Uttam Galva Steels Limited

Uttam Galva Steels Limited BUY CMP: Rs.119.25. Date: 6 Jan,2010. Key Ratios: Particulars FY08 A FY09 A FY10E FY11E OPM(%) 10 8 10 10 NPM(%) 4 2 3 3 ROE(%) 17 12 14 15 ROCE(%) 14 12 13 13 P/BV(x) 0.60 1.09 1.49 1.27 P/E(x) 3.45 8.97 10.96 8.60 EV/EBDITA(x) 2.96 3.72 3.69 3.36 Debt Equity(x) 1.48 1.71 1.59 1.46 Key Data: Sector Steel Face Value 10.00 52 wk. High/Low (Rs.) 142.00/25.30 Volume (2 wk. Avg.) 1.20 BSE Code 513216 V.S.R. Sastry Vice President Equity Research Desk 91-22-25276077 vsrsastry@firstcallindiaequity.com Target Price:133.00 Market Cap: Rs.14292.11mn. SYNOPSIS We initiated the coverage of Uttam Galva Steels Ltd and set a target price of Rs.133. for medium to long term gains. Uttam Galva Steels Limited is one of the largest manufacturers of cold rolled steel ("CR") and galvanized steel (GP) in Western India. The Company is into the business of procuring hot rolled steel ("HR") and processing it into CR and further into GP and Colour Coated Coils. The Company has expanded and modernized its operations at Khopoli which have increased its cold rolling capacity to 1million MT per annum The revenue of the company for the quarter ended on Sept 30 th decreased 19% YoY while profit increased 2% YoY. The topline of the company are expected to grow at a CAGR of 16% over 2008A to 2011E. Share Holding Pattern: Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com

Table of Content Investment Highlights... 3 Peer Group Comparison... 5 Financials... 9 Charts... 11 Outlook and Conclusion... 13 Industry Overview... 13

Investment Highlights Results Updates (Q2 FY10) The bottomline of the company for the quarter increased 2% yoy that is Rs.217.70mn from Rs.212.60mn of same period of last year. Total revenue for the second quarter stood at Rs.11025.60mn from Rs.13617.30 which is 19% decreased than that of a year ago period. EPS for the quarter stood at Rs.1.82 per equity share of Rs.10.00 each. Expenditure of the company decreased 22% YoY to Rs.9982.10mn from Rs.12748.70mn of same period of last year. Interest expenses for the quarter stood at Rs.388.4mn. OPM & NPM for the quarter stood at 9% and 2% respectively. Quarterly Results - Standalone (Rs in mn) As at Sep - 09 Sep - 08 %Change Net Sales 11025.60 13617.30 (19) Net Profit 217.70 212.60 2 Basic EPS 1.82 1.87 Equity Capital 1198.50 1139.70

Uttam Galva to rope in Arcelor Mittal as co-promoter Uttam Galva Steels has announced that the board of the company has approved a copromotion agreement amongst the company, Arcelor Mittal Netherlands BV and the promoters of the company. Following the development, Arcelor Mittal Netherlands BV, part of the largest steel producer of the globe -- Arcelor Mittal -- will become a co-promoter of the Miglani familypromoted steel producer. The agreement contemplates that the Articles of Association (AoA) of the company would be amended to incorporate the rights and obligations of the parties in the agreement. Uttam Galva gets Bombay HC s approval for scheme of arrangement

Uttam Galva Steels has received a green signal from the Bombay High Court (HC) for the scheme of arrangement between Shree Uttam Steel and Power and the company on August 7, 2009. Apart from this, the HC, Goa Bench has also given its nod for the scheme on August 17, 2009. As per the scheme of arrangement, the power division of Shree Uttam Steel and Power will be demerged into the company. The proposal for the same was approved by the board of the company in January this year. Uttam Galva Bags All India Star Exporter Award Uttam Galva Steels Limited, India s leading manufacturer - exporter of value added steel, has bagged it s 13th consecutive All India Star Exporter award for Export Excellence from the Engineering Export Promotion Council (EEPC), Ministry of Commerce & Industry. Uttam Galva hikes product prices by Rs 2000 a tonne Uttam Galva Steels has decided to hike prices of its galvanized steel products by Rs 2,000 per tonne, effective from August 15. Apart from this, the company is also going to increase the prices of its cold-rolled products by equal proportion. The move follows sharp increase in the prices of Zinc, a key input used in the production of galvanized steel, on the London Metal Exchange (LME) by $400 per tonne to $1,900 level and scarcity of hot-rolled (HR) coil which is used as a raw material in cold-rolled products. Uttam Galva plans for capacity expansion Uttam Galva Steels is planning to invest Rs 400 crore for boosting its production capacity and for adding new product mix in the next one year. The investment will be funded through a mix of internal accruals and debt. The company is looking at adding value to its existing product mix and doubling the capacity of its service centre to 40,000 tonne a month. The company s steel service centre, located close to its plants in Khopoli, Maharashtra, has a production capacity of 20,000 tonnes presently. It is also setting up a captive power plant having a capacity of 60 MW near its steel plant for an investment of Rs 300 crore. Company Profile Uttam Galva Steels Limited is one of the largest manufacturers of cold rolled steel ("CR") and galvanized steel (GP) in Western India.

The Company is into the business of procuring hot rolled steel ("HR") and processing it into CR and further into GP and Colour Coated Coils. In Galvanized coils it specializes in making ultra thin sheets, which could be as low as 0.13mm thickness. The excess capacity of CR which is not used for galvanizing is converted to value added grades in Cold Rolled Closed Annealed ("CRCA") coils, cut to length sheets and also sold as Full Hard CR in the overseas markets. More than 50% of the Company's products are currently exported to over 142 countries worldwide and it has a customer base in many advanced markets such as Australia, France, Germany, Greece, UK and the USA to name a few. In the Indian market, the Company has established itself as a major player for the supply of CRCA to manufacturers of automobiles, white goods, general engineering and drums & barrels segment. The Company is also a large supplier of galvanized coils and sheets to the construction industry. In domestic market, the company has clientele namely Mahindra & Mahindra, Bajaj Auto, Bajaj Tempo, Piaggio TATA Motors, Godrej, Daewoo, Anchor, Bharat Heavy Electricals (BHEL), Larsen & Turbro, Compoton Greaves, Kirloskar Copeland etc. The Company's manufacturing facilities are located at Khopoli, in the state of Maharashtra, India, which are close to Nhava Sheva and Mumbai ports. This provides the Company with easy access to imports of HR coils and also for exporting its products. A close proximity to the ports gives the Company the advantage of lowering its transportation costs. The Company's domestic sales are also within the radius of 500 km from its manufacturing facilities to domestic companies. The Company has expanded and modernized its operations at Khopoli which have increased its cold rolling capacity to 1million MT per annum as of March 2009. The Company has also increased its GP capacity to 750,000 MT per annum as of March 2009. The Company has also added a new colour coated line (Uttam Spectrum) with a capacity of 90,000 MT per annum as of March 2009. Due to its high quality products and brand image in the market, the Company expects that its increased volumes will be easily absorbed into the domestic and export markets. The Company now has an entire range of cold rolling Reversible mills i.e. 20-Hi, 6-Hi, 4-Hi and newly commissioned twin stand 6-Hi mill. It is now in a position to process HR coils of different grades, thicknesses and widths and is able to meet virtually the entire thickness/width range of CR/GP/GC coils for various end-use sectors. A significant portion of the Company's CR coils and GP/GC, coils/sheets are in the higher value added thin gauge segment.

Business Division With two hundred and fifty acres of land and more than 100 000 sq. meters of covered shed, Uttam Galva Steel plant is tucked between a hillock and a large lake in the beautiful surroundings of Western Region of India, near Kohopoli, which is 100 KMs away from the city of Mumbai, India. The plant has facility of cold rolling HR coils, with a capacity of 1,000, 000 Tons/Year and Galvanizing of 750 000 Tons/Year. It does additional value addition of color coating on CR or Galvanized coils.all these facilities are also supported by a service center, which tailor makes the coils to customer requirements by slitting & cutting and by delivering sheets/ coils to customer specifications Coil Roll Mill- This unit includes one 4-hi mill, two 6-hi mills (One Twin Stand) and one 20 Hi mill which manufactures products having thickness ranging from 0.15mm to 2.5mm and a width up to 1650 mm. Galvanising Mills- Company s 1650mm Super Galvanising Line is the widest line in India. It manufactures products having thickness between 0.13mm to 3mm. Colour Coating Lines- Company s color coating line has installed capacity of 90,000 ton/year. Products

CR & CRCA o The Cutting Edge of Technology Galvanizing o Galvanized Plain Products (GP) o Galvanized Corrugated Products (GC) Color Coated Products o Prepainted Steel Peer Group Comparison Name of the company CMP (As on 6 Jan, 2010) Market Cap. (Rs. Mn.) EPS (Rs.) P/E (x) P/BV (x) Dividend(%) UTTAM GALVE STEEL LTD 119.25 14292.11 8.79 13.56 1.09 - TATA STEEL 641.95 569547.1 40.78 15.74 MONNET ISPAT 390.45 18725.2 43.60 8.96 2.34 160 1.56 50

JINDAL STEEL 723.30 673234.5 13.85 52.22 12.43 550 Key Concerns There exists threat with regard to short supply of raw material (mainly due to limited producers offering raw material) & non-tariff barriers like safe guard duties being considered to be imposed by Indian Government discouraging import of raw material at International price levels which is low compared to Domestic prices. Financials 12 Months Ended Profit & Loss Account (Standalone) Particulars FY 08 A FY 09 A FY 10 E FY11 E (Rs.Mn) 12m 12m 12m 12m Net Sales 31,558.40 43,716.40 44372.15 48809.36 Other Income 21.1 4.3 4.09 4.90 Total Income 31,579.50 43,720.70 44376.23 48814.26 Expenditure -28,549.90-40,070.80-40112.4-43928.42 Operating Profit 3,029.60 3,649.90 4263.81 4885.84 Interest -1,138.80-1,656.30-1556.92-1634.77 Gross Profit 1,890.80 1,993.60 2706.89 3251.07 Depreciation -647.6-923.7-1136.2-1249.8 Profit before Tax 1,243.20 1,069.90 1570.74 2001.30 Tax -4.6-11.9-267.0-340.2 Profit after Tax 1,238.60 1,058.00 1303.71 1661.08

Extraordinary Items - -56.3 - - Net Profit 1,238.60 1,001.70 1303.71 1661.08 Equity Capital 1,139.70 1,139.70 1,198.50 1,198.50 Reserves 5,955.70 7,099.40 8,403.11 10,064.19 EPS 10.87 8.79 10.88 13.86 Quarterly Ended Profit & Loss Account (Standalone) Particulars Mar 09 A June 09 A Sep 09 A Dec 09 E (Rs.Mn) 3m 3m 3m 3m Net Sales 11,139.10 10,733.30 11,025.60 10694.83 Other Income 1.00 3.3 0.1 0.10 Total Income 11,140.10 10,736.60 11,025.70 10694.93 Expenditure -10,095.10-9,704.10-9,982.10-9682.64 Operating Profit 1,045.00 1,032.50 1,043.60 1012.30 Interest -347.5-340.2-388.4-407.82 Gross Profit 697.50 692.30 655.20 604.48 Depreciation -254.4-275.8-277.7-288.81 Profit before Tax 443.10 416.50 377.50 315.67 Tax 82.8-70.8-159.8-53.66 Profit after Tax 525.90 345.70 217.70 262.01 Extraordinary Items -56.3 - - - Net Profit 469.60 345.70 217.70 262.01 Equity Capital 1,139.70 1,139.70 1,198.50 1198.50

EPS 4.12 3.03 1.82 2.19 *A=Actual, E=Estimated Charts

Comparative Graph UTTAM GALVA STEEL BSE SENSEX

Outlook and Conclusion At the current market price of Rs.119.25, the stock trades at a P/E of 10.96x and 8.60x for FY10E and FY11E respectively. On the basis of EV/EBDITA, the stock trades at 3.69x and 3.36x for FY10E and FY11E respectively. Price to Book Value of the stock is expected to be at 1.49 and 1.27 respectively for FY10E and FY11E. The Net sales of the company are expected to grow at a CAGR of 16% over 2008 to 2011E. Uttam Galva Steels is planning to invest Rs 400 crore for boosting its production capacity and for adding new product mix in the next one year. The investment will be funded through a mix of internal accruals and debt. We expect that the company will keep its growth story in the coming quarters also. We recommend BUY in this particular scrip with a target price of Rs.133.00. for Medium to Long Term Gains. Industry Overview The Indian steel industry entered into a new development stage from 2005 06, resulting in India becoming the 5th largest producer of steel globally. Producing about 55 million tonnes (MT) of steel a year, today India accounts for a little over 7 per cent of the world's total production. India is the only country across the world to post a positive overall growth in crude steel production at 1.01 per cent for the January-March period of 2009. The recovery in steel production has been aided by the improved sales performance of steel companies. The steel sector grew by 5.3 per cent in May 2009. Significantly, state-owned steel maker, Steel Authority of India (SAIL), which reported a net profit of US$ 571 million in January-June 2009, has become the most profitable steel company globally, beating steel majors such as ArcelorMittal, Posco, Bao Steel and Nippon in the half yearly profits. Production Steel production reached 28.49 million tonne (MT) in April-September 2009. Further, India, which recorded production of 22.14 MT of steel during April-August 2009, is likely to emerge as

the world's third largest steel producer in the current year, according to Goutam Kumar Basak, Executive Secretary, Joint Plant Committee (JPC). The National Steel Policy has a target for taking steel production up to 110 MT by 2019 20. Nonetheless, with the current rate of ongoing greenfield and brownfield projects, the Ministry of Steel has projected India's steel capacity is expected to touch 124.06 MT by 2011 12. In fact, based on the status of memoranda of understanding (MoUs) signed by the private producers with the various state governments, India's steel capacity is likely to be 293 MT by 2020. Consumption India accounts for around 5 per cent of the global steel consumption. Almost 70 per cent of the total steel used is for kitchenware. However, its use in railway coaches, wagons, airports, hotels and retail stores is growing immensely. India's steel consumption rose by 5.7 per cent to 26.49 MT in the first six months of the current fiscal over the same period a year ago on account of improved demand from sectors like automobile and consumer durables. A Credit Suisse Group study states that India's steel consumption will continue to grow by 16 per cent annually till 2012, fuelled by demand for construction projects worth US$ 1 trillion. The scope for raising the total consumption of steel is huge, given that per capita steel consumption is only 35 kg compared to 150 kg across the world and 250 kg in China. Steel players like JSW Steel and Essar Steel are increasing their focus on opening up more retail outlets pan India with growth in domestic demand. JSW Steel currently has 50 such steel retail outlets called JSW Shoppe and is targetting to increase it to 200 by March 2010. They expect at least 10-15 per cent of their total production to be sold by their retail outlets. Essar Steel which currently has over 300 retail outlets across the country, plans to set up 5,000 outlets of various formats soon. It expects to sell 3MT of steel through the retail route in two years. Exports Out of India's annual iron ore production of more than 200 MT, about 50 per cent is exported. Iron ore exports increased 17 per cent to 12.6 MT in February 2009 from 10.8 MT in the same month a year ago, owing to a moderate revival in demand from Chinese steel producers, as per the latest data compiled by a group of top Indian mining firms.

Earlier, according to a study, with the rise in demand for steel in China, India's iron ore exports went up by 38 per cent to reach 13.6 MT in December 2008 against 9.8 MT in December 2007. Around 50-60 per cent of India s iron ore is exported to China. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but we do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates 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. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.

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