Emkay Global Financial Services has maintained `Hold` on Bhushan Steel with a price target of Rs 315 as against the current market price (CMP) of Rs 354 in its report dated Feb. 2, 2012. The broking house gave the following rationale:
Higher realizations and better margins offset the volume drop:
EBITDA margin at 30% was up both on YoY and QoQ despite a lower sales volume on account of improvement in realizations and fall in RM costs. Continuous weakness in INR boosted blended realizations to Rs 46,936/ ton, up 5% QoQ and 13% YoY. For both flat and long categories, realizations advanced 5% QoQ to Rs 49121/ tonne and Rs 47,212/ ton respectively. Export volume fell by 11% QoQ, however, weak INR helped export realizations to increase by 16% QoQ to Rs 57,473/ tonne. On the other hand RM costs as a percentage to sales fell 140 bps QoQ. This coupled with better realizations helped EBITDA margins to expand to 30% for the first time after Q4FY11. We believe, however, further improvement in margins would be difficult from these levels on a sustainable basis.
High fixed costs continue to dent bottom-line:
The company has a large net debt of Rs 189 billion which continues to be an overhang with high interest costs (Rs 2.3 billion for Q3FY12). Further, the depreciation costs are likely to remain high during FY13 given the nature of projects getting completed. The company plans to raise Rs 7 billion through rights issue, which would help retire some high cost debt.
Project completion progressing well:
Commissioning activities for the phase- III of the Orissa project comprising of BOF, blast furnace, slab casters with 2.5 mtpa of HRC has been progressing well, to be completed by October 2012. This would take the total HRC capacity to 4.4 mtpa. 0.5 mtpa large dia pipe mill at Khopoli has been commissioned, likely to start commercial production in Q1FY13.
Valuation: Maintain hold:
At the CMP of Rs 354, the stock is trading at 7.5x its FY13E EPS and 10x FY13E core EV/ EBITDA. We believe, the company`s performance would continue to get hurt on account of huge fixed costs. Also, in a tight iron ore supply scenario in Orissa and without captive sources, we feel there is little scope of margin improvement in the near to medium term. We value the stock at 5.5x EV/ EBITDA and maintain our target price at Rs 315. We believe at this level the valuations are marginally expensive. Maintain Hold.
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