of improving power supply position. The declining trend is visible in Day ahead market rates. Source: IEX *Figures ` per Kwh 10

11 SWOT Analysis Strengths Low cost of production of sponge iron Substantial coal assets totaling 342 MT Low cost of power due to captive power plants Opportunities Backward integration to captive iron ore mining Source: ACMIIL Research One year forward PE Chart Weakness Insufficient captive iron ore assets exposing it to volatility in iron ore prices Cyclical nature of its steel business Threats Delay in commissioning of its new mining blocks Highly regulated nature of mining business Source: ACMIIL Research Peer Comparison Forward PE Company Tata Steel SAIL Bhushan Steel Sarda energy and minerals Jindal Steel and Power Monnet Ispat and Energy Source: ACMIIL Research, Bloomberg Estimates Valuation and Recommendation Monnet Ispat is well set to move from sponge iron manufacturer to become major player in Indian Steel and Power industry. With total coal mining assets of 342 MT it enjoys substantial advantage on its cost of production of sponge, steel and power. The key to future growth lies in successful execution of its capacity expansion plans. However past delays in commisioning its mining operations in Utkal, B2 block remain our major concern. We initiate coverage on Monnet Ispat and Energy Limited (MIEL) with a BUY recommendation and a price target of ` 686 based on SOTP valuation. 11

12 Income Statement ` Mn FY08 FY09 FY10 FY11E FY12E Net Revenue 12, , , , ,854.0 Expenditure 9, , , , ,011.7 PBDIT 3, , , , ,842.2 Depreciation ,218.8 PBIT 2, , , , ,623.4 Finance charges ,353.6 PBT 2, , , , ,269.9 Tax PAT 1, , , , ,358.4 Adj EPS (Diluted) Source: Company, ACMIIL Research Balance Sheet ` Mn FY08 FY09 FY10E FY11E FY12E Source of Funds Share Capital Reserves and Surplus 10, , , , ,544.9 Total Shareholders funds 10, , , , ,141.0 Total Loan 10, , , , ,547.7 Total Capital Employed 21, , , , ,688.7 Application of funds Gross Block 12, , , , ,261.2 Depreciation 1, , , , ,169.8 Net Block 10, , , , ,091.4 Capital Work-in-progress 2, , , , ,500.0 Investments 1, , , , ,956.3 Net Current Assets 8, , , , ,454.7 Deferred tax assets , , , ,139.5 Miscellaneous Total Capital Employed 21, , , , ,688.7 Source: Company, ACMIIL Research 12

13 Cash Flows ` Mn FY08 FY09 FY10E FY11E FY12E Net cash from operating activities , , ,224.7 Net cash used in investing activities -3, , , , ,150.0 Net cash generated in financing activities 4, , , , ,616.1 Net increase in cash and cash equivalents , , ,309.3 Cash and cash equivalents at the beginning of the year 2, , , , ,852.8 Cash and cash equivalents at the end of the year 3, , , , ,543.5 Source: Company, ACMIIL Research Key Ratios FY08 FY09 FY10E FY11E FY12E Profitability Ratios Operating Profit Margin 21.7% 23.2% 30.1% 28.4% 33.1% EBITDA MARGIN 25.9% 26.3% 31.5% 30.8% 35.2% PAT Margin 14.3% 13.9% 18.0% 16.3% 17.3% RONW 15% 17% 16% 13% 14% ROCE 12% 13% 12% 9% 11% Per Share Ratios Diluted EPS CEPS Book Value per share Valuation Ratios P/E(x) P/BV(x) EV/EBITDA Capital Structure Ratios Debt/Equity Current Ratio Working Capital Ratios Inventory turnover ratios Debtor turnover ratio Creditors turnover ratio Fixed assets turnover ratio Source: Company, ACMIIL Research 13

14 Notes: Institutional Sales: Ravindra Nath, Tel: Kirti Bagri, Tel: Himanshu Varia, Tel: Institutional Dealing: Disclaimer: This report is based on information that we consider reliable, but we do not represent that it is accurate or complete and it should not be relied upon such. ACMIIL or any of its affiliates or employees 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 the report. ACMIIL and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency we have incorporated a Disclosure of Interest Statement in this document. This should however not be treated as endorsement of the views expressed in the report Disclosure of Interest Monnet Ispat And Energy Ltd 1. Analyst ownership of the stock NO 2. Broking Relationship with the company covered NO 3. Investment Banking relationship with the company covered NO 4. Discretionary Portfolio Management Services NO This document has been prepared by the Research Desk of Asit C Mehta Investment Interrmediates Ltd. and is meant for use of the recipient only and is not for circulation. This document is not to be reported or copied or made available to others. It should not be considered as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may from time to time have positions in and buy and sell securities referred to herein. SEBI Regn No: BSE INB (Cash); INF (F&O), NSE INB (Cash); INF (F&O) 14