4QFY12 Results Update Sector: Metals Monnet Ispat BSE SENSEX S&P CNX 16,328 4,943 CMP: INR449 TP: INR518 Neutral Bloomberg MISP IN Equity Shares (m) 64.4 52-Week Range (INR) 561/305 1,6,12 Rel. Perf. (%) 0/18/-1 M.Cap. (INR b) 28.9 M.Cap. (USD b) 0.6 Standalone Monnet Ispat s 4QFY12 adjusted PAT increased 14% QoQ to INR831m (up 9% YoY) in line with our estimate of INR880m. Net sales increased 12% QoQ to INR5.4b on account of higher realization. EBITDA increased 10% QoQ to INR1.4b on account of higher sponge realization and higher power sales volume. Sponge iron sale realization increased 15% QoQ to INR 24,159/t. Structural steel realization increased 6% QoQ to INR35,174/t. Scarcity of key inputs ( iron ore and coal) and higher prices has resulted in capacity shutdowns from secondary producers. This is supporting higher prices for sponge iron and steel. Sponge iron production was higher by 1% QoQ to 196kt while sales were lower by 2% QoQ to 158kt. Coal production increased 15% QoQ to 214kt on a lower base of 3QFY12 when production was affected by the temporary rise in overburden removal ratio. Monnet now has permission to mine 1.7mtpa (earlier 1mtpa). Power generation also increased 22% QoQ to 226mu with increased coal supply. Power realization increased 3% QoQ to INR3.56/kwh. Landed cost of iron ore was higher by 6% QoQ to INR6,761/t. Interest cost was up 29% QoQ to INR243m mainly on account of capitalization of 80MW power plant. 1.5mtpa steel expansion is expected by Oct-2012 except for pellet and coke oven plant. Monnet Power s 1,050MW project s phase 1 is expected by October 2013. Net debt in standalone entity is INR30b. Monnet has rich portfolio of coal allotted for its foray into power generation business. On successful completion project will give superior returns on account saving on fuel cost due to captive mine. However execution remains the key for monetizing such large coal assets. The stock is trading at FY13E P/E of 8.6xand EV/EBTIDA of 10.1x. Maintain Neutral. Sanjay Jain (SanjayJain@MotilalOswal.com); +9122 3982 5412 Pavas Pethia (Pavas.Pethia@MotilalOswal.com); +9122 3982 5413
Net sales increased 12%QoQ on higher sponge iron realization; Steel EBIT up 16% QoQ Net sales increased 12% QoQ to INR5.4b (up 21% YoY) driven by higher realization in sponge and steel. Sponge iron sale realization increased 15% QoQ to INR 24,159/ t. Structural steel realization increased 6% QoQ to INR35,174/t. EBITDA increased 10% QoQ to INR1.4b. Better realization in steel and power business was partly offset by increase in raw material costs. Landed cost of iron ore was higher by 6% QoQ to INR6,761/t. Coal production recovered 15% QoQ to 214kt after temporary production cuts in preceding quarter for removal of extra overburden as per mining plan. Segmental EBIT of steel business increased 16% QoQ to INR1.1b. Power EBIT up 16%QoQ on higher generation Power generation also increased 22%QoQ to 226mu with increased coal supply. 80MW power plant is fully operational now which also supported higher production. Segmental EBIT of power increased 14% QoQ to INR146m on higher power rates. Realization increased 3% QoQ to INR3.56/kwh. EBITDA margins are stable Sponge iron production robust Source: Company/MOSL 1.5mtpa steel expansion by Oct-2012; 1,050MW power plant in 2HFY14 1.5mtpa steel capacity expansion commissioning will start from July 2012 onwards. Most modules are expected to be operational by Oct-2012, while pellet plant and coke oven plant to be commissioned by June 2013. INR28b capex has already been incurred on the steel expansion. Balance INR10b capex will be incurred in FY13 and FY14. 525MWx2 power plant in Angul by the subsidiary Monnet Power is expected by 2HFY14 with first 525MW unit to be commissioned by Oct-2013. The power plant will be supported by two captive coal blocks Utkal B2 and Mandakini. INR18b has already been spent on the project so far. Utkal B2 coal mine has received all major clearances and company expects to sign mining lease and start production by July 2012. Mandakini coal mine has received environmental clearance while Forest Stage I clearance is under process. 2
The company is already in the process of tying up debt for 660MW power plant in the same location. The company believes it has sufficient land and coal availability to expand beyond 1,050MW capacity. Project Status Project Capacity Commencement Project cost Spent so far schedule (INR B) (INR B) 1.5mtpa Steel 38 28 Power plant 80MW Operational Rebar and Rournd 0.65mtpa June/July 2012 Sinter Plant 0.9mtpa Q2FY13 Blast Furnace 0.61mtpa Q2FY13 Oxygen Plant Jul-12 SMS 2X0.75=1.5mtpa Sept-Oct 2012 Plate mill 0.85mtpa Oct-12 Pellet plant 2mpta 1QFY14 Coke oven plant 0.4mtpa 1QFY14 1,050MW Power 50 18 Unit 1 525MW Oct-13 Unit 2 525MW Mar-14 Source: Company/MOSL Ramping up coal production to a run-rate of 1.5mtpa; maintain Neutral Underground coal mine at Raigarh has received permission to enhance capacity from 1mtpa to 1.7mtpa. The development work is underway to ramp up production to 1.5mpta run rate. This will help in reducing costs. Monnet has rich portfolio of coal allotted for its foray into power generation business. On successful completion project will give superior returns on account saving on fuel cost due to captive mine. However execution remains the key for monetizing such large coal assets. We value the stock at INR518 based on 6.5x FY13E core business EBITDA, INR22b for its equity stake of 87.5% in Monnet Power (1,050MW project) and INR5b for Orissa Sponge. Stock is trading at FY13E P/E of 8.6xand EV/EBTIDA of 10.1x. Maintain Neutral. 3
1,050MW Power plant - May 2012 Unit 1 Boiler Unit 2 Boiler Chimney Shell Casting Progress CW Pumphouse Source: Company/MOSL 4
1.5MTPA Steel capacity expansion progress - May 2012 Bar Mill Reheat Furnace Bar Mill Rolling Strands Sinter Plant Sinter Machine Stoves & Blast Furnace Oxygen plant Steel Melting Shop (SMS) Source: Company/MOSL 5
Monnet Ispat: an investment profile Company description Monnet Ispat (MISP) operates a 0.86mtpa sponge iron plant, a 0.3mtpa steel plant, and a 230MW captive power plant in the mineral-rich state of Chhattisgarh. Its 0.5mtpa sponge iron and 90MW captive power plant is strategically located close to its coal mines in Raigarh. Though it has a small steelmaking capacity in Raipur, MISP generates most of its earnings from the production of sponge iron and sales of surplus power from its captive power plant. It sells 90-100MW of surplus power on a merchant basis. Its sponge iron margins are superior due to the benefit of captive coal mines. Key investment arguments Monnet is setting up a 1.5mtpa integrated steel project at Raigarh, with a capex of INR38b, which includes a 0.61mtpa blast furnace, a 2mtpa pellet plant and a 0.4mtpa coke oven plant. Most modules are expected to be commissioned by Oct-2012. MISP is venturing into power generation by setting up a 1,050MW power project near its coal block in Orissa. It further plant to expand capacity to 1,710MW with addition of 660MW unit. 1050MW capacity is expected to be commissioned in 2HFY14. Key investment risks An unexpected fall in steel prices would adversely impact earnings. Comparative valuations Monnet Sarda Godawari Ispat Energy Power P/E (x) FY13E 8.6 3.8 2.9 FY14E 8.2 4.6 2.3 P/BV (x) FY13E 1.1 0.5 0.5 FY14E 1.0 0.4 0.4 EV/Sales (x) FY13E 2.6 0.9 0.5 FY14E 1.7 0.7 0.3 EV/EBITDA (x) FY13E 10.1 5.6 3.5 FY14E 7.3 4.0 2.1 Recent developments Mr Sandeep Jajodia Executive Vice Chairman and Managing Director have been appointed Chairman and Managing director of the company. Valuation and view The stock is trading at FY13E P/E of 8.6xand EV/ EBTIDA of 10.1x. Maintain Neutral. Sector view Steel prices showed improvement in 4QFY12 after declining in 3QFY12. Prices were 11%, 11%, 7% and 6% higher in 4QFY12 than their 3QFY12 lows for Russia, Europe, North America and China, respectively. However prices have started to correct on declining raw material prices and subdued demand. Prices of key inputs such as coking coal and iron ore have eased off in the past few months and are expected to correct further, going forward. Domestic steel prices also showed QoQ improvement in 4QFY12 as large producers benefitted at cost of secondary producer. Increased regulatory vigil has resulted in scarcity of iron ore for secondary producers. However with decreasing raw material prices, subdued demand and commissioning of new capacities, we expect domestic steel prices to correct in FY13. EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY13 52.3 53.7-2.6 FY14 54.7 53.0 3.3 Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) 449 518 15.3 Neutral Stock performance (1 year) Shareholding pattern (%) Mar-12 Dec-11 Mar-11 Promoter 49.4 49.4 49.4 Domestic Inst 3.1 4.3 4.5 Foreign 36.3 34.8 32.6 Others 11.2 11.4 13.5 6
Financials and Valuation 7
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