steel industry demand supply last 5 yrs & company plans

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MF Global Sector ReportSSTTEEEELLSSEECCTTOORRWill the party continue?

18 OCTOBER 2010

Analyst: Dhawal Doshi


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MF Global Steel Sector

Steel Sector| Will the party continue?

18 October 2010

Equity Research | India

DHAWAL DOSHI

[email protected]

SAPNA SHAH

[email protected]

mfglobal.com

2

Investment Rationale

Steel stocks have outperformed the benchmark indices over the past 3

months with gaining visibility of increased margins per tonne of steel.

Steel price jump and declining raw material prices will help the margins

increase in Q3FY11. The way ahead for the stocks would depend on

the companies ability to maintain or increase the margins. We expect

the margins to be under pressure going forward with softening steel

prices and rising raw material costs.

Sequential growth in production from China & Europe would see an

increase in the surplus for crude steel. Rising crude steel surplus will

halt the northward movement in the steel prices. Sequential fall in

production was the driving factor behind the jump in steel prices.

Chinas raw material import requirement plays a crucial role in

determining the raw material prices. We expect the raw material prices

to increase sequentially with Chinas rising import requirement led by

the growth in the Chinese steel production.

We prefer stocks with raw material integration and volume growth. Raw

material integration will help the companies secure one of the factors

determining the margins while volume growth would help the

companies partly negate the steel price fall. In the event of rising prices

the said companies would benefit more vis--vis peers.

Risks

Higher than expected consumption growth: We base our

assumptions on the finished steel demand projections by World Steel

Association (WSA). WSA expects a 13% growth to 1272 mn tonnes in

finished steel consumption in 2010 and a 5% growth to 1340 mn tonnes

in finished steel consumption in 2011. Higher growth will drive the steel

prices higher.

Calibrated production growth: A risk to our call would be continuity in

the production cuts or a calibrated production growth in line with the

demand growth. This would help the steel prices stay firm.

Pass through of raw material costs: Steel companies ability to pass

on the increasing raw material costs would cushion the margins from the

increasing raw material costs.

COMPANIES

JSW STEEL CMP Rs 1318

Reco NEUTRAL

Target Price Rs 1398

SAIL CMP Rs 220

Reco NEUTRAL

Target Price Rs 218

TATA STEEL CMP Rs 636

Reco NEUTRAL

Target Price Rs 691

Report priced as of 15 October 2010


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18/10/2010MF GLOBAL STEEL SECTOR | WILL THE PARTY CONTINUE?

3

CONTENTS

INVESTMENT ARGUMENTS

Will the Party continue? .......................................................................................................................... 4-5

Production Will China and Europe surprise? ....................................................................................... 6-10

Raw Material costs will they remain subdued? .................................................................................... 11-12

Risks ........................................................................................................................................................ 13

Comparatives .......................................................................................................................................... 14-15

Companies Section

JSW Steel ..................................................................................................................................................... 17-37

SAIL .............................................................................................................................................................. 38-58

Tata Steel ..................................................................................................................................................... 59-80


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4

INVESTMENT ARGUMENTS

Will the Party continue?Steel companies have significantly outperformed the benchmark indices over the past 3 months as against their

underperformance over the past 6 months. Visible signs of margin jump helped the companies outperform the

benchmark indices. Rising steel prices, on the back of improving demand scenario and production cutbacks from

China (60 mn tonnes on an annualized basis) and Europe (50 mn tonnes on an annualized basis), helped the

companies improve margins. Benefit of the falling raw material prices will also play a vital role in the margin

improvement in Q3FY11.

Sustainability of the outperformance is dependant on the companies ability to maintain or increase their

margins. We expect the margins to reduce with falling steel prices and increasing raw material costs.

RELATIVE PERFORMANCE 3 MONTHS RELATIVE PERFORMANCE 6 MONTHS

90

100

110

120

130

140

Jul-10 Aug-10 Sep-10 Oct-10

Tata Steel JSW Steel

SAIL Sensex

70

80

90

100

110

120

130

May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10

Tata Steel JSW Steel

SAIL Sensex

Source: MF Global India Research

With the improving demand environment, the performance is expected to remain robust until the production cuts from

China and Europe are not rolled back. Increase in Chinese production would not only ease the steel prices but also

increase the iron ore and coking imports thereby exerting an upward pressure on the raw material prices. Further the

jump in European production could have a straight bearing on the European steel prices.

We expect the surplus in crude steel to marginally increase over CY10 to CY11 with the European and Chinese

production coming back on stream. Increasing surplus would have a negative impact on the steel prices. While the

World HRC prices are still holding firm, prices in Europe have started softening after the jump in August and

September 2010 as seen in the chart below. Chinese steel majors are also keeping their prices flat for November and

December 2010. Our estimate for HRC prices is US$ 650 per tonne as against the current prevailing price of

around US$ 690 (World Steel HRC Tracker).


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5

STEEL PRICES WORLD HRC TRACKER

350

400

450

500

550

600

650

Oct-09

Nov

-09

Dec

-09

Jan

-10

Feb

-10

Mar

-10

Apr-10

May

-10

Jun

-10

Jul-10

Aug-10

Sep-10

Oct-10

Euro/tonne

500

550

600

650

700

750

800

US$/tonne

European HRC World HRC Price tracker

Source: Bloomberg, MF Global India Research

Demand supply balance: WSA expects the finished steel consumption to increase by 13% to 1272 mn tonnes in

2010 and by 5% to 1340 mn tonnes in 2011. We base our assumptions on the demand growth projected by WSA. We

expect the crude steel production to grow by 17% to 1396 mn tonnes and by 5% to 1467 mn tonnes in 2010 and 2011

respectively. This will lead to a marginal growth in the surplus of crude steel in 2010 and 2011.

CRUDE STEEL DEMAND SUPPLY

MN TONNES CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10E CY11E

PRODUCTION 946.7 1038.6 1113.4 1227.8 1325.1 1301.8 1197.4 1395.5 1466.7% GROWTH 7% 10% 7% 10% 8% -2% -8% 17% 5%

CONSUMPTION - CRUDE STEEL EQUIVALENT 968.6 1,057.8 1,131.0 1,232.7 1,320.3 1,299.3 1,203.3 1,364.3 1,429.0

% GROWTH 7% 9% 7% 9% 7% -2% -7% 13% 5%

Source: World Steel Association, MF Global India Research Estimates

CRUDE STEEL SURPLUS / DEFICIT

4

(19)(22)(26)(29)

(15)(18)

(5)

(6)35

3831

(45)

(30)

(15)

-

15

30

45

CY99

CY00

CY01

CY02

CY03

CY04

CY05

CY06

CY07

CY08

CY09

CY10E

CY11E

mntonnes



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6

Production Will China and Europe surprise?Crude Steel production is likely to witness a sequential jump in 2011 as against a declining production m-o-m in 2010.

The drop in production is primarily led by the production cutbacks in China and Europe (110 mn tonnes on an

annualised basis, China 60 mn tonnes and Europe 50 mn tonnes).

MONTHLY STEEL PRODUCTION - WORLD

113.4

107.0108.2106.5

108.8107.1

113.4

122.2

121.7

124.2

118.8

114.8

112.9

100

105

110

115

120

125

130

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

mntonnes

Source: World Steel Association, MF Global India Research

Crude steel production is expected to increase by 17% in CY10 to 1395.4 mn tonnes and by 5% in CY11 to 1466.7

mn tonnes as against 8% fall in CY09. Crude steel has already seen a 23% y-o-y growth in Jan Aug 2010 and is

likely to moderate with the declining production from China and Europe.

The production jump in 2010 is primarily driven by EU 27 and North America; however the 2 regions are still expected

to be below their peaks. Production is expected to grow by 23% and 36% in 2010 and 7% and 4% respectively in

2011 for EU 27 and North America. Production from China is expected to grow by 12% in 2010 accounting for around

47% of the global crude steel production.

6% and 7% growth in the Chinese and European Unions production to 690 mn tonnes and 180 mn tonnes

respectively in 2011 will see the crude steel production growing by 5% to 1467 mn tonnes in 2011.


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7

CRUDE STEEL SUPPLY

CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10E CY11E

EUROPEAN UNION 27 183,891 193,493 187,454 199,535 209,653 198,036 137,511 168,880 180,180% GROWTH 16% 5% -3% 6% 5% -6% -31% 23% 7%

OTHER EUROPE 25,437 28,476 30,416 27,946 30,164 31,287 28,756 32,517 34,457

% GROWTH -44% 12% 7% -8% 8% 4% -8% 13% 6%

C.I.S. 106,227 113,085 113,103 119,455 124,056 113,986 96,242 107,591 113,071

% GROWTH 6% 6% 0% 6% 4% -8% -16% 12% 5%

NORTH AMERICA 123,841 132,856 125,971 131,638 132,615 124,514 82,988 112,999 117,915

% GROWTH 1% 7% -5% 4% 1% -6% -33% 36% 4%

SOUTH AMERICA 43,025 45,875 45,335 45,297 48,252 47,409 38,095 44,159 44,952

% GROWTH 5% 7% -1% 0% 7% -2% -20% 16% 2%

AFRICA 16,172 16,501 17,466 18,399 18,391 16,729 14,684 16,783 17,484

% GROWTH 9% 2% 6% 5% 0% -9% -12% 14% 4%

MIDDLE EAST 12,868 13,674 14,646 14,766 15,841 16,036 16,660 18,862 19,853

% GROWTH 8% 6% 7% 1% 7% 1% 4% 13% 5%

CHINA 238,282 293,465 372,022 443,393 512,458 517,961 582,456 653,021 690,000

% GROWTH 20% 23% 27% 19% 16% 1% 12% 12% 6%

ASIA (EXCLUDING CHINA) 188,598 192,866 198,387 211,367 224,864 227,461 194,337 232,224 239,853

% GROWTH 4% 2% 3% 7% 6% 1% -15% 19% 3%

OCEANIA 8,400 8,302 8,648 8,691 8,781 8,423 6,014 8,430 8,928

% GROWTH 1% -1% 4% 0% 1% -4% -29% 40% 6%

TOTAL WORLD PRODUCTION 946,741 1,038,593 1,113,448 1,227,836 1,325,077 1,301,843 1,197,442 1,395,459 1,466,693

% GROWTH 7% 10% 7% 10% 8% -2% -8% 17% 5%

Source: World Steel Association, MF Global India Research Estimates

China: Chinese production is expected to grow by 12% in 2010 to 654 mn tonnes, as against a 17% growth ytd

August 2010. A sequential drop in the Chinese production since April 2010, due to various restrictions imposed, is

expected to restrict the production growth for 2010. We expect the production to grow to 690 mn tonnes in 2011, a

growth of 6% with the relaxation of the restrictions imposed.

MONTHLY STEEL PRODUCTION - CHINA

53.4

49.4

51.9

53.2

53.3

55.357.7

58.5

58.2

54.2

48.8

51.9

53.6

45

48

51

54

57

60

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

mntonnes



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8

Drop in the Chinese production was a result of the slew of measures undertaken to curb production in order to meet 5

year period energy reduction targets. China had a target of reducing its energy intensity by 20% over 2005 to 2010.

Some measures would see permanent closures in capacities while a majority of them are targeted towards meeting

the energy reduction targets. Some of the measures taken include:

1. Scrapping of export rebates with effect from July 2010,

2. Power supply rationing,

3. Ordering 2000 firms to shut old capacities in various industries including steel which are highly polluting, highly

energy-wasting or not meeting the safety norms,

4. Order to shut 18 steel mills in Wuan district for a month in September,

5. Shutting down mills with capacities below 1 mn tonnes of crude steel and 300000 tonnes of higher end steel and

raising production standards thereby pushing consolidation in the industry etc.

Majority of the above measures are temporary in nature and once relaxed would see the production increase

sequentially. We expect China to increase its monthly rate of production from 2011 but below the monthlypeak of April 2010 (58.5 mn tonnes). However in the event of China continuing with the said restrictions and

thereby limit the steel production, it will support the steel prices and will be a risk to our call.

China is expected to see some production coming back on stream from October 2010 as the mills resume production

after a week long national holiday. Also the steel mills in Wuan district are expected to commence production after the

months shut down period ended. The same has started impacting the steel price marginally in September 2010.

Chinas largest listed steel maker Baoshan Iron & Steel has kept its November 2010 prices unchanged indicating

some supply side pressures. Wuhan Steel has followed suit in keeping the prices flat for November 2010 and Angang

Steel is also expected to follow suit. China Steel, Taiwans largest steel maker has announced flat prices for

December 2010 over October November 2010 prices.

HRC PRICE - CHINA

3500

3700

3900

4100

4300

4500

4700

4900

Mar-10

Mar-10

Apr-10

Apr-10

May-10

May-10

Jun-10

Jun-10

Jul-10

Jul-10

Aug-10

Aug-10

Aug-10

Sep-10

Sep-10

Oct-10

Yuan/tonne



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9

Europe: EU production is expected to grow by 23% in 2010 to 168.9 mn tonnes, as against a 38% growth ytd August

2010. A sequential drop in production since May 2010 will restrict the production growth for 2010. We expect the

production to grow to 180 mn tonnes in 2011, a growth of 7%.

MONTHLY STEEL PRODUCTION - EUROPE

13.1

15.916.5

14.5

15.5

19.2

18.2

16.6

18.118.117.0

16.0

15.0

10

12

14

16

18

20

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

mntonnes


Production grew sharply from Jan 2010 in anticipation of demand revival thereby touching a peak of 19.2 mn tonnes in

May 2010 from a monthly rate of 13.1 mn tonnes a year ago. However a slower demand pick up as against

expectations lead to inventory pile ups and thereby leading to production cuts. Monthly production dropped from 19.2

mn tonnes in May 2010 to 15 mn tonnes in August 2010. Lower than expected demand is reflected from the falling

PMI as shown in the chart below.

EUROZONE MANUFACTURING PMI

50

52

54

56

58

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10


European manufacturers have adjusted their production in line with the demand growth. We expect the production to

increase once the inventories have fallen down. However in case the pace of production growth outweighs the

demand growth, pricing might come under pressure. European steel prices have started softening in October as

against firm prices in August and September 2010. This is in line with our assumption of some softening in steel priceswith the production coming back on stream.


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10

EUROPE STEEL PRICES

300

350

400

450

500

550

600

650

Oc

t-09

Nov-09

Dec-09

Jan-10

Feb-10

Ma

r-10

Apr-10

May-10

Jun-10

Ju

l-10

Aug

-10

Sep-10

Oc

t-10

Euros/tonne


Increasing production from China and Europe will see increased surplus and keep the steel prices under

check.


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11

Raw Material costs will they remain subdued?Raw material prices have played an important role in the sectors outperformance over the last 3 months. Declining

raw material prices from the mid of Q2FY11 helped the stocks outperform in anticipation of lower raw material costs.

The raw material costs for Q3FY11 will be lower by around 5 15% for both iron ore as well as Coking Coal (quarterly

contracts for iron ore settled at a 10 13% discount to Q2FY11 prices and for coking coal at around 7% discount). But

are the raw material prices likely to sustain at lower levels and support margins is a question?

The answer to the above question is dependent on Chinas steel production, the import requirement for the raw

materials and the ability of the steel companies to pass on the raw material costs. Increasing steel production in China

would see increased raw material imports and thereby higher raw material prices and vice versa. The margins for the

steel companies will be protected if they are able to pass on the increased costs.

Currently global steel prices have taken a pause in their upward movements and started giving up some of the gains

in the past few days. This will not impact the margins in Q3FY11 due to lower contracted prices for the raw materials.

However if the steel prices continue to remain subdued, players would see their margins declining in Q4FY11 due tothe currently rising spot raw material prices which will see the contract prices increase in Q4FY11.

Drop in the Chinese steel production since April 2010 saw a reduced requirement of the imported iron ore. The

imports were further impacted by the increasing domestic iron ore production in China. This phenomenon led to a

softening of the iron ore prices since May 2010 to August 2010. Lower iron ore prices during the said period led to a

fall in the contracted prices for iron ore for Q3FY11.

CHINA IRON ORE PRODUCTION & IMPORTS

30

60

90

120

A

ug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

M

ay-10

Jun-10

Jul-10

A

ug-10

Sep-10

mntonnes

Production Impor ts


However the iron ore prices have recently seen some pick up, as shown in the chart below, after the Chinese mills

restarted production for some of the shut capacities as discussed above. Increasing production from China as per

media reports on a sequential basis has led to higher iron ore imports thereby higher iron ore prices. Chinas iron ore

imports have jumped in September to 52.6 mn tonnes as against 44.6 mn tonnes in August 2010 as shown in the

above chart.


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12

CHINA IRON ORE PRICE 63.5% FE CONTENT

90

110

130

150

170

190

210

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

$/tonne


Any substantial increase in the steel production could see the import requirement for iron ore rising and thereby

putting further upward pressure on the iron ore prices. Coking coal prices have seen similar movements like iron ore

although of a lower magnitude on the downside. The prices softened during Q2FY11 thereby leading to lower contract

prices for Q3FY11, however have started moving up since September 2010.

CHINA COKING COAL PRICE

1000

1100

1200

1300

1400

1500

1600

Sep-0

9

Oct-0

9

Nov-0

9

Dec-0

9

Jan-1

0

Feb-1

0

Mar-1

0

Apr-1

0

May-1

0

Jun-1

0

Jul-1

0

Aug-1

0

Sep-1

0

Oct-1

0

Yuan/tonne


Increasing steel production from China will see the import requirement go up for the raw materials. This is

expected to exert an upward pressure on the raw material prices, hence impacting the margins.


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13

Risks

Higher than expected consumption growth: We base our assumptions on the finished steel demand projections byWorld Steel Association (WSA). WSA expects a 13% growth to 1272 mn tonnes in finished steel consumption in 2010

and a 5% growth to 1340 mn tonnes in finished steel consumption in 2011. Higher than the expected consumption

growth will drive the steel prices higher.

Calibrated production growth: A risk to our call would be continuity in the production cuts or a calibrated production

growth in line with the demand growth. This would keep the crude steel surplus under control and help the steel prices

stay firm.

Pass through of raw material costs: A strong operating environment would help the companies pass on the jump in

the raw material costs. Steel companies ability to pass on the increasing raw material costs would cushion the

margins from the increasing raw material prices.


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14

Comparatives

VALUATIONS GLOBAL COMPARISON

P/E (X) EV/EBIDTA (X)

CY10 CY11 CY10 CY11

ARCELOR MITTAL (BUY, PT: 30 (EUROS) COVERED BY MF GLOBAL UK) 21.0 12.8 8.3 5.0

THYSSENKRUPP (BUY, PT: 44 $ COVERED BY MF GLOBAL UK) 12.9 9.1 8.7 7.0

SALZGITTER (SELL, PT: 55 (EUROS) COVERED BY MF GLOBAL UK) 443.9 13.0 12.6 7.4

SSAB (SELL, PT: 95 (SEK) COVERED BY MF GLOBAL UK) 22.0 10.4 8.8 6.4

ONESTEEL (BUY, PT: 400C (AUD) COVERED BY MF GLOBAL AUSTRALIA LTD) 16.8 8.4 7.9 5.2

BLUESCOPE (NEUTRAL, PT: 300C (AUD) COVERED BY MF GLOBAL AUSTRALIA LTD) - 14.5 9.7 5.2

JFE HOLDINGS (SELL, PT: 2200 (YEN) COVERED BY MF GLOBAL FXA SECURITIES) 13.7 13.3 7.2 7.4

BOASHAN STEEL 11.8 10.3 5.3 4.7

WUHAN STEEL 16.7 12.2 5.3 4.5

POSCO 8.4 8.1 5.1 4.4

NIPPON STEEL 10.5 8.5 3.3 3.0

SEVERSTAL 39.6 10.4 7.8 5.7

NUCOR STEEL 54.7 15.0 12.8 6.5

AVERAGE 51.7 11.2

JSW STEEL 15.5 10.0 8.5 5.9

SAIL 14.2 11.1 8.4 6.1

TATA STEEL 8.9 8.0 7.0 5.9

Source: Bloomberg, MF Global Research Estimates

PEER COMPARISON

JSW STEEL SAIL TATA STEEL

SALES, RS MN FY10 189,572 405,514 1,023,931

FY11 233,326 443,313 1,112,105

FY12 324,560 482,690 1,179,869

EBIDTA, RS MN FY10 40,707 90,798 80,427

FY11 51,348 104,919 153,339

FY12 74,484 142,866 180,821

PAT, RS MN FY10 15,976 67,312 -20,092

FY11 18,919 63,771 64,237

FY12 33,618 82,211 72,517

EPS, RS FY10 85.4 16.3 -22.7

FY11 84.8 15.4 71.2

FY12 131.4 19.9 79.3

P/E, X FY10 15.4 13.5 -28.1

FY11 15.5 14.2 8.9

FY12 10.0 11.1 8.0

P/BV, X FY10 2.7 2.7 2.4

FY11 1.8 2.4 1.9

FY12 1.5 2.0 1.6

EV/EBIDTA, X FY10 10.0 9.4 12.8

FY11 8.5 8.4 7.0

FY12 5.9 6.1 5.9

TARGET PRICE 1398 218 691UPSIDE / (DOWNSIDE) 6.1% (0.8%) 8.7%

RATING NEUTRAL NEUTRAL NEUTRAL

Source: MF Global India Research Estimates


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15

RELATIVE PRICE PERFORMANCE

RS, % CMP CLOSE 1M 3M 6M 1YEAR YTD

BSE SENSEX 20,125 3.2 12.4 14.1 17.0 15.2NIFTY 6,063 3.4 12.7 15.0 18.7 16.6

JSW STEEL 1318 7.2 20.3 4.2 44.5 30.2

SAIL 220 8.0 10.0 -3.1 19.8 -8.4

TATA STEEL 636 5.4 24.4 -7.2 10.7 3.0

Source: Bloomberg


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16

Companies Section


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METALS | STEEL

JSTL IN: NEUTRALRS 1318

18 October 2010

mfglobal.com

MF Global Initiating Report

17


DHAWAL DOSHI

[email protected]

SAPNA SHAH

[email protected]

JSW Steel| Entering the Bigger League

Investment Rationale JSW Steel is the only steel player amongst the larger companies that is

expected to give volume growth in FY12, backed by its expansion plan(3.2mn tonnes) that goes on stream by March 2011. The company isreadying itself for the next leg of growth by commencing work on theWest Bengal steel project.

The company is making conscious efforts to secure raw material supplyand increase its integration levels. Increasing integration is expected toreduce volatility in profits.

JSW has the lowest conversion costs amongst the steel players, whichhelps it partially mitigate raw material cost pressures. The deal with JFESteel will further help the company reduce its cost through yield andproductivity improvements.

Equity infusion, through the stake sale to JFE and preferential allotment

to the promoters, has significantly de-leveraged the balance sheet. Thiswill help the company finance its two greenfield projects of 10mn tonneseach.

Risks (1) Raw material price risk, (2) Volume risk, (3) US operations

profitability, and (4) Execution risk.Valuation At the CMP of Rs 1318, the stock trades at a P/E of 10.0x FY12E EPS of

Rs 131.4 and an Ev/Ebidta of 5.9x FY12E. We arrive at a value of Rs1398 for JSW Steel on SOTP basis. We initiate coverage on the stockwith a Neutral rating and a target price of Rs 1398.

TARGET RS 1398 (+6.1%)

SECTOR RATING

OW N UW

STOCK RATING

BUY NEUTRAL SELL

> 15% -15% TO +15% < -15%

COMPANY DATA

O/S SHARES : 201MNMARKET CAP (RS) : 265BNMARKET CAP (USD) : 6.0BN52 - WK HI/LO (RS) : 1400 / 652AVG. DAILY VOL. (3MTH) : 1.5MN

FACE VALUE (RS) : 10

SHARE HOLDING PATTERN, %

PROMOTERS : 45.0FII / NRI : 35.6FI / MF : 6.5NON-PROMOTER CORP. HOLDINGS : 4.7PUBLIC & OTHERS : 7.6

PRICE PERFORMANCE, %

1MTH 3MTH 1YR

ABS 7.2 20.3 44.5REL TO BSE 4.0 8.0 27.4

VALUATION SUMMARYY/E MAR, RS MN FY2008 FY2009 FY2010 FY2011E FY2012E

NET SALES 124,567 159,348 189,572 233,326 324,560

GROWTH, % 45.6 27.9 19.0 23.1 39.1

EBIDTA 34,780 29,818 40,707 51,348 74,484

EBIDTA MARGINS, % 27.9 18.7 21.5 22.0 22.9

NET PROFIT 15,326 10,697 15,976 18,919 33,618

NET PROFIT MARGIN, % 12.3 6.7 8.4 8.1 10.4

NET PROFIT (ADJUSTED) 15,326 10,697 15,976 18,919 33,618

EPS, RS 81.9 57.2 85.4 84.8 131.4

EPS GROWTH, % 3.0 (30.2) 49.3 (0.7) 54.9

PER, X 16.1 23.0 15.4 15.5 10.0

EV/EBIDTA, X 10.5 13.7 10.0 8.5 5.9

EV/NET SALES, X 2.9 2.6 2.2 1.9 1.3

PRICE/BOOK VALUE, X 3.2 3.2 2.7 1.8 1.5ROIC, % 12.0 6.7 7.6 8.3 11.3

ROE, % 23.7 13.7 18.8 14.9 17.2

Source: Company, MF Global India Research Estimates

PRICE VS. SENSEX

0

30

60

90

120

150

180

210

Apr-08 Dec-08 Aug-09 Apr-10

JSW Steel Rel. to BSE



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18/10/2010 MF GLOBAL INITIATING COVERAGE |JSW STEEL

18

INVESTMENT OVERVIEW

SUSTAINABLE COMPETITIVE ADVANTAGE STRONG VOLUME GROWTH WITH LOW CONVERSION COSTS VIS--VIS PEERS.FINANCIAL STRUCTURE DEBT: EQUITY TO IMPROVE FROM 1.7X IN FY10 TO 0.5X BY FY12E.

SHAREHOLDER VALUE CREATION INCREASING INTEGRATION, COUPLED WITH VOLUME GROWTH, WOULD IMPROVE THE PERFORMANCE

OPERATIONALLY. STAKE SALE TO JFE STEEL HAS SIGNIFICANTLY IMPROVED THE BALANCE SHEET STRUCTURE,

THEREBY READYING IT FOR THE NEXT LEG OF GROWTH.

EARNINGS VISIBILITY CONSOLIDATED PROFITS EXPECTED TO GROW AT A 45% CAGR FROM RS 15976MN IN FY10 TO RS 33618MN BY

FY12.

VALUATION AT THE CMP OF RS 1318, THE STOCK TRADES AT A P/E OF 10.0X FY12E EPS OF RS 131.4 AND AN EV/EBIDTA OF

5.9X FY12E.

MF GLOBAL VS. CONSENSUS FY12 EPS OF RS 131.4 AS AGAINST CONSENSUS OF RS 124.

FUTURE EVENT TRIGGERS STEEL PRICE HIKE, IRON ORE ALLOCATION FOR HADDIMMPADE MINE, COMMENCEMENT OF COKING COALPRODUCTION.

EXPECTED PRICE MOMENTUM 6.1%


Rating and price target

At the CMP of Rs 1318, the stock trades at a P/E of 10.0x FY12E EPS of Rs 131.4 and an Ev/Ebidta of 5.9x FY12E.We arrive at a value of Rs 1398 for JSW Steel on SOTP basis. We initiate coverage on the stock with a Neutralrating and a target price of Rs 1398.


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19

Key Risks

Raw material price risk: JSW Steels profitability is significantly exposed to international iron ore and coking coal

prices due to its low level of integration (See detailed section on Raw Material Integration). These account for around

45% of sales and 80% of total raw material costs. Any material jump in raw material prices, without a corresponding

jump in steel prices, could significantly impact profits. However, the company is working on various mines to

increase its integration levels. Once commissioned, these will significantly reduce volatility in the company profits

due to the raw material price swings.

Volume risk: The company has been consistent in terms of adding capacities and has seen a 37.3% CAGR in

capacity over FY03-FY10 to 7.8mn tonnes. The company is further expanding its capacity to 11mn tonnes by the

end of FY11 and will commence work on its two greenfield ventures of 10mn tonnes each. In the event of the

company being unable to utilise its capacities, profits are likely to be impacted.

US operations profitability: The financial crisis had taken a toll on the companys US operations with the utilisationlevels falling down below 20%. The operations incurred significant losses during FY09 and FY10, impacting the

consolidated profits. The company reported a loss of US$ 37mn and US$ 70mn in FY09 and FY10, respectively.

With the economic recovery, the companys US operations have seen increased utilisations and is expected to break

even at the PBDT level in FY11. In the event of a downturn, JSW Steels US operations could pose a significant risk

to the companys profitability. JSW Steel is considering various options for its US operations, including a complete

sale.

Execution risk: JSW Steel has plans to increase its capacity from 7.8mn tonnes to 32mn tonnes. Delays in

commissioning the capacities could stretch the companys balance sheet.

Assumptions

Y/E MAR FY2011E FY2012E

VOLUMES (MN TONNES) 6.3 8.9

STEEL PRICE (US $) 650 650

IRON ORE (RS / TONNE)

- SPOT 600 630

- NMDC 3250 3250

COKING COAL (US$ / TONNE) 225 230Source: MF Global India Research Estimates


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21

After commissioning its 3.2mn tonnes blast furnace, the company plans to de-bottleneck its existing plants, which will

increase capacity by 1mn-2mn tonnes. Apart from the de-bottlenecking, the company is also contemplating an

increase in the capacity at the Vijaynagar unit to 16mn tonnes. JSW has the required land for the same, however,

the required infrastructure and allocation of iron ore mines would play a vital role for capacity expansion. Plans for

de-bottlenecking and expansion have not yet been finalised.

JSW is also likely to enjoy the first mover advantage amongst the large steel companies with its expansion going on

stream prior to the others. The company will see its expansions go on stream by the end of FY11 as against H2FY12

for Tata Steel and post FY12 for SAIL and Jindal Steel & Power.

STEEL CAPACITY EXPANSIONS

COMPANY EXPANSION (MN TONNES) COMMISSIONING

JSW STEEL 3.2 MAR-11

TATA STEEL 3.2 OCT-11

SAIL 2 DEC-11

8.5 FY13 / FY14

JSPL 3 FY13

Source: Company, MF Global India Research

JSW also plans to add two integrated steel plants of 10mn tonnes each in West Bengal and Jharkhand, on a

greenfield basis, that will take the capacity to 32mn tonnes. The company has made some headway, in terms of the

Bengal project, and is expected to start work during the current financial year. Phase I of the Bengal project

(capacity: 3mn tonnes) would commence construction from October 2010 and is expected to commence operations

within three years from the start of work. The total project cost, including the development of mines, is Rs 150bn.

The capacity expansions have also led to huge operational leverage (fixed cost recovery) and economies of scale.The company has been able to reduce its conversion cost per tonne by 29% over FY05 to FY10. The volume growth

with larger size plants will further enable the company enjoy some economies of scale. However, we have not

assumed the same in our estimates as reflected in the chart below.

CONVERSION COST PER TONNE (RS / TONNE)

5000

5500

6000

6500

7000

7500

8000

8500

9000

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12


Regular investments in building capacities has led to a 22.2% CAGR in revenues over FY05 to FY10, along

with a reduction in the conversion costs due to the operational leverage. We further expect a 28.2% CAGR in

sales on the back of a 24.8% CAGR in volumes. JSW will also benefit from the early mover advantage it has

in expanding its capacities.


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Increasing integration levelsKey to sustained profitabilityJSW Steel is working to increase its integration levels for its expanded capacity to have a sustainable profit growth.

The company is looking at the domestic as well as the overseas markets for securing its raw material supplies. JSW

has acquired iron ore mines in Chile and coking coal mines in USA, apart from the mines in India. The quantum of

captive iron ore is expected to more than double by FY12, whereas the company would see its first semi-hard coking

coal shipment from USA in the current year.

CAPTIVE RAW MATERIALS AND % INTEGRATION

0.0

1.0

2.0

3.0

4.0

5.0

FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

mntonnes

0%

5%

10%

15%

20%

25%

30%

Iron ore Coking Coal

% captive - iron ore % captive - Coking Coal


Existing mine: The company currently sources around 20% of its iron ore requirement from Vijaynagar Minerals

Pvt. Ltd. (VMPL), 40% owned by JSW Steel. VMPL has increased its volumes from a million tonnes in FY04 to1.8mn tonnes in FY10, a CAGR of 9.2%. It is further expected to increase to around 2mn-2.5mn tonnes in FY11. The

company plans to increase the mining capacity to 4mn tones. However, it would restrict the volumes to the current-

year levels in order to extend the life of the mine. The current reserves of the mine stand at 36mn tonnes.

Other Indian iron ore mines: Apart from VMPL mines, the company is allocated five other iron ore mines. However,

of the five mines, only the Hadimmapade mines are expected to commence operations in the near future. The mine

has reserves of 60mn tonnes and is expected to have 2mn tonnes of output in the 1st

year of operations, followed by

5mn tonnes in the next year. The company had already received forest clearances for the same. However, the

Supreme Court, in a ruling, has asked the Karnataka Government to de-allocate the mine given to JSW Steel along

with Kalyani Steel and re-allocate it again within a period of four months. Karnataka-based mining company, MSPL,

had contested the allocation of the mine by the state government. JSW will have to compete with other players to get

the mine allocation. In the event that JSW is not re-allocated the mine, it is expected to cost the company

significantly. We have not assumed any benefit from the said mine and would await more clarity before

assuming the same in our numbers.

JSW Steel has also been recommended the Donimalai mines in Karnataka, Kanjamalai mines and Kavuthmalai

mines in Tamil Nadu by the state governments. However, the Centre is yet to accord the final approval for the same.

In addition to the said mines, the company has also been allocated the Ankua mines in Jharkhand. The mines have

reserves of 400mn tonnes and will be used for the West Bengal project.

Chilean mines: JSW Steel has acquired a 70% stake in Chilean iron ore mines. The remaining stake is held by a

local partner. The mines are spread over an area of 26,000 hectares, of which around 1% of the area is being

explored. The total reserves in the area explored are 1500mn tonnes with a 25% Fe grade. After beneficiation, thereserves would be 150mn tonnes with a 63.5% Fe grade. The company expects the production to start from

December 2010 with year 1 having 1mn tonnes of volumes and year 2 with 2mn tonnes of volumes. The said

volumes will be produced through the dry process beneficiation. The mining and the beneficiation will be outsourced

and is expected to have a FOB cost US$ 55 per tonne.


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The company also plans to set up a wet process beneficiation plant that will help it increase the output to 5mn

tonnes a year (2mn tonnes through the dry process and 3mn tonnes through the wet process). The total capex to set

up the beneficiation is US$ 100mn, of which US$ 40mn has already been spent. The plant is expected to commence

operations by FY13. The in-house beneficiation is expected to reduce the FOB cost for the additional 3mn tonnes to

US$ 45 per tonne. The company intends to sell the iron ore produced from Chilean mines to enjoy the freight

arbitrage.

Coking coal mines, USA: The company has recently acquired coking coal mines in USA with reserves of 146mn

tonnes of Semi-Hard Coking coal. Of the total reserves, 45mn tonnes are in the area where the drilling activity has

undertaken. The mine also has a railway load out and a barge facility. One of the mines is already under operation,

whereas the company has asked for permits to operationalise the other mines. The mine is expected to start

production from December 2010 with first-year production of a million tonnes, a delay of 2 months on account of

delay in getting permits. The production is expected to ramp up by 1mn tonnes a year, until it reaches 3mn tonnes.

However, we have not assumed the full production in our estimates. The landed cost to the company is

expected to be US$ 150 per tonne in India.

Rohne coal block: JSW Steel has been allocated the Rohne coal block in Jharkhand with total reserves of 250mn

tonnes of coking coal. The company plans to commence land acquisition for the same. Total land requirement is

1250 hectares, a part of which is forest land. JSW Steel has a 69% stake in the block, while the rest is held by

Bhushan Power & Steel (24%) and Jai Balaji Industries (7%). The company expects to get clearances and start

production by the end of FY12. Full-year production will be 8mn tones, of which JSWs share is 5.6mn tonnes. The

output from the mine is to be used for the Vijaynagar and the Jharkhand facility. Total capex for the mine is

estimated at Rs 500Rs 600 crore, of which Rs 50 crore has been currently spent. However, the mine falls in the

NO GO area and this could delay approvals for the mine. Hence, we have not assumed any benefit from the

block. We will factor in the benefit once JSW gets the approvals for the mine.

Kulti/Sitarampur Mines: The said mines have been allotted to the West Bengal Mineral Development Corporation

(WBMDC), which, in turn, will supply the coking coal to the West Bengal Steel project. The supply of coal to the

project is likely on a cost plus basis. The two mines have total reserves of 420mn tonnes of coking coal. The

commissioning of the mines is expected to be along with the commissioning of phase 1 of the West Bengal project.

Increasing integration levels safeguard the company from volatility in the raw material prices, apart from a

significant jump in profitability.


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JFE collaborationTechnology, cost savings and more in storeJSW Steel had entered into a strategic collaboration agreement with JFE Steel Corporation in November 2009 to

come together and leverage each others strengths for mutual benefit. The areas covered under the agreement

were:

1. Collaboration for automotive steel production which would include supplying the required technology,

2. Production of steel products other than automotive steel,

3. Energy reduction programmes,

4. Environmental programmes,

5. Quality and yield improvement programmes,

6. Performance audit of JSW facilities,

7. Benchmarking of techno-economic parameters,

8. Procurement of raw materials in and outside India,

9. Building up the integrated West Bengal Steel project, and

10. Mutual stock holding.

Taking ahead the collaboration agreement, the two companies have signed definitive agreements in various areas

mentioned above. JSW and JFE have announced a 14.99% stake sale by JSW Steel to JFE Steel Corporation,

along with a lot of other initiatives on the operational front. JFE will have an option to always retain its holding in the

company to 14.99% in the event of JSW Steel diluting its equity, going forward.

Deal structure: JFE Steel Corporation infused Rs 4800 crore in the form of a Fully Convertible Debentures (FCD)

into JSW Steel which is recently converted into equity shares at a price of Rs 1500 per share. Conversion at Rs

1500 per share will see an inflow of Rs 5700 crore into the company (4mn additional shares to be issued to JFE to

take its stake to 14.99% and 2mn additional shares to help retain the 14.99% stake, post the FCCB conversions) as

against an inflow of Rs 5100 crore had the conversion happened at Rs 1331 per share.

CAPITAL-RAISING FROM JFE

NO OF SHARES AMOUNT RAISED (RS CRS) @

(MN SHARES) RS 1500 RS 1331

32 4800INITIALLY

36 4800

4 600ADDL ISSUE TO GET 14.99% STAKE

- -

2 300ON FCCB CONVERSION

2 300

5700 5100Source: Company, MF Global India Research

Foreign collaboration agreement for automotive steel: The two companies have entered into an agreement for

licensing JFEs automotive steel technology to JSW Steel. The company will manufacture various products for the

automotive market using the technology supplied by JFE. This will help JSW to increase its focus on the fast-growing

automotive market that currently accounts for around 10% of the companys revenues. JFE will also supply the

substrate materials required for the manufacture of automotive steel till JSW does not absorb the technology to

manufacture the same. JFE will send in a team of engineers to the companys Vijaynagar facility, which will be

followed by a trial trade, and then the regular substrate supply. The supply is expected to start early next year with

an annual volume of 100,000 tonnes. Both the companies are also expected to jointly market products to the

Japanese auto makers at a later stage.


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General technical assistance agreement: JSW and JFE have also entered into a general technical assistance

agreement wherein, JFE will assist JSW with various operational parameters which will help reduce JSWs cost of

production. This will help JSW bridge the gap between its production cost with that of JFE. JFEs cost of

production is around US$ 430 per tonne as against around US$ 510 per tonne for JSW Steel.However, we do

not assume any benefits of the same in our numbers. The major areas shortlisted under the agreement are:

1. Energy reduction/Environment protection.

2. Improvement in production process and yield, and

3. Production capacity analysis and indices benchmarking.

JSW will pay a royalty of Rs 100 crore over a period of ten years to JFE for the automotive technology and

the technical assistance provided.

West Bengal Project: In addition to the above, JSW and JFE are currently negotiating a stake sale in the West

Bengal project. However, the talks are at a very nascent stage. The stake sale would help the company partly meet

the financing needs of the project. Availability of land for the project has been one of the major drivers for JFE to lookat the project.

Mutual Stock Holding: The 1st

step towards the mutual stock holding was JFE Steel Corporation picking up a

14.99% stake in JSW Steel. JSW Steel will consider picking up a stake in JFE Steel over a period of 2 years. The

stake will be limited to 5% currently.

Collaboration with JFE will not only help JSW to cater to the automotive steel market, but will also allow it to

improve its quality and efficiency, resulting in reduction of production cost. The two companies are further

looking to partner themselves for various raw material and steel (West Bengal) projects that could

significantly benefit the company, going forward.


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Cost focus and changing product mixImproving marginsApart from increasing its integration levels, JSW Steel also has a focus on improving its margins through a better

product mix, increasing productivity levels and focus on controlling/reducing costs. This also includes signing of the

General Technical Assistance Agreement with JFE. Further, the company is setting up captive power plants,

beneficiation plants, and increasing the Hot strip mill capacity along with the integrated 3.2nm tonnes Blast Furnace

expected to be commissioned by March 2011. However, we have not assumed any significant benefit on

account of the same in our estimates.

OPERATING PROFIT (US$/TONNE)

100

150

200

250

300

FY05 FY06 FY07 FY08 FY09 FY10 Q1FY11 FY11E FY12E

US$


Product mix: JSW is reducing the proportion of Semis in the overall sales, leading to a better margin. Semis as apercentage of sales have reduced from 21.8% in FY10 to 9% in Q1FY11. The drop is on account of the

commissioning of 1.8mn tonnes Hot Strip Mill in March 2010. We expect that to increase marginally in FY12 to

10.3% on account of the commissioning of the 3.2mn Blast Furnace. However, the increase is only marginal due to a

simultaneous commissioning of a 3mn tonne Hot Strip Mill.

PRODUCT MIX

43.1%

18.9%21.8%

9.0%

29.1%

40.6%

51.3%51.9%

30.7%

0.0% 8.5%8.6%

15.3%13.3%

8.6%

15.9%

34.9%31.6%

34.9%

32.2%

0%

10%

20%

30%

40%

50%

60%

FY07 FY08 FY09 FY10 Q1FY11

Flats Longs

Semis Value added



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Cost control/Reduction: JSW Steel is undertaking various activities which would help it lower the operating costs

per tonne. The company has already set up a 10mn tonne beneficiation plant that will be scaled up to 20mn tonnes.

The beneficiation plants (2x500 tonnes per hour) are likely to be commissioned by October 2010 and April 2011.

Commissioning of the beneficiation plants allows the company to buy iron ore of the lower grade and beneficiate the

same to the higher Fe content. This is likely to lower its raw material costs. At full capacity, the plants are expected

to meet the iron ore requirements of the expanded steel capacity.

The company also significantly benefits from the ban on iron ore exports from Karnataka. JSW bought 58% Fe

content iron ore at distressed prices (Rs 1050-Rs 1100 per tonne). JSW buys 40% of its iron ore requirements from

the spot markets. Assuming the company buys the entire spot market requirement from the Karnataka miners, it is

likely to save around Rs 275 crore on a quarterly basis. This accounts for around 9% of the profits estimated for

FY11.

BENEFIT ON ACCOUNT OF THE BAN ON IRON ORE EXPORTS FROM KARNATAKA (ASSUMED ON QUARTERLY NUMBERS)

STEEL PRODUCTION (MN TONNES) 1.6

IRON ORE REQUIREMENT 2.7

SPOT MARKET PURCHASES (A) 1.1

MARKET PRICE (RS / TONNE) 4000

CURRENT COST INCL BENEFICIATION (RS / TONNE) 1500

SAVINGS PER TONNE (RS) (B) 2500

BENEFIT (RS CRS) (A) X (B) 272.0


The benefit is expected to continue as long as the ban is in place or the miners run out of their inventories and stop

producing. The miners have significantly reduced their production, but it is still good enough for JSW Steel to meet

its requirements. The company has been buying the ore since the start of August 2010 after the ban was introducedin July 2010. As the timing and the quantum is difficult to estimate, we have not assumed the same in our

numbers.

JSW Steel is also setting up 2x300MW captive power plants at its Vijaynagar facility that will meet the power needs

of the existing capacity as well as the expansion underway. The plants are expected to be commissioned by March

2011 and will see a sharp increase in captive power generation in FY12. Outside power requirement as a

percentage of power consumed is expected to fall from 43.5% in FY10 to 19.8% in FY12 after the plants commence

operations.

BENEFIT ON ACCOUNT OF THE BAN ON IRON ORE EXPORTS FROM KARNATAKA (ASSUMED ON QUARTERLY NUMBERS)

0%

10%

20%

30%

40%

50%

FY06 FY07 FY08 FY09 FY10 FY11E FY12E

Asa%o

fpowerconsumed

4%

5%

5%

6%

6%

7%

7%

Power&fuekasa%o

fsales

Power purchased as a% of requirement Power as a % of sales



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JSW Steel has also been able to improve the employee productivity over the years, which has helped it contain the

employee cost over a period. Larger sized plants and better technologies have enabled the company improve the

productivity per employee.

EMPLOYEE PRODUCTIVITY

400

450

500

550

600

650

700

750

800

FY06 FY07 FY08 FY09 FY10

1.8%

1.9%

2.0%

2.1%

2.2%

2.3%

2.4%

2.5%Output per Employee (tonnes) Employee Cost as a % of Sales


Higher productivity and the focus on costs have helped the company have one of the lowest conversion costs within

the industry.

CONVERSION COSTS PER TONNECOMPARATIVE

0

50

100

150

200

250

JSW Steel SAIL Tata Steel

US$


Lower conversion costs amongst peers have given the company a competitive edge, despite lower integration levels.

This, along with better yields, has helped the company leapfrog to the 2nd

rank from the 7th

earlier in the ranking of

top-35 steel makers done by World Steel Dynamics. Expansions, location in high-growth markets and labour costs

were the other major reasons for the upgrade in the ranking. The company was next only to POSCO.


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TOP-10 STEEL MAKERS BY WORLD STEEL DYNAMICS

COMPANY SCORE RANK

POSCO 7.53 1JSW STEEL 7.3 2

NUCOR 7.25 3

SAIL 7.23 4

CSN 7.23 5

NLMK 7.16 6

TATA / CORUS 7.1 7

USIMINAS 7.09 8

SEVERSTAL 7.05 9

GERDAU 7.01 10


JSW is expected to benefit from the changing product mix as well as its focus on reducing costs through

various measures. The focus on cost control, thereby lower conversion costs, helps the company be

competitive enough, despite lower raw material integration levels vis--vis its peers.


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Improving balance sheet - provides the next leg of growthThe JFE deal and the promoter warrants (when converted) have significantly helped the company reduce its

leverage. These two factors will cumulatively lead to a cash inflow of around Rs 7800 crore which will help the

company significantly de-leverage its balance sheet. The inflows will see the leverage reduce from 1.7x in FY10 to

0.5x by FY12.

FUND-RAISING

RS MN FY11E FY12E TOTAL

WARRANTS 5294 15881 21175

JFE STAKE SALE 54000 - 48000

ADDITIONAL SHARES ISSUED TO MAINTAIN 14.99% STAKE * 2662 2662

TOTAL AMOUNT RAISED 59294 18543 77837


* - On conversion of FCCBs

DEBT:EQUITY

0.0

0.5

1.0

1.5

2.0

2.5

FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E


The leaner balance sheet will help the company finance its next leg of growth i.e. West Bengal project and

Jharkhand project taking the total capacity to 32 nm tonnes. The company is also negotiating with JFE for a stake

sale in the West Bengal project which will further help the company ease its funding requirements.

Lower working capital requirements has also aided the company improve leverage alongwith the equity infusions.The companys net working capital days have gone into the negative territory since the past couple of years

relatively easing the working capital requirements. Net working capital days have reduced from 20 days in FY06 to a

negative 47 days in FY10.


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WORKING CAPITAL DAYS

52

11

-87

-47

50 53435541

11 1015 1014

134

181

1048597

63

19

-43

-69

-150

-100

-50

0

50

100

150

200

FY05 FY06 FY07 FY08 FY09 FY10

Days

Inventory Debtor Creditor Net Working Capital


A stronger balance sheet will help the company finance its next leg of growth, apart from helping it sustain

the downturn in a commodity cycle.


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ValuationsJSW Steel, Indias 2

ndlargest steel maker and largest in the private space, would see its volumes grow with the

commissioning of the 3.2 mn tonnes blast furnace at Vijaynagar. The companys collaboration with JFE Steel

Corporation will help the company enter into the league of top global steel makers. The stake sale to JFE Steel

Corporation has not only de-leveraged the company but has also readied it for the next leg of capacity growth in

West Bengal and Jharkhand. Increasing raw material integration and a focus on cost control will see a sustained

profit growth for the company.

At the CMP of Rs 1318, the stock trades at a P/E of 15.5x FY11E EPS of Rs 84.8 and 10.0x FY12E EPS of Rs

131.4. The stock trades at an Ev/Ebidta of 8.5x FY11E and 5.9x FY12E. We arrive at a value of Rs 1398 for JSW

Steel on a SOTP basis comprising of its steel business and the investment held in JSW Energy. We initiate

coverage on the stock with a Neutral rating and a target price of Rs 1398, implying an upside of 6.1%.

VALUATION TABLE

RS MN BASIS FY12

STEEL BUSINESS EV/EBIDTA

EBIDTA 74484

MULTIPLE 6

ENTERPRISE VALUE 446906

LESS: NET DEBT 96655

MARKET CAP 350251

PER SHARE 1369

ADD:

INVESTMENTS IN JSW ENERGY CMP LESS 20% DISCOUNT 30

TARGET PRICE 1398

CMP 1318

% UPSIDE 6.1%



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Absolute Rolling Valuation Band Charts

PE BAND

5x

10x

15x

20x

0

500

1000

1500

2000

2500

3000

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Rs

PBV BAND

0.8x

1.6x

2.4x

3.2x

0

500

1000

1500

2000

2500

3000

3500

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Rs

MCAP/SALES BAND

0.4x

0.8x

1.2x

1.6x

0

100000

200000

300000

400000

500000

600000

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Rs mn

EV/EBIDTA BAND

3x

6x

9x

12x

0

200000

400000

600000

800000

1000000

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Rs mn

EV/SALES BAND

0.6x

1.2x

1.8x

2.4x

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Rs mn



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Value Drivers

SALES AND ASSET TURNOVER

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

FY08 FY09 FY10 FY11E FY12E

0.00

0.20

0.40

0.60

0.80

1.00

1.20

Net Sales, Rs mn (LHS) Asset Turnover, x (RHS)

EBITDA AND EBITDA MARGIN

0

15,000

30,000

45,000

60,000

75,000

90,000


0

5

10

15

20

25

30

EBITDA, Rs mn (LHS)

EBITDA margin, % (RHS)

NOPLAT AND OPFCF

-100,000

-80,000

-60,000

-40,000

-20,000

0

20,000

40,000

60,000


NOPLAT, Rs mn OPFCF, Rs mn

ECONOMIC PROFIT

0

100,000

200,000

300,000

400,000


0

2

4

6

8

10

12

14

Avg invested capital, Rs mn (LHS)WACC, % (RHS)ROIC, %



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35

Financials

INCOME STATEMENT

Y/E MAR, RS MN FY2008 FY2009 FY2010 FY2011E FY2012E

NET SALES 124,567 159,348 189,572 233,326 324,560

GROWTH, % 46 28 19 23 39

OTHER INCOME 0 0 0 0 0

TOTAL INCOME 124,567 159,348 189,572 233,326 324,560

OPERATING EXPENSES -89,786 -129,530 -148,865 -181,978 -250,076

EBITDA (CORE) 34,780 29,818 40,707 51,348 74,484

GROWTH, % 30.4 (14.3) 36.5 26.1 45.1

MARGIN, % 27.9 18.7 21.5 22.0 22.9

DEPRECIATION -7,419 -9,878 -12,987 -14,860 -19,024

EBIT 27,361 19,941 27,720 36,488 55,460

GROWTH, % 26.1 (27.1) 39.0 31.6 52.0

MARGIN, % 22.0 12.5 14.6 15.6 17.1

INTEREST PAID -5,730 -11,556 -11,080 -9,744 -7,785

OTHER NON-OPERATING INCOME 1,537 2,717 5,360 960 1,008

NON-RECURRING ITEMS 1,075 -7,948 0 0 0

PRE-TAX PROFIT 24,100 3,270 22,111 27,821 48,805

TAX PROVIDED -7,658 -726 -6,467 -9,250 -15,519

PROFIT AFTER TAX 16,442 2,544 15,643 18,571 33,286

NET PROFIT 16,400 2,749 15,976 18,919 33,618

MF NET PROFIT 15,326 10,697 15,976 18,919 33,618

GROWTH, % 17.5 (30.2) 49.3 18.4 77.7

NET PROFIT (ADJUSTED) 15,326 10,697 15,976 18,919 33,618

EXTRAORDINARY ITEMS: GAINS/(LOSSES) 1,075 -7,948 0 0 0

UNADJ. SHARES (M) 187 187 187 223 256

WTD AVG SHARES (M) 187 187 187 223 256

CASH FLOW


PRE-TAX PROFIT 24,100 3,270 22,111 27,821 48,805

DEPRECIATION 7,419 9,878 12,987 14,860 19,024

CHG IN WORKING CAPITAL 9,163 26,220 -7,734 -674 -2,467

TOTAL TAX PAID -5,265 -476 -2,388 -5,880 -13,497

OTHER OPERATING ACTIVITIES 2,505 -3,626 -1,358 -100 -122CASH FLOW FROM OPERATING ACTIVITIES 37,922 35,265 23,618 36,027 51,743

CAPITAL EXPENDITURE -114,264 -80,623 -17,271 -70,281 -40,000

CHG IN INVESTMENTS -2,246 730 -2,316 37 -1,399

CHG IN MARKETABLE SECURITIES 0 0 0 0 0

OTHER INVESTING ACTIVITIES 0 0 0 0 0

CASH FLOW FROM INVESTING ACTIVITIES -116,653 -79,777 -19,476 -70,128 -41,277

FREE CASH FLOW -78,731 -44,512 4,141 -34,102 10,467

EQUITY RAISED/(REPAID) 1,774 0 0 54,007 36,597

DEBT RAISED/(REPAID) 79,513 44,140 -3,871 -12,070 -34,033

DIVIDEND (INCL. TAX) -3,114 -268 -2,120 -2,610 -2,994

OTHER FINANCING ACTIVITIES 0 0 0 0 0

CASH FLOW FROM FINANCING ACTIVITIES 80,051 44,890 -6,204 39,676 -100

NET CHG IN CASH 1,320 378 -2,063 5,575 10,367


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36

BALANCE SHEET

AS AT 31ST MAR, RS MN FY2008 FY2009 FY2010 FY2011E FY2012E

CASH & BANK 4,715 5,093 3,030 8,605 18,973MARKETABLE SECURITIES AT COST 0 0 0 0 0

DEBTORS 5,391 3,991 6,964 9,589 13,338

INVENTORY 21,817 29,246 28,667 38,355 53,352

LOANS & ADVANCES 9,086 12,428 16,038 16,840 23,576

OTHER CURRENT ASSETS 198 172 0 0 0

TOTAL CURRENT ASSETS 41,207 50,929 54,700 73,389 109,239

INVESTMENTS 4,696 3,966 6,282 6,245 7,644

GROSS FIXED ASSETS 188,883 231,720 276,912 296,912 421,755

LESS: DEPRECIATION -30,743 -40,798 -53,393 -68,253 -87,277

ADD: CAPITAL WIP 57,708 95,852 69,562 119,843 35,000

NET FIXED ASSETS 215,848 286,775 293,082 348,503 369,478

NON-CURRENT ASSETS 0 0 0 0 0

TOTAL ASSETS 261,751 341,670 354,063 428,137 486,361

CURRENT LIABILITIES 43,402 81,799 78,078 90,393 113,270

PROVISIONS 3,662 829 2,649 2,774 2,913

TOTAL CURRENT LIABILITIES 47,064 82,628 80,727 93,168 116,183

NON-CURRENT LIABILITIES 136,770 181,160 181,369 172,668 140,657

TOTAL LIABILITIES 183,834 263,788 262,096 265,836 256,840

PAID-UP CAPITAL 1,871 1,871 1,871 2,231 2,559

RESERVES & SURPLUS 74,129 73,280 87,911 157,884 224,775

SHAREHOLDERS EQUITY 77,917 77,882 91,968 162,301 229,521

TOTAL EQUITY & LIAB ILITIES 261,751 341,670 354,063 428,137 486,361

PER-SHARE DATA

FY2008 FY2009 FY2010 FY2011E FY2012E

MF EPS (INR) 81.9 57.2 85.4 84.8 131.4

GROWTH, % 3.0 (30.2) 49.3 (0.7) 54.9

BOOK NAV/SHARE (INR) 416.6 416.4 491.7 727.6 896.8FDEPS (INR) 81.9 57.2 85.4 84.8 131.4

CEPS (INR) 115.9 152.5 154.8 151.4 205.7

CFPS (INR) 181.9 192.8 104.3 157.1 198.2

DPS (INR) 14.0 1.0 9.5 10.0 10.0

FINANCIAL STRUCTURE

FY2008 FY2009 FY2010 FY2011E FY2012E

TOTAL DEBT/EQUITY (%) 159.5 216.2 178.9 93.9 51.6

NET DEBT/EQUITY (%) 153.4 209.7 175.6 88.6 43.3


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37

PROFITABILITY, PRODUCTIVITY, LIQUIDITY AND VALUATION RATIOS

FY2008 FY2009 FY2010 FY2011E FY2012E

RETURN ON ASSETS (%) 10.3 3.3 6.5 6.3 8.4RETURN ON EQUITY (%) 23.7 13.7 18.8 14.9 17.2

RETURN ON INVESTED CAPITAL (%) 12.0 6.7 7.6 8.3 11.3

ROIC/COST OF CAPITAL (X) 1.3 0.7 0.8 0.9 1.3

ROIC - COST OF CAPITAL (%) 2.5 (2.9) (2.0) (0.9) 2.5

RETURN ON CAPITAL EMPLOYED (%) 12.4 4.2 8.5 8.1 10.8

COST OF CAPITAL (%) 9.5 9.7 9.6 9.2 8.8

ROCE - COST OF CAPITAL (%) 2.9 (5.5) (1.1) (1.1) 2.0

ASSET TURNOVER (X) 0.8 0.7 0.7 0.8 1.0

SALES/TOTAL ASSETS (X) 0.6 0.5 0.5 0.6 0.7

SALES/NET FA (X) 0.8 0.6 0.7 0.7 0.9

WORKING CAPITAL/SALES (X) (0.1) (0.2) (0.1) (0.1) (0.1)

FIXED CAPITAL/SALES (X) - - - - -

RECEIVABLE DAYS 15.8 9.1 13.4 15.0 15.0

INVENTORY DAYS 63.9 67.0 55.2 60.0 60.0

PAYABLE DAYS 176.4 230.5 191.4 181.3 165.3

CURRENT RATIO (X) 0.9 0.6 0.7 0.8 1.0

QUICK RATIO (X) 0.4 0.3 0.3 0.4 0.5

INTEREST COVER (X) 4.8 1.7 2.5 3.7 7.1

DIVIDEND COVER (X) 5.9 57.2 9.0 8.5 13.1

PER (X) 16.1 23.0 15.4 15.5 10.0

PEG (X) - Y-O-Y GROWTH 5.3 (0.8) 0.3 (22.6) 0.2

PRICE/BOOK (X) 3.2 3.2 2.7 1.8 1.5

YIELD (%) 1.1 0.1 0.7 0.8 0.8

EV/NET SALES (X) 2.9 2.6 2.2 1.9 1.3

EV/EBITDA (X) 10.5 13.7 10.0 8.5 5.9

EV/EBIT (X) 13.4 20.6 14.7 12.0 7.9

EV/NOPLAT (X) 13.5 14.1 11.9 10.4 7.4

EV/CE 1.7 1.6 1.5 1.3 1.2

EV/IC (X) 2.4 1.8 1.6 1.5 1.3Source: Company, MF Global India Research Estimates


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METALS | STEEL

SAIL IN: NEUTRALRS 220

18 October 2010

mfglobal.com

MF Global Initiating Report

38


DHAWAL DOSHI

[email protected]

SAPNA SHAH

[email protected]

SAIL| Large becoming larger

Investment Rationale

SAIL is nearly doubling its existing capacity by FY13 placing the company in

the league of top global steel producers. The company will become one of

the top 10 steel manufacturers globally from 16 th position in 2009.

Changing product mix will reflect higher value addition in SAILs product

basket. The expansion programme will eliminate semis from its product mix.

SAILs focus on the Longs segment will benefit the company as most of the

competitors are expanding their capacities in the Flats segment.

Productivity improvements and increasing efficiencies will see the production

costs go down. Lower conversion costs along with raw material integration

will make the company competitive vis--vis peers.

SAIL is expanding its raw material capacities (iron ore, coking coal and

limestone) to cater to the increased requirements post expansion. The

company is evaluating organic as well as inorganic options to increase theintegration levels.

Strong balance sheet not only helps the company support the huge

expansion plan but also helps it weather any economic downturns.

Risks

1. Raw Material price risk, 2. Execution risk.

Valuation

At the CMP of Rs 220, the stock trades at 14.2x FY11E EPS of Rs 15.4

and 11.1x FY12E EPS of Rs 19.9. It trades at an Ev/Ebidta of 8.4x

FY11E and 6.1x FY12E. We initiate coverage on the stock with a

Neutral rating and a target price of Rs 218.

TARGET RS 218 (-0.8%)

SECTOR RATING

OW N UW

STOCK RATING

BUY NEUTRAL SELL

> 15% -15% TO +15% < -15%

COMPANY DATA

O/S SHARES : 4130MNMARKET CAP (RS) : 910BNMARKET CAP (USD) : 20.6BN52 - WK HI/LO (RS) : 259 / 155AVG. DAILY VOL. (3MTH) : 3.3MN

FACE VALUE (RS) : 10

SHARE HOLDING PATTERN, %

PROMOTERS : 85.8FII / NRI : 4.4FI / MF : 7.4NON PROMOTER CORP. HOLDINGS : 0.5PUBLIC & OTHERS : 1.9

PRICE PERFORMANCE, %

1MTH 3MTH 1YR

ABS 8.0 10.0 19.8REL TO BSE 4.8 -2.3 2.7

VALUATION SUMMARY


NET SALES 395,085 432,041 405,514 443,313 482,690

GROWTH, % 16.5 9.4 -6.1 9.3 8.9

EBIDTA 105,714 83,774 90,798 104,919 142,866

EBIDTA MARGINS, % 26.8 19.4 22.4 23.7 29.6

CORE EBIDTA 105,714 83,774 90,798 104,919 142,866

NET PROFIT 75,355 61,667 67,312 63,771 82,211

NET PROFIT MARGIN, % 19.1 14.3 16.6 14.4 17.0

EPS, RS 18.2 14.9 16.3 15.4 19.9

EPS GROWTH, % 21.2 (18.2) 9.2 (5.3) 28.9

PER, X 12.1 14.7 13.5 14.2 11.1

EV/EBIDTA, X 7.6 9.6 9.4 8.4 6.1

EV/NET SALES, X 2.0 1.9 2.1 2.0 1.8PRICE/BOOK VALUE, X 4.0 3.2 2.7 2.4 2.0

ROIC, % 32.0 19.5 16.7 15.1 17.3

ROE, % 37.5 24.1 21.9 17.8 19.7


PRICE VS. SENSEX

0

30

60

90

120

150

180

Apr-08 Dec-08 Aug-09 Apr-10

SAIL Rel. to BSE



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18/10/2010 MF GLOBAL INITIATING COVERAGE |SAIL

39

INVESTMENT OVERVIEW

SUSTAINABLE COMPETITIVE ADVANTAGE 100% IRON ORE INTEGRATION HELPS THE COMPANY MAINTAIN A LOW COST OF PRODUCTIONFINANCIAL STRUCTURE DEBT EQUITY OF 0.5X IN FY10, EXPECTED TO INCREASE TO 0.6X BY FY12 DESPITE OF THE STRONG CAPEX

SHAREHOLDER VALUE CREATION COMMISSIONING OF THE HUGE EXPANSION PROGRAMME AND ACQUISITION OF COKING COAL MINES

EARNINGS VISIBILITY EPS EXPECTED TO IMPROVE FROM RS 14.9 IN FY10 TO RS 19.8 BY FY12

VALUATION AT THE CMP OF RS 220, THE STOCK TRADES AT 11.1X FY12E EPS OF RS 19.9 AND AN EV/EBIDTA OF 6.1X FY12E.

MF VS. CONSENSUS EPS OF RS 19.9 FOR FY12 AS AGAINST A CONSENSUS ESTIMATE OF RS 19.3

FUTURE EVENT TRIGGERS STEEL PRICE HIKE AND ACQUISITION OF A COKING COAL MINE

EXPECTED PRICE MOMENTUM (0.8%)


Rating and Price Target

At the CMP of Rs 221, the stock trades at 14.3x FY11E EPS of Rs 15.4 and 11.1x FY12E EPS of Rs 19.9. It trades

at an Ev/Ebidta of 8.5x FY11E and 6.1x FY12E. We initiate coverage on the stock with a Neutral rating and a

target price of Rs 218.


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40

Key Risks

Raw Material price risk: SAILs dependence on the 3rd

parties for its coking coal requirement exposes it to the

fluctuations in the coking coal prices. The company has been impacted by the jump in coking coal price during the

current year. SAIL is working towards securing the coking coal supplies. The company is developing the Tasra and

Sitnala blocks which will give around 4.75 mn tonnes ROM production and 2.45 mn tonnes of washed coal. However

the same is expected to commence operations after 3 4 years from now.

Execution risk: SAIL has embarked on Rs 807bn expansion programme to increase its steel and associated mining

capacities. It is expanding its crude steel capacity from 14.5 mn tonnes to 26.2 mn tonnes and the saleable steel

capacity from 12.6 mn tonnes to 23.1 mn tonnes. Delays in the expansion plans will significantly impact the

companys operations and Balance sheet.

Assumptions

Y/E MAR FY2011E FY2012E

SALES VOLUMES (MN TONNES) 11.9 12.9

STEEL PRICE (US$ / TONNE) 650 650

IRON ORE COST (RS / TONNE) 833 875

COKING COAL COST (US$ / TONNE) 225 235

Source: MF Global India Research Estimates


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41

INVESTMENT THESIS

Capacity expansion will place it as one of the top global steel manufacturing companiesSAIL has embarked upon a capacity expansion plan which will see the company become one of top 10 crude steel

producers globally from the 16th

position currently. The company is expanding its hot metal capacity from 14.5 mn

tonnes to 26.2 mn tonnes, crude steel capacity from 14.5 mn tonnes to 24.6 mn tonnes and the saleable steel

capacity from 13.5 mn tonnes to 23.1 mn tonnes.

TOP CRUDE STEEL PRODUCERS GLOBALLY (2009)

77.5

31.3 31.126.5 25.8 24.6

20.5 20.5 20.1 16.7 15.3 15.2 15.1 14.2 14 13.7 13.5

0

15

30

45

60

75

90

ArcelorMittal

Baosteel

POSCO

NipponSteel

JFE

SAIL*

JiangsuShagang

TataSteel

Ansteel

Severstal

Evraz

USSteel

Shougang

Gerdau

Nucor

Wuhan

SAIL

mntonnes Post Expansion


* - Expanded Crude Steel Capacity

Existing expansion plans: SAIL is expanding capacities on a brownfield basis and is expected to commission the

same in FY2013 except for IISCO which commissions by Nov 2011 and Salem which is commissioned in August

2010. IISCO commissioning is delayed by 3 4 months as against the earlier commissioning in June 2011.

CAPACITY EXPANSION

(MN TONNES) HOT STEEL SALEA BLE STEEL COMMISSIONING

CURRENT EXPANDED CURRENT EXPANDED

MAIN STEEL PLANTS

BHILAI STEEL PLANT (BSP) 5.4 7.5 4.4 6.5 MAR-13

DURGAPUR STEEL PLANT (DSP) 2.2 3.5 1.9 2.8 DEC-12

ROURKELA STEEL PLANT (RSP) 2.3 4.5 2.0 4.0 DEC-12

BOKARO STEEL PLANT (BSL) 4.1 7.4 3.5 6.5 DEC-12

IISCO STEEL PLANT (ISL) 0.5 2.9 0.4 2.4 NOV-11

SPECIAL STEEL PLANTS

ALLOY STEEL PLANT (ASP) 0.0 0.0 0.2 0.4

SALEM STEEL PLANT (SSP) 0.0 0.0 0.2 0.3 COMMISSIONED

VISVESVARYA IRON & STEEL (VISL) 0.1 0.3 0.1 0.2

14.5 26.2 12.6 23.1


The total capex including the modernization, value addition, de-bottlenecking and raw material augmentation isaround Rs 807bn. Of the above the company has already spent Rs 208bn and placed orders for Rs 440bn. The

above capex is to be funded with debt equity of 1:1.


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42

CAPEX

(RS BN) SPENT ORDERS PLACED TO BE ORDERED TOTAL

BSP 32.1 89.7 83.0 204.8DSP 4.1 10.5 18.3 32.8

RSP 32.0 93.8 24.3 150.2

BSL 29.1 37.9 25.3 92.4

ISP 84.1 143.7 0.7 228.5

SSP 16.1 19.0 0.0 35.1

OTHERS 10.8 45.4 7.4 63.6

208.3 440.0 159.0 807.4


SAIL is also planning to develop its Jagdishpur unit in a phased manner after the acquisition of assets of Malvika

Steel in Feb 2009 for Rs 209crs. The company has planned a capacity of 150000 tonnes of TMT bars, 13000 tonnesof Crash Barriers Steel and 10000 tonnes of Galvanised Corrugated Sheets. The company is also setting up a

475MW gas based power plant at the unit. The company will utilize around 300MW of the same and sell the balance

quantity.

Future plans: SAIL is evaluating reviving Fertiliser Corporation of Indias (FCI) Sindri unit in a JV with FCI. The unit

has 6000 acres of land and will house a 5 mn tonnes steel plant and 1.15 mn tonnes fertilizer plant. The total capex

planned for the unit is around Rs 300 350bn. SAIL has sent a proposal with regards to the revival. The

development will take a long time before it materially impacts the company.

SAIL has entered into a strategic alliance with POSCO to set up a 1.5 mn tonnes steel plant using POSCOs

patented FINEX technology. The plant is expected to have an investment of around Rs 150bn and is proposed to be

set up at SAILs Bokaro facility. Feasibility studies for the same are currently on post which definitive agreements willbe signed. POSCO is likely to get a majority stake in the venture, however the % stake is still being negotiated. The

project when commissioned will use atleast 50% of the 40 mn tonnes iron ore fines stored at SAILs Gua mines. The

balance fines will be used for captive purposes after the beneficiation plant commences operations and for the

proposed iron ore nuggets venture with Kobe Steel. SAIL and POSCO have also signed a MOU for the feasibility

studies for commissioning a CRNO Steel.

SAIL is also in discussions with Japans Nippon Steel to collaborate for better technologies in Steel and related

areas.

The expansion programme will help the company position itself as one of the top 10 producers of crude

steel globally. Further the revenues are expected to almost double once the capacities are fully operational.The company is also considering global tie ups to get access to new and better technologies apart from

reducing the learning curve.


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Changing product mix moving towards higher value additionCommissioning of the expansion plans would also see a sharp improvement in the value addition done by the

company. The share of value added products will increase in the overall sales mix while that of Semis would reduce

to Nil. Semis as a % of sales stood at 18.9% in FY2010 and are currently at 11% in Q1FY2011.

SEMIS AS A % SALES

18.9%

19.9%19.5%

15.9%

18.9%

18.1%

17.2%

17.7%

11.0%

5%

10%

15%

20%

25%

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Q1FY11


DSP sells the highest proportion of semis in its product basket at 65% followed by BSP at 23.4%. This has led to the

unit earning lower margins vis--vis others. DSP has earned average segmental margins of around 12% from FY04

to FY10 as against a 20% plus average margins for the other units like BSP, RSP and BSL over the same period.

UNITWISE SEMIS AS A % SALES FY10

UNIT

BSP 23.4%

DSP 64.9%

RSP 1.0%

BSL 1.2%

ISP 20.5%


UNIT WISE PBIT MARGINS

0%

5%

10%

15%

20%

25%

30%

35%

40%

FY04 FY05 FY06 FY07 FY08 FY09 FY10

BSP DSP RSP BSL



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44

The expansion programme will help the company improve its margins as semis are replaced by finished products.

SAIL is focusing on increasing its exposure towards the longs segment by replacing the semis with the longs. Also

the new product additions planned by the company are targeted more towards the longs segment. Focus on longssegment will benefit the company as the demand for the same increases with the increasing infrastructure spends

and most of the other players targeting the new capacities in the Flats segment. Both Tata Steel and JSW Steel are

expanding its 2.9 mn tonnes and 3.2 mn tonnes expansion respectively in the flats segment.

PRODUCT MIX

Product mix - Current

Flats

56%Longs

24%

Semis

20%

Product mix - Post Expansion

Flats

54%

Longs

46%


Improving the product mix will see an improvement in the margin profile for the company. Focus on Long

products in the new product launches will benefit the company as most of the other expansion coming into

the Flat segment.


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SAIL has also reduced its specific energy consumption helping it curtail the power costs. Specific energy

consumption has come down from 7.16 G Cal per tonne of crude steel in FY2007 to 6.72 G Cal per tonne of crude

steel in FY10. The company further plans to reduce the same to 5.5 G Cal per tonne of crude steel with the

implementation of the modernization cum expansion programme.

SPECIFIC ENERGY CONSUMPTION (G CAL / TONNE)

7.166.95

6.74 6.72

5.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

FY07 FY08 FY09 FY10 Target


The modernization programme will see increased production from the superior technology as against the old

technologies currently employed by SAIL. Crude Steel production from the Twin Hearth Furnace route (majorly in

BSP and ISP) will be curtailed significantly by increasing the production from the BOF process. Similarly the saleable

steel production will be reduced through the Ingot Casting route (all units except RSP) by increasing the production

from Continuous Casting route. This will lead to a significant reduction in the energy costs for the company.

PROCESS MIX

CURRENT POST EXPANSION

TWIN HEARTH PROCESS 23% 0%

INGOT CASTING 33% 0%


SAIL has also reduced the coke rate over the years by optimizing the coal blend for the blast furnaces. Coke rate

has reduced from 541 kgs per tonne of hot metal in FY2007 to 517 kgs per tonne of hot metal in FY2010. The

company expects the same to come down to 450 kgs per tonne of hot metal once the expansion plans are

implemented.


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COKE RATE

541 533521 517

450

300

350

400

450

500

550

600

FY07 FY08 FY09 FY10 Target

Kg/tonne


In addition to the above, the company has also planned various technological changes which will see an

improvement

steel industry demand supply last 5 yrs & company plans

Documents