Pinc Research calls a ‘Sell’ on Bhushan Steel
CMP: Rs 506 Target Rs 353
Bhushan Steel's Q2FY11 revenue at Rs 17bn grew 32% YoY, mainly as sales volume surged 22% YoY to 413kt on sale of 49kt of HRC from Orissa phase-II (1.9mntpa HRC), still under trial production. Operating profit rose 43% YoY to Rs4.9bn as OPM expanded 207bps to 28.5% mainly due to partial captive consumption of HRC (154kt out of total HRC requirement of ~350kt). PAT grew 37% YoY to Rs 2.6bn.
Phase-II expansion update: While company's revenue and margin is being expanded by HRC output from Orissa phase-II, higher interest and depreciation cost would impact net profit from Q3FY11 onwards, when the project is expected to be capitalised. Coke oven battery of 0.85mntpa is expected to commission by Q4FY11.
Rs 60bn Phase III expansion entailing 3.0mnt of billets and 2.5mnt of HRC is on schedule for commissioning by FY13. We expect this to provide major volume growth. Bowen Energy: Bhushan had increased its stake in Bowen Energy to 60% in FY10 and in Q2FY11 gave an open offer to acquire remaining 40% from minority shareholders.
Valuations And Recommendation: In spite of higher interest and depreciation cost from Q3 onwards on capitalisation of phase-II expansion, we expect Bhushan's profitability to improve with increased captive consumption of HRC. Phase-III expansion remains major volume growth driver for the future. We expect company's EBITDA and EPS to grow at a CAGR of 26% and 10% respectively over FY10-FY13E.
However, at 6.8x FY12E EV/EBITDA, we believe that the stock is overvalued. High financial leverage (current D/E of 3.0x) is additional concern. We maintain 'SELL' with a target price of Rs 353 at which it will trade at 5.5x FY12E EV/EBITDA.
Elara Capital calls a ‘Buy’ on Prakash Ind.
CMP: Rs 140 Target Rs 200
Higher input prices sustain pressure on margin: Prakash Industries (PKI) reported a revenue growth of 11.5% YoY on the back of higher volume sales and better realizations. However, EBITDA during the quarter was flat due to the severe raw material cost pressures. EBITDA margins for the quarter declined to 21.4% in Q2FY11 compared to 23.9% in Q2FY10. The cost of iron ore sourced from external mines increased ~40% YoY during the quarter which was partly mitigated by a higher captive consumption of sponge iron. The net profit for the quarter improved 3.5% YoY despite a flat EBITDA largely due to lower interest expenses.
Highlights of the quarter: PKI recorded ~111,000 wire rod sales during the quarter registering a growth of 9.4% YoY. Wire rod realizations during the quarter improved 0.3% YoY to ~INR 27,350/tonne. Having repaid entire loans, PKI was a net cash company as of September 2010. The cash and equivalents of PKI stood at INR 15bn.
Valuation and recommendation: We expect margins for PKI to continue to be under pressure as the iron ore mining is facing consistent delays. Although, PKI management has guided for the start of the Orissa mine (~0.5mn tonnes annual mining capacity), we have factored in much lower integration benefits in FY11 as well as FY12. The merchant power project (625MW) remains on track and the first phase of 125MW is likely to commission in Q4FY11. However, considering the delays in the start of iron ore mining, we have reduced our estimates and accordingly lowered the target price to INR 200/share while we reiterate our ‘Buy’ rating.
K R Choksey calls a ‘Buy’ on Jagran Prakashan
CMP: Rs 137 Target Rs 160
Ad yields dominated the growth in ad revenues: Net sales increased y-o-y due to higher ad revenues which witnessed growth due to increase in ad yields despite volumes was lower compared to Q2FY10. Ad revenue registered 12.7% y-o-y growth to Rs 193.5 crore.
Our View: Q3FY11 is expected to be the good quarter due to festival season which is likely to boost ad revenue growth. On the cost front while margin pressure is expected to remain intact due to increasing newsprint prices. Despite some concerns of increasing raw material cost and competitive threat from DB Corp and Hindustan we hold a positive view on Jagran Prakashan on the back of: 1) Its strong presence in tier 2 and tier 3 markets, 2) dominant position in largest Hindi speaking market, UP, 3) its entry into English segment by acquiring a profitable venture Mid-day, 4) Expected launch of Urdu daily Inquilab in other parts of India. Based on higher than expected Q2FY11 results we revise our FY11 and FY12 estimates upwards. At the CMP of Rs 137, stock is trading at FY11E and FY12E P/E of 20.1x and 17.2x for EPS of Rs 6.9 and Rs 8.0 respectively. We roll forward our price target by 1 year from FY11E to FY12E to get a target price of Rs 160 after assigning a P/E multiple of 20x on FY12E EPS of Rs 8.0. Hence we maintain our BUY rating on the stock with 15-months target price to Rs 160, representing upside potential of 16%.