Initiation of Coverage - Banco · PDF fileBook Value Per ADR US$19.01 ... IMSA IPC Sources: ... 12 International

U.S. investors’ inquiries should be directed to Santander Central Hispano Investment at (212) 407-7809.Please refer to the back of report and footnotes for important disclosures.

Latin American Equity Research Mexico – ConglomeratesMexico City, November 22, 2002

GRUPO IMSA BUYInitiation of CoverageLuis Miranda, CFA(52-55) [email protected]

PRESENT PRICE: US$12.47/P$13.91*TARGET PRICE: US$18.00/P$21.00

Company StatisticsBloomberg IMY US52-Week Range US$8.06-US$16.002002E P/E Rel to IPC 0.82x2002E P/E Rel to Congs 0.64xIPC Index 5,6423-Yr CAGR (01-04E) 8.3%Market Capitalization (mn) US$776Float (%) 16%3-Mth Avg Daily Vol (mn) US$0.25Shares Outst (ADR 9:1) (mn) 26.6Net Debt/Equity (x) 0.7Book Value Per ADR US$19.01*All prices as of the close November19, 2002, unless otherwiseindicated.

Estimates and Valuation Ratios2001 2002E 2003E 2004E

Net Earn (Local) 1,477 1,512 1,824 2,209Current EPS 2.62 2.69 3.24 3.92Net Earn (US$) 158.3 152.4 176.1 202.9Current EPADR 2.57 2.42 2.78 3.24P/E 5.3 5.2 4.3 3.5EBITDA/ADR 5.09 6.59 7.29 7.80FV/EBITDA 4.7 4.1 3.7 3.3CE/ADR 3.64 3.41 3.92 3.95P/CE 4.15 4.42 3.85 3.82Div Per ADR 0.05 0.06 - -Div Yield 3.2% 2.3% - -

Relative Performance (12 Months)

80

100

120

140

160

180

200

220

N-01 J-02 M-02 M-02 J-02 S-02 N-02

IMSA

IPC

Sources: Bloomberg, Company Reports and Santander CentralHispano Investment estimates. All data in U.S. dollars in millionsunless otherwise stated. CE/ADR Cash earnings per ADR.

We are initiating coverage of Grupo Imsa with a Buy ratingand a target price for year-end 2003 of US$18.00 per ADRor P$21.00 per local share. This price implies 44% potentialappreciation, higher than our estimate of 37% upside for theIPC index. We view Imsa (a diversified industrial companywith four business lines, steel processing, automotive batteries,aluminum products, and steel and plastic construction products)as an attractive investment based on the company’s solidfundamentals, strong balance sheet, proven managementexecution and attractive valuation. While we identify a majordrawback in Imsa’s limited float and liquidity, the investmentpositives more than offset the negatives, in our opinion.

We believe that management’s track record speaks foritself. The group’s strategy of growing organically and throughacquisitions has been implemented consistently, andsuccessfully, through the years. For example, Imsa’s salesincreased from US$850 million in 1995 to US$2,290 million in2001, reaching 18% CAGR in U.S. dollar terms. In the sameperiod, EBITDA had an outstanding 21% CAGR. We expectthis growth rate to decline going forward, mainly due to asignificantly higher comparison base in 2002. Nonetheless, weestimate attractive 14% EBITDA CAGR for 2001-2004E.

The stock is attractively valued, currently trading at 3.7xour one-year forward-looking FV/EBITDA multiple. Thisimplies a 18% discount compared to its 4.5x three-year average,and a 21% discount to its 4.7x five-year average. In terms of netasset value (NAV), the stock is trading at a discount of 50% toour estimated fair value. Our US$18.00 target price implies aone-year forward-looking FV/EBITDA multiple of 4.0x and a29% discount to NAV. (We also used a two-stage DCFvaluation model with a 25% liquidity discount. Through thismethod, we reached a price objective of US$20.60.)

We believe that Imsa will be a beneficiary of the expectedeconomic recovery in the U.S. and Mexico, as well as of apick-up in steel prices. In addition, Imsa’s most recentacquisitions – VP Buildings in 2001, Pinole Steel andLightfield in 2002 – should have a positive effect on thecompany’s bottom line. We expect Imsa’s consolidated sales togrow 20.8% in 2002 and 10.5% in 2003, in U.S. dollar terms.We forecast EBITDA growth of 29% in 2002 and 10.6% in2003 in U.S. dollar terms.

Grupo Imsa: Initiation of Coverage

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TABLE OF CONTENTSInvestment Positives ....................................................................................................................... 3Investment Concerns....................................................................................................................... 4

Earnings Outlook..................................................................................................................... 5Imsa Acero .............................................................................................................................. 6Enermex .................................................................................................................................. 8Imsatec .................................................................................................................................... 9Imsalum................................................................................................................................. 11

Valuation....................................................................................................................................... 12Forward-Looking FV/EBITDA............................................................................................. 12International Comparison ...................................................................................................... 15DCF Model............................................................................................................................ 16Net Asset Value..................................................................................................................... 17

Appendix I................................................................................................................................. 18What Is Imsa?........................................................................................................................ 18Raw Materials and Vertical Integration ................................................................................ 19Shareholder Ownership ......................................................................................................... 20Dividends .............................................................................................................................. 21

Financial Structure .................................................................................................................... 21Capital Expenditures ................................................................................................................. 22

Strategy and Evolution .......................................................................................................... 23IMSA ACERO-Steel Processing Products................................................................................ 25

Product Lines......................................................................................................................... 27Competition........................................................................................................................... 28

ENERMEX-Automotive Batteries ............................................................................................ 28Strategy.................................................................................................................................. 29Competition........................................................................................................................... 29Production Facilities.............................................................................................................. 30Raw Materials ....................................................................................................................... 30

IMSATEC-Steel and Plastic Construction Products ................................................................. 31Business Strategy / Imsatec ................................................................................................... 31Products / Imsatec. ................................................................................................................ 31Competition........................................................................................................................... 32Production Facilities.............................................................................................................. 33Raw Materials and Suppliers................................................................................................. 34

IMSALUM-Aluminum and Related Products .......................................................................... 34Strategy.................................................................................................................................. 34Products................................................................................................................................. 34Competition........................................................................................................................... 35Raw Materials ....................................................................................................................... 35

Financial Statements ..................................................................................................................... 36Appendix I............................................................................................................................. 40Appendix II ........................................................................................................................... 41

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INVESTMENT POSITIVESExpected economic recovery. Imsa is an industrial diversified company that we believe willbenefit from the expected recovery in both the U.S. and Mexican economies. Currently, 45% ofthe group’s consolidated sales are made in Mexico and approximately 47% are generated in theUnited States. We believe that Imsa’s diversified portfolio is well balanced and will represent aleveraged-play opportunity when the U.S. and Mexican economies begin to recover. Imsa’sbusiness portfolio includes products directed to high-end segments of the steel industry(galvanized and pre-painted products), auto industry (automotive batteries), and constructionindustry (pre-engineered buildings and plastic reinforced panels, aluminum products andprefabricated buildings). We expect these segments to have a modest recovery during the secondhalf of 2002 and a healthier performance in 2003. The expected stronger economic growth,compared with a relatively slow 2002, and the company’s recent acquisitions should lead to 29%EBITDA growth in 2002 and 10.6% in 2003, in U.S. dollar terms.

Clear strategy. Management has proved over the years that it has a clear strategy, which deliversgrowth organically and through rational acquisitions that have added value and increasedprofitability. We believe that through a more profitable sales mix, strict cost controls and ahealthier economy, Imsa should post an 11.6% ROIC in 2003, a significant improvement from8.5% in 2000. Overall, Imsa’s strategy is to focus on value-added products through internaldevelopment, association or acquisitions, in order to sustain growth and improve its sales mix.This strategy sounds simple and obvious, but generally these types of goals are easy to state andhard to accomplish. Nevertheless, the track record of Imsa’s management speaks for itself andproves that, over the years, they have been able to implement this “simple” strategy.Furthermore, the company has been able to maintain its leadership in practically all of itsbusiness segments. We strongly believe that management’s execution capabilities are aninvestment positive for the stock.

We believe that the outlook for the steel industry in the Nafta region is positive. Imsa Acero,the group’s steel division, accounts for 47% of consolidated revenues. After a long period ofoversupply in the steel industry and strong pressure from imported products, which led in 2001 tothe lowest prices in 15 years, the industry finally saw price increases in 2002. From mid-1995 tothe beginning of 2002, prices of cold-rolled steel and slab declined 55% and 47%, respectively.Since the beginning of 2002, however, these prices have increased 46% and 55%, respectively.We believe that the price hikes, combined with an efficient strategy for raw material purchases,should have a positive effect on the operating performance of the company's largest division.

Financial structure. The group has an outstanding track record in quickly and efficientlyintegrating new businesses into the organization. Furthermore, management has been able tocarry out major acquisitions without jeopardizing the company’s financial structure. Imsa hasimpressive financial ratios: (1) current net debt to equity is 0.7x; (2) net debt to EBITDA is 2.8x;and (3) EBITDA to net interest paid is a solid 7.3x. The group has investment-grade rating BBB-by S&P for its foreign currency debt. We believe that this rating will allow Imsa to continuefinancing its operations at attractive interest rates (currently the company’s debt has an averagecost of Libor + 135 bps). For local currency (Mexican pesos), the company has an AA ratingfrom Fitch and S&P.

We believe that the stock’s valuation is attractive. Imsa has traditionally been a relativelycheap stock. We believe that this is mostly due to its small float. However, we believe thatcurrent valuation levels offset the stock’s low liquidity investment risk. It trades at 3.7x our 2003FV/EBITDA estimate, which represents an 18% discount to its three-year average. Further, interms of net asset value, the stock trades at a close to 50% discount to our estimated fair value.

We believe thatthe companyshould benefitfrom economicrecovery.

We believe thatthe group has aclear strategy andproven executioncapabilities.

Healthier outlookfor the steelindustry in theNAFTA region.

A strong financialstructure.

The stock tradesat almost a 50%discount to itsNAV.


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INVESTMENT CONCERNSOur main concern is a slower-than-expected economic recovery in the U.S. and Mexico. Thequestion about a double-dip in the U.S. economy continues to be a key issue, as economicindicators continue to show mixed signals. However, we maintain that an economic recovery willmaterialize during the second half of 2003 in both the U.S. and Mexico, and that there will behealthier economic growth in 2003. Our estimates are based on the following assumptions. Forthe U.S., we are considering 2.0% and 3.2% GDP growth in 2002 and 2003, respectively, and1.4% and 3.5%, respectively for Mexico.

The stock’s low liquidity. Imsa’s current market capitalization is US$775 million, but its freefloat is only 16% or US$122 million. Furthermore, its three-month daily average volume is onlyUS$0.25 million, considering both the Mexican Stock Exchange and ADRs on the NYSE,through the company’s UBC shares and ADRs, respectively. In our view, Imsa’s relatively smallmarket cap and low liquidity deters potential institutional investors who would otherwise investin the stock. However, we believe that for potential long-term investors, Imsa’s solidfundamentals, attractive outlook and strong management should offset the low liquidity issue.

Outstanding growth rates, in our opinion, will be hard to sustain. Imsa’s revenues grew fromUS$850 million in 1995 to US$2,290 million in 2001 for an 18% compound annual growth rate(CAGR). During the same period, EBITDA grew at a 21% CAGR. We believe that this pace isnot sustainable, now that Imsa has reached a high base of comparison. We expect lower butattractive growth for the company, with a CAGR of 14% for EBITDA in U.S. dollars in the2001-2004 period.

A major acquisition could weaken Imsa’s strong financial structure. Imsa’s strong salesincrease in the past few years has been fueled by organic growth and acquisitions. We believethat acquisitions will continue to play a key role in Imsa’s development. Management has provento be very successful in acquiring and efficiently integrating businesses while preserving thecompany’s financial health. Nevertheless, in our view, any major acquisition could jeopardizeImsa’s financial strength and/or operating performance. However, we do not believe that thecompany’s conservative management team would engage in a risky venture.

The cost of Imsa’s raw materials is increasing, especially that of slab. Steel slab and non-coated steel represent approximately 65% of Imsa Acero’s cost of goods sold (COGS), andapproximately 30% of Imsa’s total COGS. As a steel processor, Imsa Acero has a lower fixed-cost structure compared with a traditional steel manufacturer, which allows it to maintain a morestable gross margin compared with steel manufacturers. Its results are more vulnerable to marketfluctuations when prices for end-users are relatively stable and raw material (slab) pricesincrease, or in volatile times, when it cannot adjust its end-user prices as fast as the spot marketprices for raw materials change. In this situation, Acero could experience short-term pressure onmargins, which traditionally have been offset by increases in final product prices, as there is astrong correlation between prices of raw materials and prices to end-users. Nevertheless, thelowest operating margin posted by the steel division was 8.2% in 4Q00, and it was able toachieve a high 23.5% operating margin in 2Q99 (in 3Q02, the margin was 15.9%).

Imsa’s exposure to Argentina is only 0.5% of sales; however, its exposure to South andCentral America is approximately 7% of sales. We believe that the Brazilian crisis has notbecome an issue for Imsa, owing to relatively stable demand in the aftermarket for automotivebatteries, which is its main business in that country. However, we believe that if Brazil were toexperience a long-term crisis, with a negative effect on the South and Central Americaneconomies, it would have a negative impact on more than 7% of the company’s sales.

A delay in therecovery of theU.S. economy isour main concern.

Imsa stock’sliquidity is low.

Past growth rateswill be difficult tosustain.

A big acquisitioncould damage thefinancialstructure.

Increasing pricesin raw materials

A long-term crisisin South America

5

EARNINGS OUTLOOKImsa is a diversified industrial company with four business lines, steel processing (47% of sales),automotive batteries (16% of sales), aluminum products (10% of consolidated sales), and steeland plastic construction products (27% of consolidated sales), based on our 2002 estimates. Thegroup is an important exporter and has subsidiaries in the U.S., Central and South America, andEurope. Exports and sales from foreign subsidiaries represented almost 50% of revenues in 2001.The following chart summarizes sales and EBITDA by division.

Figure 1. Imsa – Sales and EBITDA Breakdown by Division (based on 2002 estimates)

Sales

Imsa Steel47%

Imsalum10%

Imsatec27%

Enermex16%

EBITDA

Imsa Steel59%

Imsalum5%

Imsatec15%

Enermex21%

Source: Santander Central Hispano Investment.

Given that close to 47% of Imsa’s sales are directly linked to the economy of the U.S. and 45%to that of Mexico, we believe that the company will benefit from the expected economic recoveryin the U.S. and Mexico. Our estimates assume a modest but gradual recovery of both economiesstarting in 3Q02. We estimate GDP growth for Mexico of 1.4% in 2002 and 3.5% in 2003, whilewe expect the U.S. economy to grow 2.4% and 3.9%, respectively.

We also believe that in 2002, the recovery in steel prices should have a positive impact on thegroup’s financials. Another factor that should benefit Imsa is the inclusion of its most recentacquisitions, VP Buildings (2001), Pinole Steel (2002) and Lightfield (2002). We expect Imsa’sconsolidated sales to increase 21% in 2002, 11% in 2003 and 5% in 2003, in U.S. dollar terms.The higher growth expected for 2002 is explained mostly by the consolidation of VP Buildings inOctober 2001; the acquisitions of Pinole steel (galvanized and painted steel) and Lightfield inSpain FRP (Fiberglass Reinforced Plastic Panels) in June 2002; and the recovery in the prices offlat steel products. Figure 2 summarizes our consolidated estimates. At the operating level, weestimate 10.6% EBITDA growth in 2003 in U.S. dollar terms, mainly driven by a solid operatingperformance in the steel and construction divisions.

Figure 2. Imsa – Consolidated Estimates, 2001-2004E (U.S. Dollars in Millions)2001 2002E 2003E 2004E 02E/01 03E/02E 04E/03E

Sales 2,230 2,694 2,979 3,124 20.8% 10.5% 4.9%Operating Profit 210 290 337 369 37.8% 16.3% 9.4%Operating Margin 9.4% 10.8% 11.3% 11.8%EBITDA 314 406 450 481 29.6% 10.6% 7.0%Margin EBITDA 14.1% 15.1% 15.1% 15.4%Net Profit 158 152 176 203 -3.7% 15.5% 15.2%Sources: Company reports and Santander Central Hispano Investment estimates.


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Figure 3 shows our volume estimates for the steel, automotive batteries and aluminum productsdivisions. Our estimates indicate strong growth in the steel division’s volume in 2002. This is theresult of a healthier economic environment for the steel industry in the Nafta region, as well asdiversification into new business segments, import substitution in the region and acquisitions. Inthe case of Enermex (the automotive batteries division), the strong volume growth is beingdriven by a higher penetration into the U.S. market.

Figure 3. Imsa’s Estimated Volume per Business Unit, 2000-2004E2000 2001 2002E 2003E 2004E

Steel Domestic (tons) 1,236,509 1,291,992 1,480,436 1,547,055 1,634,003 YoY ∆ 27.3% 4.5% 14.6% 4.5% 5.6%Steel Exports (tons) 567,164 506,104 610,061 661,916 706,529 YoY ∆ 43.0% -10.8% 20.5% 8.5% 6.7%Steel Total (tons) 1,814,053 1,798,096 2,090,496 2,208,971 2,340,532 YoY ∆ 32.6% -0.9% 16.3% 5.7% 6.0%Enermex (000 Units) 18,836 20,740 22,219 22,968 23,866 YoY ∆ 10.7% 10.1% 7.1% 3.4% 3.9%Imsalum (tons) 46,496 47,323 47,611 49,754 51,744 YoY ∆ -0.9% 1.8% 0.6% 4.5% 4.0%Sources: Company reports and Santander Central Hispano Investment.

In the past, acquisitions have been key growth drivers for Imsa. We believe that this willcontinue to be the case going forward. However, we are not factoring in any further acquisitionsinto our estimates. Our DCF model assumes sustained capex of around US$130 million toUS$140 million per year from 2003 on, without a major acquisition. In the following section, weaddress the key assumptions for our estimates for each of Imsa’s divisions.

IMSA ACEROWe expect Imsa Acero (the company’s steel division) to post strong results in 2002, withestimated sales of US$1,236 million, resulting in a robust 19% YoY increase. Our EBITDAestimate is US$242 million, implying attractive 26% YoY growth. For 2003, we estimate sales ofUS$1,371 million (11% growth YoY), with US$251 million in EBITDA (4% growth YoY). Themain drivers of the estimated growth are as follows:

Higher prices and volume. We estimate that the Nafta region, especially the U.S., will continueto benefit from the ruling of Investigation 201, which led to tariff increases on imported steelproducts into the U.S. as of March 2002. As members of Nafta, Canada and Mexico wereexcluded. As can be seen in Figure 4, prices of cold-rolled steel, hot-rolled steel and slab haveincreased 35% on average since this announcement was made. In addition, at the end of 2001, theMexican government increased tariffs on imported steel products from countries with whichMexico does not have a trade agreement. The trade measures led to higher prices and also to amarket share decline of imported products in the Nafta region. The latter led to higher salesvolume for regional producers due to substitution for imported products.

During 2002, Imsa Acero introduced price increases of approximately 30%, on average. Theincreases started at the end of the first quarter and were implemented throughout the secondquarter. The full impact should not be seen until the second half of 2002, given that there areseveral large contracts that would not be subject to the new prices until they are renewed duringthe second half of the year. If the tariffs for imported steel in the U.S. were eliminated or quotasincreased significantly, we would see pressure on prices. We believe that this would have anegative short-term effect on Imsa’s steel numbers, as the company would be negatively affectedby lower prices to end-users, as well as the higher cost of raw material.

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Figure 4. Price of Hot-Rolled Coil, Slab and Imsa’s Gross Margin (US$/ton and % of Sales)

120140160180200220240260280300

D-96 M-97 O-97 M-98 A-98 J-99 J-99 N-99 A-00 S-00 F-01 J-01 D-01 M-0215.017.520.0

22.525.027.530.0

32.535.0

Hot Rolled Slab Imsa's Gross Mrg. (Right)

Announcement of 201measures

Source: Bloomberg.

Cost of raw materials. Steel slab and non-coated steel represent approximately 60% of ImsaAcero’s cost of goods sold. Prices of these materials have risen approximately 40% since March2002, but margins have not suffered because the company has been able to acquire slab atattractively low prices. However, management believes that during the second half of the year,and as cheap slab inventories are depleted, the division could experience some margin pressureas a result of higher prices for both slab and non-coated slab. In any case, we expect this divisionto post strong operating margins for 2002, even after recognizing margin pressure in late 2002.

Acquisition of Pinole Steel. The acquisition of Pinole Point Steel in June 2002 brings 135,000short tons per year of pre-painted flat steel, which we estimate will increase Imsa’s consolidatedpre-painted installed capacity by almost 26%. Although a minor increase in terms of total sales,as the acquisition represents less than 5% of the company’s total installed capacity, the impact atthe EBITDA level should be greater, in our opinion. This would be the result of a more profitablesales mix, with more pre-painted steel sales in the U.S, an important driver in our EBITDAgrowth estimate for 2003.

Figure 5 shows our sales and EBITDA estimates for Imsa Acero until 2004. Although we expectpressure on margins in 2003 and 2004 due to higher raw material prices, we believe that this willbe offset at the EBITDA level with higher sales, better use of the company’s installed capacity,an improved sales mix and ongoing productivity programs.

Figure 5. Imsa Acero Sales and EBITDA, 2000-2004E (U.S. Dollars in Millions)

1,1641,042

1,2361,4181,371

197 185

242 251268

0

200

400

600

800

1,000

1,200

1,400

1,600

2000 2001 2002E 2003E 2004E150

200

250

300

350

400

Sales EBITDA

Sources: Company reports and Santander Central Hispano Investment estimates.


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Figure 6 summarizes our estimates for Imsa Acero’s installed capacity. We expect installedcapacity growth to be focused on higher-value-added products, such as galvanized and pre-painted steel, and some growth in 2003 and beyond in hot-rolled steel. We expect betterutilization of Imsa’s cold-rolled capacity.

Figure 6. Imsa – Imsacero Plant Capacity (tons 000), 2000-2004E2000 2001 2002E 2003E 2004E

Hot-Rolled Flat Steel 1,310 1,310 1,450 1,650 1,850Hot-Rolled, Pickled and Oiled Steel 1,445 1,445 1,445 1,545 1,745Cold-Rolled Flat Steel 1,610 1,610 1,610 1,610 1,610Galvanized Steel 1,335 1,335 1,635 1,635 1,635Pre-painted Flat steel 520 520 656 656 656Sources: Company reports and Santander Central Hispano Investment estimates.

ENERMEXIn 2002, we expect Enermex to post a 4% sales increase YoY, mainly on the back of higher salesvolume in the U.S. In our opinion, this would be partially offset by lower sales volume in SouthAmerica. In fact, we believe that the main driver for Enermex’s performance will be the expectedmarket share gain in automotive batteries in the U.S. aftermarket. On one hand, we expect this tobring top-line growth to the division, enough to compensate for the expected poor performanceof the Argentine operations. Operations in Brazil, however, have not suffered as much as those inArgentina, precisely because of the higher exposure to the aftermarket business. Generallyspeaking, the aftermarket segment in the automotive battery business represents 85% of the totalmarket and OEMs represent only 15%. On the other hand, operations in the U.S. are mostlyfocused on distribution to major independent retailers. This contrasts with sales and production,company-owned distributors and sales to independent retailers in Mexico.

Therefore, as growth should be driven by the operation in the U.S., we can expect a lower marginin 2002. However, as a result of the higher sales in absolute terms, we expect modest EBITDAgrowth in 2002 (US$85 million).

One of the key factors that is allowing Enermex to gain market share in the U.S. is ExideTechnologies’ Chapter 11 filing in March 2002. Exide is the second-most important player inautomotive batteries in the U.S, but its market position has eroded since the filing. AlthoughExide is expected to continue to be the main competitor in that market, we believe that Enermexhas been taking advantage of the current market situation to bring in new accounts.

Figure 7. Enermex Sales and Operating Margin, 2000-2004E (U.S. Dollars in Millions and % of Sales)

389 411 427461

498

68

82 8593

101

0

100

200

300

400

500

600

2000 2001 2002E 2003E 2004E50

60

70

80

90

100

110

120

Sales EBITDA

Sources: Company reports and Santander Central Hispano Investment.

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For 2003 and 2004, we expect top-line growth driven by the economic recovery. Currently thereare no projects to expand installed capacity in Brazil or Mexico, but we expect marginal capacityincreases coming from the removing of project bottlenecks. Key drivers for growth in 2003 andbeyond for this division should be higher penetration in current markets and the addition of newaccounts. We do not expect to see any reason for price increases in the industry, sincecompetition is expected to remain stiff.

Figure 8. Enermex – Automotive Batteries Installed Capacity and Utilization Rate, 2000-2004E2000 2001 2002E 2003E 2004E

Installed Capacity (Units 000) 26,000 26,700 26,700 27,368 27,641Volume Sold (Units 000) 18,836 20,740 22,219 22,968 23,866Utilization Rate (%) 0.72 0.78 0.83 0.84 0.86Sources: Company reports and Santander Central Hispano Investment estimates.

With this division, bear in mind that in the Mexican and U.S. operations, the third and fourthquarters are the strongest due to seasonality. In South America, it is the first and second quarters,as cold weather has a positive correlation with demand for automotive batteries.

A medium-term risk factor for this division would be a higher exposure to OEMs. Currently, theU.S. operations are all centered in the aftermarket segment, while in Mexico, they are 25%OEM/75% aftermarket. We believe that if this mix were going to change in the medium termtoward OEMs, Enermex would experience margin pressure, as the OEM market has traditionallyyielded lower margins than the aftermarket segments. Nevertheless, management does not seethis happening in the medium term, as its partner, Johnson Controls, supplies directly to theOEMs in the U.S.

IMSATECDuring 2002, Imsatec’s operating results are expected to improve significantly, mainly driven bythe consolidation of VP Buildings in 4Q01. This business unit was acquired in September 2001and has been included in Imsatec’s “foreign operations” since October of that year. Therefore,foreign sales amounted to 80% of total sales in 3Q02 for this business. Of this figure, more than90% was generated in the U.S.

We expect the consolidation of VP Buildings to be the key driver for Imsatec’s 2002 results,given that we see short-term pressure on construction spending in the U.S. During the first half of2002, construction spending in the U.S. experienced a slowdown, mainly because of sloweractivity in the nonresidential segments, especially industrial. In the short term, we expect thisfactor to be more than offset by the consolidation of VP Buildings. For 2003, we expect ahealthier economic environment and, thus, richer sales growth, as we outline below.


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Figure 9. U.S. Construction Spending, July 2000-Sept. 2002 (SAAR U.S. Dollars in Billions)

150

200

250

300

350

400

450

J-00 A-00 J-00 O-00 J-01 A-01 J-01 O-01 J-02 A-02 J-02Residential Non Residential Public

Sources: U.S. Bureau of Census.

In 2002, we estimate sales of US$733 million for Imsatec, with US$62 million EBITDA. As weexplained above, most of the YoY growth is related to the consolidation of VP Buildings, whichwe believe should contribute approximately US$330 million in sales in 2003, about 45% of thedivision’s estimated revenues. For 2003 and 2004, our sales growth estimate is driven mostly byeconomic recovery, as we are not counting on any acquisitions. During 2002, we expect a 90 bpscontraction in the operating margin to 6.1%, on the back of the consolidation of VP Buildings, alower-margin business. However, we forecast 20- and 70-basis-point operating marginimprovements in 2003 and 2004, respectively, owing to higher sales and expected productivitygains derived from operating efficiencies in the company’s U.S. operations.

Figure 10. Imsatec Sales and Operating Margin, 2000-2004E (U.S. Dollars in Millions and % of Sales)

312

502

733824812

35

46

6267

75

0100200300400500600700800900

2000 2001 2002E 2003E 2004E2030405060708090100110

Sales EBITDA


Imsatec’s operating margin looks disappointingly low compared with that of other business unitsin Imsa’s portfolio. However, if we compare this division’s profitability with its capital invested,we can conclude that results are encouraging. For example, in terms of EBITDA to operatingassets, Imsatec has a higher return than the steel and aluminum divisions. We believe that thisratio should improve in the medium term, as demand picks up because of the expected gradualeconomic recovery. In turn, this could translate into a higher use of Imsatec’s design anddistribution centers, mainly in the U.S.

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Figure 11. Imsa’s Estimated Return on Operating Assets by Division (U.S. Dollars in Millions)Sales EBITDA Operating Margin Estimated EBITDA to2002E 2002E 2001 2002E Op. Assets Op. Assets

Imsa Acero 1,236 242 10.9% 13.4% 1,611 15.0%Enermex 427 85 16.6% 16.8% 357 23.8%Imsalum 277 22 4.4% 6.0% 213 10.3%Imsatec 733 62 7.0% 6.1% 423 14.7%Sources: Company reports and Santander Central Hispano Investment.

IMSALUMImsa’s aluminum extrusion business has been affected by the weak demand in its export anddomestic markets, which represented 53% and 47% of sales, respectively, as of 3Q02. We expectresults in the second half of 2002 to improve, but overall we expect a weak year in terms of sales.We estimate total revenues for the division to reach US$277 million in 2002, a 7% decline YoY.However, the division is undergoing a restructuring process in order to improve profitability. Infact, its operating margin has improved during the first half of 2002 by 130 basis points despitethe decline in sales. We estimate an operating margin of 6% in 2002 and 6.3% in 2003.

The main areas in which Imsa has been focusing in order to turn around this division are: (1) achange in top management in 2001; (2) the rationalization of product assortment; (3) qualityimprovement measures; and (4) overall stringent control on production and logistics. We areforecasting sequential EBITDA improvements through 2004, with close to 30% YoY growth in2002 in U.S. dollar terms (benefiting from the low comparison base in 2001), 18% in 2003 and20% in 2004. Although these numbers look optimistic, our 7.8% estimate for the operatingmargin for 2004 is significantly lower than the 11.3% reported for 1999. Therefore, we believeour numbers are reachable and that they actually fall on the conservative side.

Figure 12. Imsalum Sales and Operating Margin, 2000-2004E (U.S. Dollars in Millions and % of Sales)

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VALUATIONImsa started as a steel processing company, but revenues from the steel division should representonly 45% of 2002 revenues, according to our estimates. However, the company has evolved intoan industrial diversified group, with exposure not only to the steel industry but also to theconstruction industry through Imsatec (28% of sales) and Imsalum (10% of sales), and to theauto industry through its automotive batteries business, Enermex (17% of sales). Therefore, webelieve that a comparison with the industrial diversified group, and not only the steel industry, iswarranted.

We are initiating coverage of Imsa with a Buy rating. Our year-end 2003 target price isUS$18.00 per ADR or P$21.00 per local share. Our price objective is based on a one-yearforward-looking estimated FV/EBITDA multiple of 4.0x (4.5x trailing at year-end 2002). Ourtarget price for year-end 2003 implies 44% potential appreciation from current levels. Thiscompares favorably with our estimate of a 37% return for the IPC index. We also used a two-stage DCF valuation model and a NAV estimate as cross-references for our target price. Using aDCF model, we derived an estimated fair value of US$20.60 per ADR for 2003, considering a25% discount due to the stock’s low liquidity, which limits investment appeal. Based on oursum-of-the-parts model, the stock is currently trading at a 50% discount to our estimated fairvalue. Furthermore, if the stock reached our target price, it would still be trading at a 29%discount to NAV.

FORWARD-LOOKING FV/EBITDAImsa’s current valuation has not been affected by the stock’s solid performance during theyear. Despite the 33% year-to-date return in U.S. dollar terms for Imsa’s ADR, the stockvaluation in FV/EBITDA terms (one-year forward looking), is 7% cheaper than at the beginningof the year. This is the result of a positive outlook for the company, driven by the expectedeconomic recovery in the U.S. and Mexico, expected improvements at the operating level, andthe incorporation of recently acquired businesses (please refer to the earnings outlook section inthis report). In fact, the stock has clearly outperformed the IPC index, which YTD has had anegative 20% return. The following figure shows how our estimated FV/EBITDA multiple hasnot appreciated, despite the stock’s performance. We refer to a one-year forward-lookingFV/EBITDA estimate during the report, unless otherwise specified.

Figure 13. Imsa’s 12-Month Forward-Looking FV/EBITDA and ADR Price- 1999 to Date

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In relative terms, Imsa’s forward-looking FV/EBITDA multiple is currently at a 12% discount toour conglomerate’s sample, comprised of: Gcarso (Buy; Current Price: US$2.40; Target Price:US$3.45); Alfa (Not Rated); Desc (Underperform, Current Price: US$7.60; Target Price:(US$9.60); Gissa (Hold; Current Price: US$1.36; Target Price: US$2.50), and Vitro (Hold;Current Price: US$2.50; Target Price: US$3.50). This is higher than the three-year averagediscount of 8%. We recognize that because of its limited liquidity, Imsa’s stock valuationwarrants trading at a discount to its most liquid peers. The company’s market cap is US$775million; however, the stock’s liquidity should remain a concern as long as the free float remainsat the 16% level. Nevertheless, we have to recognize that from the beginning of the year to date,the three-month daily average volume has increased from a discouraging US$0.1 million,considering both local shares and ADRs, to a still modest US$0.25 million.

Figure 14. Imsa’s 12-month forward-looking FV/EBITDA and Conglomerates Average

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FV/EBITDA (x) (Left) IMY (US$) (Right)


Based on our estimates, Imsa currently trades at 3.7x our one-year forward-looking FV/EBITDAmultiple. This represents a 18% discount to its 4.5x three-year average and a 21% discount to its4.75x five-year average. Furthermore, despite the stock’s appreciation during the last two years,its valuation is only 9% above its five-year low of 3.5x, which was posted in 1998 during theRussian bond crisis. Figure 15 shows Imsa’s ADR’s historical price performance and one-yearforward-looking FV/EBITDA multiple.

Figure 15. Imsa’s Historical 12-month Forward-looking FV/EBITDA Multiple1998 1999 2000 2001 2002E

1-year average 5.06 5.22 5.34 4.25 3.773-year average 6.27 5.92 5.21 4.93 4.455-year average NA NA 5.88 5.47 4.73Maximum 6.38 6.07 6.38 4.61 4.24Minimum 3.70 3.94 4.18 3.68 3.47NA not available. Sources: Company reports and Santander Central Hispano Investment.

Figure 16 shows Imsa’s one-year forward-looking FV/EBITDA from 1999 to date, as well as itsthree-year average. In addition, we have included plus one and minus one standard deviationfrom this period’s average.


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Figure 16. Imsa’s 12-month Forward-looking FV/EBITDA

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We believe that Imsa’s current valuation is attractive and does not reflect either the companyhealthy financial structure or the healthier outlook for the steel industry. There have been priceincreases of almost 35% for some products during the year. The recovery has come after theindustry touched bottom during the beginning of 2002, and after a 15-year low in prices.Furthermore, for Imsa this recovery has been accompanied by improving results and increasingEBITDA. Nonetheless, we believe that the stock’s low liquidity has eclipsed several positiveitems such as: (1) attractive fundamentals; (2) a solid management team; (3) a positive industryoutlook, fueled by the expected economic recovery and stable prices in the NAFTA region, dueto the tariffs imposed on imported products and industry consolidation; and (4) a businessportfolio and operations that are less cyclical compared with most of its peers.

We believe that a multiple expansion could occur, based on the following: (1) expected economicrecovery in both the U.S. and Mexico: and (2) no changes in Imsa’s solid fundamentals. Webelieve that despite the stock’s recent ouperformance, it remains an attractive investmentopportunity. Our main concern would be a further delay in the recovery of the U.S. economy,which would clearly affect the demand for the company products, not only in the U.S., but also inMexico.

However, we are well aware that Imsa’s limited investor appeal (due to the stock’s small freefloat) should continue to be a major constraint for investors. With this in mind, we forecastmoderate multiple expansion for the stock, projecting that it could reach its three-to-five yearaverage range of 4.5x to 4.7x its one-year forward-looking FV/EBITDA in the near future. Webelieve that this would be supported by the company’s strong fundamentals and bright outlook.

We are setting a target price for year-end 2003 of US$18.00 per ADR, or P$21.00 per localshare. Our target price implies a 4.7x trailing FV/EBITDA multiple for year-end 2003,marginally below Imsa’s 4.8x three-year average, and 8% below the stock’s 5.1x five-yearaverage. Our target price is also based on our one-year forward-looking multiple of 4.0x, 11%below Imsa’s 4.5x three-year average, and 15% below its 4.7x five-year average. Based on atwo-stage DCF model, we obtain a US$20.60 price per ADR, considering a 25% discount for thesmall cap and limited liquidity of the company. Finally, we obtained an estimated net-asset-valueof the company business portfolio and determined that the stock is trading at close to a 50%discount to its estimated fair value. Furthermore, our price objective implies that the stock wouldbe trading at a 29% discount by year-end 2003.

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INTERNATIONAL COMPARISONAccording to our estimates, Imsa steel sales during 2002 should account for 45% of Imsa’sconsolidated revenues (not considering Imsatec’s sales). Although Imsa is a steel processor, not asteel producer, Imsa’s stock price has showed a high correlation to “traditional” steel companies’price performance.

Figure 17. Imsa’s 12-month forward-looking FV/EBITDA, Dec. 1996-July 2002

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We ran an exercise to find the degree of correlation between Imsa’s ADR price and Standard &Poor’s 500 steel index. The correlation coefficient (R2) for the 1996-2002E period wassignificant at 0.84. However, this coefficient falls to 0.62 for the 1999-2002E period. We believethat the correlation decreased as the company business portfolio continued to grow toward thevalue-added steel products and the construction area, while Imsa maintained a very healthyfinancial structure. We believe that, going forward, the company’s relative valuation to the steelindustry will continue to be an important variable to monitor. In fact, in our view, during 2003,the expected recovery in the steel industry should play out in favor of Imsa, but that would bejust an additional factor supporting the company’s attractive growth outlook, healthy financialstructure and what we believe to be a high-quality management team.

For 2002-2003, our estimate of Imsa’s consolidated operating margin is significantly higher thanthat for the average of our general steel company sample in the U.S. However, this is not true forthe steel companies in Brazil and Argentina, which – on top of having advance technology ontheir premises – have benefited from the depreciation (Brazil) and devaluation (Argentina) oftheir currencies (as exports are generally an important part of their sales), as well as cheaperlabor and energy cost denominated in local currencies and higher prices in the domestic market.For more detail on our sample, please see appendix II.In terms of valuation, we believe that Imsa deserves to trade at a premium, as it offers higherprofitability than most of the companies ex Brazil and Argentina. For example, according toValue Line, one of the companies expected to post the highest operating margins for 2003 isWorthington, which is a steel processor (with an estimated operating margin of 12% for 2003).For Imsa, we estimate an operating margin of 11.4% for 2003, but for Imsa Acero, we estimate amargin of 13.0%, which we believe is a significant figure. In terms of PE, Worthington is tradingat a 2003E PE of 16.x, versus Imsa’s 4.9x. We are stressing the valuation of Imsa versus the steelcompanies, because of the importance of Imsa Acero in the company’s consolidated revenues(45%). Nevertheless, as we have stated, while this is a parameter that we believe is important toconsider, it does not tell the complete story. Furthermore, we believe that the expected recoveryin the steel industry in 2003 should be an important driver in Imsa’s results; however, once again,we expect results also to be fueled by a healthier economic outlook and its effect on theremaining 55% of the business portfolio.


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In terms of P/E, Imsa’s stock is trading at a significant discount to all the Mexican steelcompanies and industrial conglomerates. Furthermore, if we consider the normalized P/E(adjusted for FX and monetary gains), Imsa’s one-year forward-looking P/E is 4.6x, a 21%discount to its three-year average. We believe that this is another useful parameter that shows therelative attractive valuation of the stock.

Figure 18. Imsa’s 12-month forward-looking normalized P/E, Sept. 1997-Sept. 2002

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DCF MODELWe have also determined a year-end 2003 target price for Imsa through a discounted cashflow model. We used a two-stage model, with earnings estimates up to 2007 and a perpetuitygrowth of 2.0%. Our DCF valuation assumes a risk-free premium of 7.60%, which is based on a10-year U.S. bond and the USM012 Mexican sovereign bond. We used an equity risk premiumof 5.5% and a 0.90 beta versus the IPC Index, with the company’s current debt to totalcapitalization ratio maintained at 52%. With these figures, we determined a cost of equity of12.93% and an after-tax cost of debt of 5.1%, arriving at a WACC of 9.03%. Figure 19 shows thehighlights of our DCF model.

We have applied a liquidity discount of 25% to our DCF model, in order to account for thestock’s small float and, thus, limited investment appeal on that basis. Based on our DCF model,our fair value price for Imsa’s share would be US$20.60 for the ADR and P$23.30 for the localshares. We believe that the price we obtained from our DCF calculation is a useful cross-reference to compare against the target price derived from multiple valuation and net asset valuediscount.

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Figure 19. Imsa’s DCF Model, 2003E-2008E (U.S. Dollars in Millions)(US$ Million) 2003E 2004E 2005E 2006E 2007E 2008EEBIT 337 369 400 403 417 429Tax 98 113 127 124 128 132NOPLAT 239 256 274 279 289 298D&A 109 114 122 128 132 136Working Capital (93) (38) (51) (64) (83) (92)CAPEX 130 130 130 140 140 147FCF 126 202 214 202 197 194Perpetuity Growth 2.00%Perpetuity Value 2,864FCF + Perp. 126 202 214 202 197 3,059Net Present Value 2,571-(Net Debt + Minorities) 956Estimated Market Cap. 1,722Liquidity Discount 25%Adjusted Est. Market Cap. 1,291Current Market Cap. 780Premium / Discount -40%Sources: Company reports and Santander Central Hispano Investment.

NET ASSET VALUEThe stock trades at a 50% discount to its estimated NAV, and our price target implies thatthe stock would be trading at a 29% discount to NAV. Based on what we believe to beconservative EBITDA multiples for Imsa’s businesses, we find the valuation in terms of net-asset-value compelling. As is the case with other industrial diversified groups with low liquidity,we believe that a conglomerate discount will continue to prevail going forward. We feelcomfortable with our 2003 target price of US$18.00 per ADR, as it would still imply a 29%discount to our fair NAV estimate.

The EBITDA multiples we are using for our NAV estimates are based on Value Line estimatesfor industrial and steel companies (please see Appendix I for the complete list of estimates). Twopoints should be highlighted in our valuation. First, we are adjusting our net debt figure toaccount for US$77 million debt related to the joint venture in Enermex with Johnson Controls,where Imsa consolidated the total debt, but 50% of the debt represents Johnson Controls’ share.Second, we are using the high end of the steel companies’ multiples, as we believe it is morerepresentative of Imsa’s steel processor status, higher profitability and attractive growth rates.

Figure 20. Imsa – Net Asset Value 2003E (U.S. Dollars in Millionsa)EBITDA EBITDA % Effective

Subsidiary 2002E 2003E Multiple Ownership EV % of NAVImsa Acero 242 251 5.5 100% 1,380 88.8%Enermex 85 93 4.9 60% 453 29.1%Imsalum 22 27 4.0 85% 107 6.9%Imsatec 62 67 5.7 97% 382 24.5%Others (6) 6 1.0 100% 5 0.3%Total 405 444 2,326 149.7%- Net Debt 772 -49.7%= Sum of the Parts 1,555 100.0%Number of Shares (mn) 555 62

Local ADRNAV per Share P$26.77 US$25.21Current Price P$13.91 US$12.47Prem /(Disc) to NAV -50.5%a Except per share amounts.* Adjusted to reflect the divestiture of the household product division.Sources: Company reports and Santander Central Hispano Investment estimates.


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APPENDIX I

WHAT IS IMSA?Imsa is a diversified industrial company with four business lines: steel processing (46% of sales);automotive batteries (18% of sales); aluminum products (14% of consolidated sales); and steeland plastic construction products (22% of consolidated sales). In 2001, the company hadconsolidated net sales of US$2,298 million and operating income of US$217 million. The groupis an important exporter and has subsidiaries in the U.S., Central and South America, andEurope. The group’s exports and sales from foreign subsidiaries represented almost 50% of totalsales in 2001. So far this year, the U.S. represented 83% of the export and foreign subsidiaryrevenues, while South America represented 13% and the rest of the world 2%. The followingtable summarizes the main products by division, and we will discuss each business unit in depthlater on the report.

Figure 21. Imsa’s Business Units and Main ProductsBusiness % Sales* % EBITDA Main ProductsImsa Acero - SteelProcessing Products

47% 59% Galvanized flat steel, painted flat steel, cold rolled flat steeland hot rolled steel.

Enermex - AutomotiveBatteries and Related Prod.

16% 21% Automotive batteries, distribution of automotive air, gas andoil filters.

Imsatec – Steel and PlasticConstruction Products

28% 15% Steel and plastic products, consisting of insulated panels,FRP panels, galvanized steel products, steel and plasticpackaging products, pre-engineered metal buildings, steelstructures for buildings, among others.

Imsalum - Aluminum andOther Related Prod.

10.0% 5% Fabricated aluminum products, consisting of aluminumextrusions, including aluminum, fiberglass, wood and steelladders, windows and sliding doors.

Sources: Company reports * Based on 2002 estimates

According to company estimates, Imsa’s major product lines have leading positions in Mexico.These product lines include coated steel, automotive batteries, aluminum products, insulated steeland fiberglass panels (this information is based on the company’s estimates and various sources).Imsa has expanded internationally through organic growth and acquisition of distribution centersand manufacturing facilities in the U.S., as well as in South and Central America. The followingtable reviews the estimated market share and the company’s position.

Figure 22. Imsa’s Products and Market ShareCountry / Region Products Market Share PositionMexico Galvanized steel 47% 1

Pre-painted steel 50% 1Automotive batteries 75% 1Aluminum extrusions 32% 1Aluminum ladders 70% 1Insulated panels 60% 1Fiberglass panels 85% 1

Central America Galvanized steel 30% 1U.S. Galvanized steel (West Coast) 30% 1

Pre-engineered metal buildings 15% 2Ladders 20% 2Insulated panels 40% 1Fiberglass panels 22% 2Automotive Batteries 11% 4

Argentina Automotive Batteries 44% 1Brazil Automotive batteries 20% 1Sources: Company reports and Santander Central Hispano Investment estimates.

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RAW MATERIALS AND VERTICAL INTEGRATIONGrupo Imsa has four different business units with different cost structures. However, on aconsolidated level, the main raw materials are commodities, such as steel slab, hot- and cold-rolled flat steel coil, and aluminum and lead. During 2001, these raw materials represented42%of the company’s total cost of sales. We believe that in the medium term, this percentageshould increase as a result of the expected economic recovery in the U.S. and Mexico, whichwould led to a recovery in commodity prices. As a reference, during 1999, these same productsaccounted for 48% of the company’s total cost of sales. In term of cost structure, one benefit ofImsa Acero, the company’s main division, is that approximately 70% to 75% of its total cost ofgood sold are variable, with 60% to 65% related to the price of steel.

To reduce its cost of these raw materials and insulate the company from fluctuations in the costof hot- and cold-rolled flat steel coil and lead, Imsa has followed a vertical-integration strategy.For Imsa Acero, the steel division, it has achieved integration through the acquisition of a hotstrip mill and additional cold-rolling capacity. For the automotive batteries segment in Mexico,the company has achieved integration through the expansion of its lead and plastic recyclingcapacity, which currently supplies 44% and 79% of its lead and plastic demand, respectively, forits Mexican operations. For the aluminum and other related products segment, the company hasaccomplished this through aluminum casting capacity.

Management believe that, as a result of Imsa Acero’s position as a steel processor, the company’sgross margin is not as sensitive as that of a primary steel producer to the cyclicality of rawmaterial prices and to variations in the realized sales prices of products. However, we recognizethat as slab and non-coated steel represent a high percentage of total cost, when prices decline,Imsa’s consolidated gross margin benefits. In contrast, the opposite is also true; when prices ofraw materials increase, there is pressure on operating margins. However, in the medium term, thespread between final products and raw materials is stable.

Figure 23. Price of Hot-Rolled Coil, Slab and Imsa’s Gross Margin (US$/ton and % of Sales)

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Announcement of 201measures

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Although Imsa’s gross margin is affected by price changes of its main raw materials, we have torecognize that being a steel processor gives the company another benefit: higher margins. Thefollowing graphs shows, in the same time frame as the previous one (December 1996-July 2002),the gross margin for Imsa, U.S. Steel and AK Steel, two integrated steel producers. As we cansee, the gross margin of the integrated steel producers is significantly lower and more volatilethan Imsa’s margin as a steel processor.


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Figure 24. Imsa, U.S. Steel and AK Steel’s Gross Margin (% of Sales)

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Energy is another component of costs that we should consider. Electricity and gas representedapproximately 4% of cost of good sold in 2001. The price that Pemex charges for natural gas inMexico generally takes as a reference the price in the U.S. During December 2000, the pricereached an exorbitant US$10 Mbtu level, more than three-fold the level registered at thebeginning of that year. As a result, in February 2001, PEMEX decided to support Mexicancompanies by offering a fixed price of US$4.0 Mbtu. Grupo Imsa entered into an agreement tobe supplied gas at a fixed price of US$4.00 Mbtu for the period from January 1, 2001 toDecember 31, 2003. The current market price is US$2.80 Mbtu. We believe that this translatesinto a bit of a disadvantage for the Imsa Acero Division, as a significant part of its sales arederived from its U.S. subsidiaries, which consume gas at the market price.

Figure 25. Natural Gas Prices (Henry Hubb-Tx)

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SHAREHOLDERS OWNERSHIPThe company was listed on the Mexican Stock Exchange and on the New York Stock Exchangeon December 11, 1996, and trades on an equity unit and ADR basis, respectively. Imsa’s equityis represented by two types of shares: Series B and Series C. As of July 2002, the company’sequity was represented by 2,337,039,474 Series B shares and 478,026,316 Series C Shares, for atotal of 2,815,065,790 shares. The Series B shares have voting rights, while the Series C sharesgenerally are not entitled to vote, except in some specific cases.

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In Mexico, each equity unit is represented by five shares, IMSA UBC (three B’s and two C’s),and the IMSA B (five B shares). While the ADR consist of nine IMSA UBS equity units. Thistranslates into 563,013,158 equivalent UBC equity units, or 62,557,018 equivalent ADR’s fortotal capitalization estimates. According to the listing requirements, the equity notes are notseparable for a period of at least six years from the initial public offering (December 11, 2002).

The controlling group, the Clariond Reyes and Canales Clariond families, hold most of the SeriesB stock (approximately 88.4%), and at least 51% of total B shares must be held in a controllingtrust. The trust has duration of 30 years and may be terminated at any time upon the vote of theowners of 75% of the trust. Withdrawal of B Units from the Trust also requires the affirmation of75%. Although the Series B shares trade in the market, the liquidity for these shares is negligible.

The principal stockholders of the company, which is represented by the Clarions Reyes andCanales Clariond families, as well as some executive officers of the group, hold approximately84.0% of the outstanding shares of the group, which, in turn, represents approximately 88.4% ofthe voting shares. The free float for the company is approximately 16%, with an estimated three-month daily average volume of US$0.25 million for the UBC equity units and for the ADRs.

DIVIDENDSThe company has a dividend payout policy of 15% of net income, adjusted for FX losses andmonetary gains. However, this policy has not been consistent over time and can vary, dependingon the company’s cash requirements. All of the shares, regardless of the series, are entitled to thesame dividend and distribution rights. During the 1991 to 2002 period, the company has paiddividends, except for 1995 and 2000. During 1995, dividend were not paid as a result of theeconomic crisis in Mexico in an effort to conserve cash and maintain a healthy financial position.Meanwhile, 1999 dividends were paid that same year and, therefore, no dividends were paidduring 2000.

As a result of its growth-through-acquisitions strategy in all its business units, the company has ahigh retention rate, which we estimate between 80% to 89% from 1998 to 2001. In terms ofdividend yield for 1999, 2001 and 2002, the rate was 1.9%, 3.2%, and 2.3%, respectively. Webelieve that in the medium term, the company will maintain a high-retention-rate policy, as webelieve that its strategy will not change and the company will require cash to continue to fundacquisitions. Furthermore, we must consider that there is no assurance that there will bedividends paid in the future; therefore, we are not taking dividends into account in our estimates.

FINANCIAL STRUCTUREImsa’s management has been very successful in managing growth and acquisitions. Thecompany financial structure is very healthy, and despite all the acquisitions and expansion, inSeptember 2003, net debt was U$849 million, 0.7x equity and 2.8x EBITDA (trailing 12months). The interest coverage ratio was 7.3x, and during the last seven years, according to ourfigures, interest coverage has never fallen below 3.0x. As a result of the company’s healthyfinancial structure and positive business outlook, in February 2002, Standard & Poor’s upgradedthe company’s foreign currency credit rating to investment grade, raising it from BB+ to BBB-.We believe that this shows the company’s balance sheet strength and financial flexibility, factorsthat should help Imsa maintain its growth-through-acquisitions strategy.

As of September 2002, Imsa reported debt of US$890 million, of which 83%% is long term and100% is U.S. dollar-denominated. We highlight that Imsa holds approximately US$224 millionin peso-denominated debt but has swaps to U.S. dollars matching the maturity of the debt. Theaverage cost of debt is at a rate of Libor +135% in U.S. dollars, while 100% of the debt has afloating rate. This is due to the swaps the company has on its different debt instruments.


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As we can see in the following graph, the company faces maturities from 2002 to 2006.However, we do not consider this a risk, as we have a positive outlook on the company andbelieve that the capex is manageable.

Figure 26. Imsa’s Debt Maturities, EBITDA and Capex, 2002E-2006E (U.S. Dollars in Millions)

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500

600

2002E 2003E 2004E 2005E 2006EDebt Maturities EBITDA Capex


CAPITAL EXPENDITURES

The company made significant capital expenditures between the beginning of 1996 to 2001, in aneffort to expand production capacity, increase is range of products, reduce costs and increaseproductivity. The following table summarizes Imsa’s capex by division from 1999 to ourestimate for 2004.

Figure 27. Imsa’s Capex, 1999-20004E (U.S. Dollars in Millions)1999 2000 2001 2002E 2003E 2004E

Imsa Acero 200 75 99 96 98 98Enermex 25 25 28 27 11 12Imsatec 7 2 11 28 18 15Imsalum 18 19 13 6 3 5Total 251 121 151 158 130 130Sources: Company reports and Santander Central Hispano Investment estimates.

Imsa Acero. From 1999 to 2001, this division invested approximately P$3,482 million in themodernization and increase of capacity of its hot-rolling mill, the installation of an industrialservice center for processing coated steel products, a new tension-leveling line and a cut-to-length line in the U.S., as well as for acquisitions.

Enermex. In the automotive batteries business, the capital investments were related to thecapacity increase in Mexico and modernization of the plants in Mexico and Brazil, as well asinvestments in the distribution network.

Imsatec. From 1999 to 2001, the investments were related to increasing the production capacityof insulated steel panels, a new polycarbonate panel plant, a new fiberglass-reinforced plasticpanel plant in the U.S., a new warehouse in Spain to supply fiberglass-reinforced plastic panelsin Europe and a polygonal metal pole plant.

Imsalum. The investments are mainly related to the modernization and increase of extrusioncapacity, the increase of aluminum smelting capacity and the installation of a new aluminumextrusion painting line, as well as the distribution network in Mexico and the U.S.

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For 2002 and 2003, Imsa Acero’s capex plan includes expansion of existing production capacity,as well as modernization and development of new products and markets. For Enermex, itincludes some minor investments and productivity programs. For Imsatec, the projects includemodernization programs and do not consider any acquisitions. Finally, for Imsalum, the capexfor the next two year is expected to include modernization, expansion and development of newproducts and markets.

Overall, capex should be funded mainly through internally generated fund and, if necessary,through outside financing, either through banks, suppliers or on the open market.

STRATEGY AND EVOLUTIONThe company’s strategy is to grow on its core businesses through organic growth andacquisitions, either in its current markets or via geographical diversification, mainly in the Naftaregion. Its core businesses are value-added steel processed products, automotive batteries andspecialized construction products. This has been the case over the past 10 years, when thecompany made a series of acquisitions, expanded internally and formed joint ventures aimed atexpanding its products and markets.

From 1994 through December 2001, Imsa’s total investments and acquisitions came toapproximately P$17,798 million (US$1,941 million). This included capital expenditures foracquisitions and to expand its capacity, upgrade its facilities and implement productivityprograms. The amount represents approximately 2.3x the company’s current market cap.

We believe that a good way to visualize Imsa’s strategy and how this has translated into action isto list the main events in the company’s history.


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Figure 28. Imsa’s Time Line1936. Industrias Monterrey, S.A. is founded as a steel processor company.1950. The steel and plastic construction products segment is formed.1970. Imsa Signode is formed to include the steel and plastic construction products.1970’s. Imsatec is founded and absorbs Imsa Signo, Formet and Multipanel from Imsa Acero1975. Imsatec acquires Stabilit, S.A. (fiberglass and reinforced plastic panels (RPP) in the U.S.)1978. IMSA Signode signs joint venture with Illinois Tool Works, Inc.1987. Enermex is formed (acquires Acumuladores Mexicanos, S.A. and Acum. del Centro S.A.).1989, Imsa enters the aluminum extrusions business through the acquisition of Cuprum, S.A.1991. Imsalum acquires Davidson Ladders, and assets from Stapleton Ladders, in the U.S., andsigns technical agreement with an Italian extrudor for the windows and doors market.1991. APM was acquired from Fundidora Monterrey, S.A. (hot- and cold-rolled facilities).1993 Enermex acquires Inacel, S.A.I.C. in Argentina, a controlling interest in a Brazilianautomotive battery manufacturer, as well as Advantage Battery Corporation, a U.S. automotivebattery distributor.1994. Imsatec acquires Metl Span Corp. in the U.S. (prefabricated steel and foam-insulatedpanels) and a minority interest in Empresas Ipac, S.A., in Chile (steel processor and FRPproducer).1995. Cuprum acquires Tiendas Alutodo, S.A., (23 retail outlets in Mexico).1996. Imsa is listed on the Mexican Bolsa and on the NYSE.1997. Imsatec increases its ownership in Empresas Ipac to 50% and acquires Glastell Inc. inMemphis, a U.S. producer of fiberglass and RPP.1997. Imsa Acero acquires Ingasa, a Guatemalan steel processor.1998. Enermex forms a JV with Johnson Controls, Inc. and Varta AG (Germany) to produceand/or distribute automotive batteries throughout North America.1998. Imsalum acquires control of Alcomex, S.A. (industrial aluminum profiles in Mexico).1998. Imsalum and Emerson Electric, Co. merge their ladder businesses, forming LouisvilleLadder.1999, Imsa Acero acquires AHMSA’s galvanizing and painting steel plants for US$105 million.1999. Imsatec acquires the remaining 50% of the shares of Empresas Ipac.2000. Imsatec, through Stabilit, form JV with Bayer AG to produce polycarbonate plastic sheets.2000. Imsatec inaugurates a new Formet plant in Monterrey within its Valmont Formet jointventure to produce poles.2000. Acquisition of Steelscape, merged into Imsa Building Products (BHP Coated Steel Corp.and BHP Steel Building Products).2001. IBP is transferred from Imsa Acero to Imsatec and renamed ASC Profiles.2001-Imsatec acquires the VP Buildings, Inc.2001 Imsatec starts producing FRP in the new plant in Tennessee, U.S.2001 Imsatec. the polycarbonates plant starts operation in Mexico.2002. Imsa Acero acquires MSC Pinole Point Steel, Inc. and MSC Pre-Finish Metals, Inc.2002, Imsalum closes the Kentucky, U.S., ladder plant.2002.Imsatec enters the European market with the acquisition of Lightfield (FRP)Sources: Company reports. *F RP Fiber Glass Reinforced Plastic Panels

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Figure 29 shows Imsa’s current operating structure.

Figure 29. Imsa’s Operating Structure

I M S A

IMSA ACERO100%

Stock Exchange Mexico IMSA UBC NYSE: IMY (9:1)

16%

ENERMEX100%

51%

84%

IMSALUM100%

IMSATEC100%

UNITEDSTATESMEXICO

IMSA

2 Plants

APM

1 Plant

100%100%

Steelscape

3 plants

100%

Enertec Mx

6 Plants

Enertec Brasil1 Plant

EnertecVenezuela

(Distribution)

EnertecArgentina

(Distribution)

50%

Cuprum

5 Plants

AlutodoStores

LouisvilleLadder Grp.

3 Plants

51%100%100%

Formet (100%)2 Plants

Stabilit (100%)3 Plants

Valmont-Formet (51%)1 Plant

Imsa ITW (50.01%)4 Plants

Forjas Metálicas2 Plants (100%)

Multypanel (100%) 1 plant

Varco Pruden (100%)1 Plant

Bayer Imsa (50%)1 Plant

CentralAmerica

100%

Ingasa

1 plants

GESAmerica

DistributionIn the US

50%

Stabilit America Inc(100%)

2 Plants

Metl-Span (100%)3 Plants

VP Buildings8 Plants

ASC Profiles (100%)7 Plants

AEP Span (100%)1 Plant

Gpo Imsa Chile (100%)3 Plants

MEXICO US &Latam MEXICO US &

LatamUS &

LatamMEXICO

Control Group

EUROPE

100%

Lightfield

Joint VentureJohnsonControl

50%

Source: Company reports.

IMSA ACERO-STEEL PROCESSING PRODUCTS

In general terms, the steel industry has three broad types of companies along its value chain. Thefirst are primary steel producers, followed by intermediate steel processors and, finally, steelservice centers. Primary steel producers historically have emphasized the sale of steel to largevolume purchasers, competing in a commodity market, while intermediate steel processorsspecialize in value-added processing of steel products and play a role as intermediaries betweenthe primary steel producers and the industrial customers and general steel service centers. Steelservice centers specialize in the additional processing of steel to fulfill specific customerdemands, such as cutting to length, slitting, shape correction, surface improvement, blanking,plate burning and stamping. Through Imsa Acero, Imsa is an intermediate steel processor and hassteel service centers.

Another important difference is that primary steel producers are involved in a capital-intensiveprocess characterized by high fixed costs, while intermediate steel processors generally havemore flexible cost structures, including lower labor costs, inventory levels and capital investmentper ton produced, than do primary steel producers.


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Through its Imsa Acero Division, which represented 46% of total sales and 59% of EBITDA in2001, Imsa is a steel processor and service center for intermediate steel products. Imsa buys steelslabs and coils of wide-open tolerance from integrated steel mills and mini-mills and processessuch steel to the precise type, coating, thickness, length, width, shape, temper and surface qualityspecified by its customers. Imsa Acero has operations in Mexico, the U.S. and Central America.

Imsa Acero manufactures and processes steel in three facilities throughout Mexico, as well asfive steel service centers, and distributes its products through its 15 distribution centers. Outsideof Mexico, it manufactures and processes steel in four facilities, as well as three service centers,and distributes its products through five distribution centers. The steel service center offershigher-value-added products and services, such as roll-forming, cutting and slitting. Thedistribution is done through direct sales from its distribution and service centers, as well asthrough independent trading companies.

As of December 2001, Imsa Acero had an installed capacity of 520 tons per year (tpy) for pre-painted flat steel, 1,335 tpy for galvanized flat steel, 1,610 tpy for cold-rolled flat steel and 1,310tpy for hot-rolled flat steel at its hot strip mill. The division’s main raw materials are slab andnon-coated steel, and they represent 60%-65%% of cost; approximately 75% of these materialscome from domestic suppliers. The hot-rolled flat steel is primarily used to supply the division’sdownstream steel-processing operations.

Figure 30. Imsa – Imsacero Plant Capacity and Production, 1995-2004E (tons 000)1995 1996 1997 1998 1999 2000 2001 2002E 2003E 2004E

Hot Rolled Flat Steel 1,000 1,000 1,200 1,200 1,200 1,310 1,310 1,450 1,650 1,850 Growth 9% 11% 14% 12%Hot Rolled-Pickled and 1,020 1,445 1,445 1,445 1,445 1,445 1,545 1,745 Growth 42% 7% 13%Cold Rolled Flat Steel 890 890 1,025 1,210 1,210 1,610 1,610 1,610 1,610 1,610 Growth 162% 15% 18% 33%Galvanized Steel 375 635 715 715 935 1,335 1,335 1,635 1,635 1,635 Growth 69% 13% 31% 43% 0% 0%Pre-painted flat steel 190 265 265 265 330 520 520 670 670 670 Growth 39% 25% 58% 0% 29% 0% 0%Sources: Company reports and Santander Central Hispano Investment estimates.

The division’s strategy in the steel processing product segment is to achieve sustained growthand increased profitability by processing and distributing low-cost, high-quality processed steelin a variety of value-added sizes, gauges, shapes and surface treatments to the domestic andinternational markets, and to maintain its excellent customer service. This strategy is based onthree important factors, described below..

1. Expansion of Presence in International Markets. Imsa’s management seeks to maintain astable base of foreign sales in order to diversify its revenue base, both in terms of currency andgeographical diversification. Foreign sales are used to maximize capacity utilization and respondto economic downturns. In line with its strategy, the division seeks to participate in the high endof the export market, focusing on high-value-added products, such as galvanized and pre-paintedproducts and cold-rolled flat steel.

2. Value-Added Products and Services. Imsa Acero plans to expand its value-added productmix to include a larger percentage of galvanized and pre-painted flat steel, roll-formed steel andspecialty cold-rolled flat steel, either through organic growth, joint ventures or acquisitions.Figure 30 reviews Imsa Acero’s installed capacity and historical growth.

Management believes that through investments and a wider product portfolio, it will be able to

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expand its customer base in the industrial, home appliance, automotive and metals formingmarkets. In fact, during 2Q02, the autoparts market, which had been a marginal market for thedivision, began to pick up with a positive outlook. This market has more reliable demand andpredictable pricing policies compared with supplying to the commodity market.

3. Cost Control and Quality Assurance. Imsa Acero has invested heavily over the past years todevelop technologically advanced hot-rolling, cold-rolling, galvanizing, painting and roll-forming equipment. The division intends to continue to make investments in advanced processtechnology, which are intended to improve product quality, product specifications constraints,productivity and efficient response time to customer requests.

PRODUCT LINESImsa Acero’s steel processing products currently include galvanized flat steel products, pre-painted flat steel products, galvanized steel shapes, cold-rolled flat steel (full hard and annealedand tempered), hot-rolled coils and pickled and oiled hot-rolled coils. Coated steel and non-coated steel have each accounted for roughly one-half of the division’s total steel production byvolume. While the bulk of the non-coated steel produced since 1997 has been sold domestically,as a result of the acquisition of Steelscape in the U.S. in 2000, more than half of coated steelproducts is now sold outside Mexico.

Galvanized Flat Steel. According to estimates by Canacero, the National Chamber of SteelCompanies in Mexico, and Imsa, during 2001, Imsa Acero was the largest galvanized steelproducer in Mexico in terms of production volume, including Galvalume® (zinc-aluminum-silicaalloy coating steel products). The principal domestic and foreign end-users of galvanized flatsteel products are the construction, automotive and home appliance manufacturing industries.During 200, approximately 31% of the domestic sales volume of galvanized steel and pre-paintedflat steel came from higher-value zinc-aluminum coated steel sales.

Pre-painted Flat Steel. Management believes that Imsa Acero is the largest producer of pre-painted flat steel in Mexico in terms of sales volume of pre-painted zinc-galvanized andGalvalume flat steel. The principal domestic and foreign end-users of pre-painted flat steel areprefabricated building product manufacturers, appliance manufacturers and the automotiveindustry.

Galvanized Steel Shapes. These are steel products for the construction market, includinggalvanized steel profiles, which are used in the manufacture of wall studs, purlins, tubes andother shapes, window and door frames, fences, grating and structural members. All of these steelshapes are fabricated at Imsa Acero’s steel service centers from its internally producedgalvanized sheet steel.

Cold-Rolled Flat Steel (Full Hard and Annealed and Tempered). At its cold-rolling mills, thedivision manufactures high-grade products with accurate gauge control, surface quality andductility that meet the demands of end-users. The company uses a hydrogen-nitrogen atmospherein most of its annealing ovens to obtain the high surface cleanliness of the annealed productrequired for certain applications. The main end-users are tube makers and steel roll-formers, aswell as manufacturers of automotive parts, appliances, machinery and equipment, steel strappingand coated steel.

Hot-Rolled Coils and Hot-Rolled Pickled and Oiled Steel. Imsa Acero purchases steel slabs toproduce hot-rolled coils, mainly for internal consumption by its cold-rolling operations. Themain benefit of this operation is that it enables the company to control the quality of the rawmaterial used in its downstream steel-processing operations.


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COMPETITIONThe critical factors in maintaining a competitive position in the Mexican steel-processingindustry are cost reductions through productivity gains, technologically modern equipment,dependable sources of raw materials and developed domestic and export distribution systems, aswell (some times) through technical assistance. In the construction market, key factors include awide range of products for construction applications, product performance and timely deliveries.In the commercial market, key factors include competitive pricing, product availability frominventory and ongoing sales and marketing efforts. Hylamex and Ahmsa are the maincompetitors in the domestic hot-rolled and cold-rolled markets.

Imsa Acero has been facing stiffer competition from imported products in the domestic market,as import duties on galvanized steel imported from the U.S. and Canada into Mexico are beingreduced from 15.0% in 1995 to zero in 2003. The main competitors of Steelscape (Imsa’s U.S.operation) are California Steel Industries, Inc., USS-POSCO Industries and Material Sciences. InMexico, the two competitors are Galvak, the steel processing unit of Hylsamex, and Villacero.

ENERMEX-AUTOMOTIVE BATTERIES

Through Enermex, Imsa should generate an estimated 16% of its sales in 2002 and 26% of itsEBITDA. The automotive batteries business started in 1987, when the division was formed inorder to acquire Acumuladores Mexicanos, S.A. and Acumuladores del Centro, S.A., the twolargest manufacturers of automotive batteries in Mexico. Later, in 1987, Enermex, acquired thecontrolling interest in Inacel, S.A.I.C., a manufacturer of automotive batteries in Argentina.Those acquisitions were followed by the acquisition of other automotive manufacturers in Braziland a distributor in the U.S.

In December 1998, Enermex, Johnson Controls from the U.S. and Varta from Germanyformalized an agreement to form three joint ventures to manufacture and distribute automotivebatteries in the Americas’ region. Enermex and Johnson Controls partnered to form a jointventure in Mexico to serve the Mexican market and to export batteries to the U.S., Canada andCentral America. They also became partners in GES America, which is a distribution networkthat serves medium and small-sized clients in the U.S. and Canada. Finally, Enermex, JohnsonControls and Varta partnered to form a joint venture in order to manufacture and distributeautomotive batteries in South America.

During 2001, Enermex sold 20,740 batteries throughout the Americas’ region, with 50% sold inthe U.S. and Canada, 28% in Mexico, 18% in the Mercosur region and 3% in the Andean regionand Central America. The division estimated that it has a 11% market share in the U.S. andCanada, 75% in Mexico, 44% in Argentina, 20% in Brazil and 20% in Venezuela.

In Mexico, approximately 72% of the division’s automotive batteries are sold in the replacementmarket, which historically has been subject to substantially less cyclicality than the OEM market.Enermex’s main brand in Mexico is LTHTM (which has been in production since 1928 and isestimated to be the best-selling brand of automotive batteries in Mexico). Enermex maintains adistribution system in Mexico, which serves more than 8,000 accounts through 19 regional salesoffices. In addition, more than 90% of the division’s battery products are delivered by its fleet ofapproximately 420 trucks, which also collect and transport used batteries for recycling.

Management believes that a competitive advantage for Enermex is its low cost of production.This is achieved through its vertical integration, which includes lead recovery and smelting andplastics processing in Enermex’s battery recycling operations. The level of automation at thedivision’s production facilities results in economies of scale, which is another key element in its

29

cost structure. Enermex is the only automotive battery producer in Mexico with recyclingoperations; and the size of its facilities results in economies of scale)

STRATEGYEnermex strategy is to become the leading automotive battery manufacturers in the Americas, bymaintaining its leading position in the Mexican market and further penetrating the U.S. andCanadian markets, as well as the Mercosur and Andean region markets, either through organicgrowth or acquisitions. The key elements of this strategy include the following:

Continued International Expansion. Enermex’s JV with Johnson Controls has been verysuccessful, allowing it to grow at a 45% compound annual rate in the U.S. from 1996 to 2001.Management expects further expansion in this market, mainly driven by greater participation inthe independent automotive battery specialist channel and from its penetration into thewarehouse distribution market. We point out that despite its high growth rate, Enermex only has11% share of the U.S. market. In addition, in the South American countries, managementcontinues to see very attractive opportunities due to the market size, expected growth of vehiclepopulation, fragmented industry structure, low level of vertical integration and increased growthof vehicle assembly. Through the joint venture established with Johnson Controls and Varta inSouth America, Enermex now has a capacity of 4.5 million units per year in Brazil. In the OEMmarket, it seeks to leverage its relationships in the OEM market, as well as its relationship withAsian and European manufacturers located in North America.

Emphasis on Vertical Integration and Economies of Scale. Enermex is expected to continueto strive for low production costs in automotive battery manufacturing through lead andpolypropylene recycling as well as automation in the manufacturing process. The division’sbattery recycling program in Mexico, including its recovery of used batteries through itsdistribution network, provided approximately 44% of the lead and 79% of the plasticrequirements used in its manufacturing operations in 2001. In addition, management hasconsolidated manufacturing operations in the Mercosur and Andean regions in order to achievemanufacturing economies of scale and increase capacity utilization. During 2001, plants wereclosed in Argentina and Venezuela to concentrate production in Brazil.

Global Customer Accounts. As a result of its JV with Johnson Controls and Varta, managementbelieves that they can increase Enermex’s market share in the OEM and replacement markets.This is due to the trend among automotive battery buyers to increase the purchasing of batteriesthrough global sourcing. This applies not only to OEM’s but also to major retailers in thereplacement market.

Research and Development. As part of the joint venture with Johnson Controls and Varta, thesetwo companies provide technical assistance and technology to Enermex. The technology atJohnson Controls and Varta is considered to be one of the competitive advantages of the group.Management believes that, in the medium term, cost reduction opportunities (both in product andprocesses), as well as access to future trends in battery manufacturing should yield substantialbenefits in quality and profitability both in Mexico and Brazil.

COMPETITIONThe replacement and OEM battery markets served by Enermex are highly competitive. Theprincipal factors of such competition in the replacement market are price, quality, and service,warranty and delivery time. In the OEM market, competition is also based on technology andglobal sourcing capabilities.


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Competitors in Mexico include domestic producers such as Acumuladores Cale de Tlaxcala, S.A.de C.V. and Gonher de Mexico, S.A. de C.V. Imports are made in small quantities and to specificregions from major multinational competitors such as Exide Corporation, Delco-Remy and otherregional manufacturers in the U.S. and Canada. Competitors in South America includeAcumuladores Moura S.A., Acumuladores Titan, C.A., Willard/Wao, Champion, S.A., Pradema,MAC de Colombia, Delphi Automotive Systems Brazil, Industria Tudor SP de Baterias, MetalbatIndustria e Comercio de Acumuladores, Acumuladores Ajax and Baterias Cral.

Management believes that its main competitive advantage in Mexico is its vertical integration,followed by its distribution network and its brand recognition.

As a result of Nafta, current import duties of 2% are to be eliminated in the year 2003, andEnermex expects to face some increasing competition in Mexico from U.S. producers ofautomotive batteries. However, the division believes that entry costs for significant potentialcompetitors are high because of the need to develop brand recognition and a substantialdistribution network.

PRODUCTION FACILITIESEnermex operates five automotive battery manufacturing plants in Mexico, two of which arelocated in the Monterrey area, one in Torreón, one in Celaya and one in Tlaxcala. It also has abattery case manufacturing plant and one used-battery recycling plant, both located in theMonterrey area. Enermex’s foreign facilities consist of one automotive battery manufacturingplant located in Brazil.

In Mexico, Enermex extensively recycles automotive batteries and operates one recycling facilitywith an output capacity of approximately 83,300 tons of lead and 8,160 tons of polypropyleneper year. The process went on stream in 1997 and Enermex currently supplies 44% and 79% ofits lead and plastic requirements, respectively.

Figure 31. Enermex – Plant Capacity and Production, 1998-2001 (Units 000)1997 1998 1999 2000 2001Total 20,200 22,800 26,000 26,700 % Utilization Rate 76% 73% 75% 78%Mexico 15,400 18,000 22,200 22,200 % Utilization Rate 76% 75% 73% 76%Argentina 1,800 1,800 - - % Utilization Rate 58% 52%Brazil 3,000 3,000 3,800 4,500 % Utilization Rate 90% 72% 90% 90%Recycled Lead Mexico 74 74 74 83 % Utilization Rate 98% 99% 99% 99%Recycled Polypropylene Mexico 8 8 8 8 % Utilization Rate 89% 97% 97% 97%Sources: Company reports and Santander Central Hispano Investment estimates. Installed Capacity and Percentage Utilization forAutomotive Batteries and Related Products(1)

RAW MATERIALSEnermex’s principal raw materials for the manufacture of its automotive and industrial batteriesare lead, polypropylene, sulfuric acid, calcium and antimony, all of which are generally availablein the open market from multiple sources. In 2001, lead represented approximately 50% of theraw material cost of the automotive batteries plants operating in Mexico and approximately 38%of Enermex’s total cost. As we mentioned earlier, the battery recycling program, provides asignificant part of the division’s lead and plastic requirements in Mexico. In addition to its ownused battery recovery, Enermex imports used batteries for recycling from the U.S.

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IMSATEC-STEEL AND PLASTIC CONSTRUCTION PRODUCTS

Imsatec is Imsa’s steel and plastic construction products division and represented 13% of salesand 15% of EBITDA in 2001. This division evolved out of the company’s steel-processingbusiness as a value-added extension of the group’s galvanized and pre-painted flat steel productlines. The activities of the segment have expanded over the years to encompass the manufactureand sale of a broad range of steel and plastic fabricated products for use in the construction andother industries.

Management believes that its metal processing and fabrication expertise, product developmentcapabilities and capacity to identify strategic acquisitions are key elements on the success of thisdivision. Imsatec has operation in Mexico, as well as in the U.S., Chile and recently Europe. TheU.S. historically has been its principal export market for the steel and plastic constructionproducts, and, during 2001, Imsatec’s exports and foreign operations represented 70% of thedivision sales.

In 2001, the assets of Imsa Building Products, which started to consolidate in Imsa Acero during2000, and Imsa Varco Pruden, which started to consolidate during 1999, were transferred fromImsa Acero to Imsatec. The main reason for this was that the product line was a better fit withImsatec’s product line.

BUSINESS STRATEGY / IMSATECImsatec’s business strategy in the steel and plastic construction products segment is to takeadvantage of growth opportunities in the construction sector and home improvement marketsthrough the manufacture of a diversified portfolio of fabricated steel and plastic constructionproducts. As in the other previously mentioned divisions, in this business unit, the company alsolooks for growth opportunities through organic growth and acquisition. Management appears tobe very thorough when evaluating a possible acquisition, as it must leverage the company’scurrent operations, fitting into three different areas.

Technological Leadership and Distribution Channel Optimization. We expect managementto look for opportunistic acquisitions or strategic alliances with international partners who cancontribute new technologies for products to be distributed through Imsatec’s distribution networkin Mexico or internationally distributed through the partner’s distribution network. Also,management believes that there are growth opportunities provided by overlapping markets in thecompany’s current distribution channels for steel and construction products.

Emphasize Customer Service. With high-value-added products, customer service is a crucialelement of its growth strategy. As part of its continuing customer service activities, the companyengages in vendor managed inventory (VMI) activities with some of its customers. It also hasestablished “retail link” information systems with several mass merchandisers in the U.S., inorder to respond more efficiently to its customers’ orders. Imsatec supports these activities withflexible manufacturing capabilities in order to meet a volatile demand.

PRODUCTS / IMSATECThe steel and plastic construction products segment is comprised of steel and plastic constructionproducts, consisting of prefabricated steel and foam-insulated panels, FRP panels (fiber-plasticreinforced panels) and galvanized steel products (including culverts, guardrails, electrictransmission towers and lighting stands). The division also has steel and plastic packagingproducts, pre-engineered metal buildings and steel building products.


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Prefabricated Steel and Foam-Insulated Panels. These consist of closed-cell polystyrene orpolyurethane foam glued or injected between steel sheets. The primary raw material is pre-painted flat steel, which is supplied by Imsa Acero. These panels are used in prefabricatedbuildings; in certain exterior architectural applications, such as storefronts, roofs, canopies,cornices and telephone and vending booths; in interior architectural applications, such as walls;and in industrial applications such as insulating walls, roofs and doors for cold storage chambers.In Mexico, Multypanel, the company’s main brand, obtained first place in a brand-recognitionsurvey.

Fiberglass Plastic Reinforce Panel (FRP). This product line includes translucent (polyester)and opaque (acrylic) FRP panels, both flat and corrugated, for the construction industry. Thepanels are made from mixing resins and catalysts with fiberglass and applying the mixture on acarrier film, in a continuous casting process. Applications include roofs, greenhouses, patio shedsand skylights, partitions, wall protection coverings and other applications. As a result of the jointventure with Bayer Corp., the division started to produce double-wall polycarbonate sheets in2001. This product is the equivalent of a high-end FRP panel.

Galvanized Steel Products. Imsatec manufactures a wide range of galvanized steel products forthe construction industry, including culverts, guardrails, electric transmission towers, steel poles,lighting stands, corrugated pipe for water drainage and galvanized steel fence posts. Suchproducts are made by molding steel into the desired shapes and galvanizing the formed productin a molten zinc bath.

Pre-engineered Metal Buildings. VP Buildings designs and engineers metal buildings andmanufactures a variety of pre-engineered steel framing systems, wall and roof panels and steelbuilding components. It offers a wide selection of building systems and can meet customerspecific needs with various building solutions for the commercial, industrial and warehousesegments. These building systems are commercialized through a network of more than 1,000independent authorized builders; examples of pre-engineered metal buildings includemanufacturing plants, strip malls, fast food concerns, warehouses, schools, temples and hangars.

Steel Building Products for Roofing, Siding and Decks. ASC Profiles manufactures a line ofmetal cladding products distributed to the architectural, commercial, industrial and agriculturalmarkets. The product line includes metal decking, architectural roofing, curved or tapered roofsystems, residential roof systems, mansards, metal wall panels, fenders and soffit systems, aswell as custom fabricated products.

Steel and Plastic Packaging Products. This line includes steel strapping, industrial staples andnails and other similar products used in handling and packaging industrial shipments.

COMPETITIONThe principal factors affecting competition in the steel and plastic construction products segmentare design and engineering capabilities, timely delivery, new product development and overallcustomer service. Imsatec faces significant domestic and foreign competition within the steel andplastic construction products segment as a result of its diversified product portfolio. Thefollowing table summarizes Imsatec’s main competitor per division per market.

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Figure 32. Imsatec Main CompetitorsPrefab. Steel andFoam Insulated

Panels

InsulatedMetal

Panels

FRPPanels

SteelBuildingProducts

Pre-Eng.Metal

BuildingsGalvamet Mx & U.S. U.S.Fanosa MxAlumashield Ind. Inc. Mx & U.S. U.S.Coolmatic U.S.Laminados Tecnicos MXLaminas EconomicasTransparetes

Mx

Fibraluz MSSequentia Co. U.S.

Lasco Ind. U.S.Kemlite Co. U.S.Metal Sales Manufacture Inc. U.S.NCI Building System Inc. U.S.

Butler Manuf. Co. U.S.NCI Building Syst. U.S.

American Steel Building. U.S.Star Building Syst. U.S.

Sources: Company reports and Santander Central Hispano Investment estimates. Installed Capacity and Percentage Utilization forAutomotive Batteries and Related Products(1)

PRODUCTION FACILITIESThe following table shows Imsatec’s installed capacities and percentage utilization for the steeland plastic construction products segment.

Figure 33. Imsatec’s Capacity and utilization Rate, 1999-20011999 2000 2001

Capacity % Capacity % Capacity %Steel and Plastic ConstructionSteel Processing (1)U.S. - - 268 31 523 46Mexico 15 12 24 47 24 54Chile 12 10 12 13 12 29Prefabricated Steel and Foam (2)Mexico 2,350 42 2,000 61 2,000 65U.S. 3,399 56 3,399 61 3,399 57Chile 600 18 1,200 21 1,200 25FRP Panels (2)Mexico 12,700 70 13,600 74 14,420 75U.S. 4,650 60 4,650 52 8,350 60Galvanized steel products (1)Mexico 69,919 66 69,919 58 69,919 55Chile 36,000 22 36,000 56 36,000 54Steel packaging products (1)Mexico 32,064 73 32,064 71 32,064 61Plastic packaging products (1)Mexico 1,128 91 1,128 85 1,128 86Steel Poles (3)Mexico -- -- 1,400 14 1,400 65

Sources: Company reports and Santander Central Hispano Investment estimates. (1) Installed capacity in tons per year. (2) Installedcapacity in thousands of square meters per annum. (3) Installed capacity in units per annum.


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RAW MATERIALS AND SUPPLIERSIn the steel and plastic construction products segment, raw materials of hot-rolled, cold-rolled,galvanized and pre-painted flat steel products are manufactured by the Imsa’s steel processingproducts segment and by third parties. Imsa supplies approximately 30%-35% of Imsatec’s totalhot-rolled and cold-rolled needs. Additional important raw materials include chemicals formaking insulating plastic foam for the manufacture of prefabricated steel and foam-insulatedpanels, as well as polyester and acrylic resins and fiberglass tape for the manufacture of FRPpanels. These raw materials are generally available from a variety of sources, and there is nodependence on a single supplier.

IMSALUM - ALUMINUM AND RELATED PRODUCTS

The aluminum division represented 12% of sales and 6% of EBITDA during 2001. Imsa’smanagement estimates that Imsalum is the largest producer of fabricated aluminum products inMexico (based on Imsa’s information), as well as one of the largest producers of ladders in termsof sales volume in North America. This business line has operations in Mexico and the U.S., andduring 2001, export sales and revenues from foreign operations represented 53% of the division’ssales.

STRATEGYImsalum’s strategy is to grow in the aluminum market through the manufacture of a diversifiedportfolio of fabricated aluminum products. Management’s main objective is to look for end-userproducts that would realize higher margins. Also, the company is looking for opportunitiesprovided by overlapping markets for its current distribution channels. In the recent years, and upto 2001, the division had been an underperformer within Imsa’s portfolio. However, in 2001, itstarted to turn around, controlling costs and focusing its business. The results have improved inthe first half of 2002, and we expect this trend to continue at a modest pace.

In this business unit, management is centered on productivity through technologicalcompetitiveness. The division has invested significantly in technologically advanced continuousmanufacturing processes in order to meet high-quality specifications and achieve incrementalcost efficiencies. Currently, the division is working on an upgrade program to modernize itsextrusion presses in order to improve their productivity.

PRODUCTSThe aluminum and other related products segment is mainly composed of fabricated aluminumproducts, consisting of aluminum extrusions, aluminum, fiberglass, steel and wood ladders,aluminum and PVC windows and sliding doors.

Aluminum Extrusions. Aluminum extrusions consist of aluminum profiles obtained byextruding heated aluminum billet in a high-capacity extrusion press. The company sells a portionof its aluminum extrusions and further processes the remainder to produce ladders, windows andsliding doors. The main markets are windows, doors, curtain walls, architectural products, andthe manufacture of aluminum industrial, products such as ladders, automotive products andappliance parts. As of December 2001, Imsalum had an aluminum extrusion capacity ofapproximately 70,000 tpy. We estimate that this plant works at almost full capacity as it soldabout 47,000 tons in 2001, and about 33% of the capacity was used for the production of value-added products. We do not estimate any increase in capacity in 2002 and 2003, just somemarginal improvements through getting rid of production bottlenecks.

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Ladders. This includes aluminum, fiberglass, steel and wood ladders for industrial, construction,commercial and household markets.

Windows and Doors. Imsalum manufactures prefabricated aluminum and PVC windows andsliding doors. Aluminum windows, made from extrusions produced by the division, aremanufactured in a variety of grades, ranging from simple mill-finish windows for the low-income housing market to anodized or painted windows for the high-end residential andcommercial construction markets in Mexico and the U.S. In 1991, the division entered into alicensing and technical assistance agreement with an extruder and designer of Italian doors andwindows in order to introduce a line of high-end, custom-made aluminum windows and doors.

COMPETITIONIn the aluminum extrusion market in the domestic market, the main competitors are Indalum,S.A. de C.V. and Productos Nacobre, S.A. de C.V. In the U.S., the market is highly fragmentedand very competitive, with more than 100 aluminum extruders operating one or two presses anda small number of large integrated extruders. Competition is generally conducted on a regionalbasis due, in part, to the large number of extruders and transportation costs. Managementbelieves that Imsalum enjoys a cost advantage over its U.S. competitors because of its verticalintegration and lower labor costs, as well as its design, engineering capabilities, proprietarytechnology and broad product line.

The Mexican and U.S. ladder markets are highly competitive and concentrated. Competitors inthe manufacture of ladders include Escalumex, S.A. de C.V., Almexa, S.A. de C.V. andSpecialum, S.A. de C.V. in Mexico and Werner Ladder Co., Green Bull Ladder and BauerCorporation in the U.S.

RAW MATERIALSThe principal raw materials for aluminum extrusions are aluminum billet and aluminum scrap.The company purchases aluminum billet from major aluminum producers and internationaltraders at international market prices and aluminum scrap from scrap brokers. Aluminumrepresents approximately 32% of the cost of sales of fabricated aluminum products. Most of thefinished aluminum products manufactured by the company use internally produced aluminumextrusions.


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FINANCIAL STATEMENTSFigure 34. Imsa – Income Statement, 2000-2004E (U.S. Dollars in Millions)

2000 2001 2002E 2003E 2004ESales 2,159 2,230 2,694 2,979 3,124COGS 1,685 1,731 2,107 2,353 2,468Depreciation 88 103 115 109 114Operating Profit 220 210 290 337 369Operating Margin 10.2% 9.4% 10.8% 11.3% 11.8%EBITDA 308 314 406 450 481EBITDA Growth -8.4% 1.9% 29.6% 10.6% 7.0%EBITDA Margin 14.3% 14.1% 15.1% 15.1% 15.4%Total ICF 36 (2) 78 64 49Interest Paid 90 67 48 55 53Interest Earned 5 6 7 (1) (0)Forex Loss (Gain) 6 (28) 76 37 27Monetary Gains (55) (35) (39) (28) (31)Earnings after ICF 184 213 212 274 320Other Income (Expenses) 38 26 17 15 13Earnings before Taxes 223 238 229 288 332Tax Provision 62 65 63 98 113Non-Consolidated Subs. - - - - -Earnings before Extra. Items 161 174 167 190 219Extraordinary Items - - - - -Minority Interest 20 15 14 14 16Net Income (Majority) 141 158 152 176 203Cash Earnings Normalized 180 206 293 289 306Net Income Normalized 92 103 176 177 193Earnings per ADR 2.28 2.57 2.42 2.78 3.24Normalized Earnings per ADR 1.50 1.69 2.84 2.79 3.09Cash Earnings (Norm) / ADR 2.94 3.39 4.69 4.56 4.89E Santander Central Hispano Investment estimate.Sources: Company reports and Santander Central Hispano Investment.

Figure 35. Imsa – Cash Flow Statement 2000-2004E (U.S. Dollars in Millions)2000 2001 2002E 2003E 2004E

Net Majority Earnings 141 158 152 176 203Depreciation 88 103 115 109 114Other Non-Cash Items (49) (63) 37 8 (4)Change in Working Capital 57 (2) (29) (93) (38) Cash Flow from Operations 237 196 275 201 275Change in Financing Activities (379) (353) (441) (332) (387) Cash Flow from Financing (379) (353) (441) (332) (387)Capex 121 151 158 130 130 Cash Flow Investing 121 151 158 130 130Net Cash Flow (21) (6) (9) (2) 18Previous Cash Position 79 58 53 44 42Closing Cash 58 53 44 42 60E Santander Central Hispano Investment estimate.Sources: Company reports and Santander Central Hispano Investment.

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Figure 36. Imsa – Balance Sheet, 2000-2004E (U.S. Dollars in Millions)2000 2001 2002E 2003E 2004E

AssetsCash & S-T Investments 58 53 44 42 60Net Accounts Receivable 326 363 411 449 477Inventory 519 548 444 677 720Other Current Assets 61 95 96 92 88Total Current Assets 964 1,059 996 1,261 1,346Other Investments 226 228 215 213 213Net Fixed Assets 1,604 1,744 1,815 1,880 2,020Other Assets 226 228 215 213 213Total Assets 2,795 3,032 3,026 3,353 3,579LiabilitiesAccounts Payable 273 316 205 394 425S.T. Bank & Non-Bank Loans 144 147 180 178 176Taxes Payable - - - - -Other Current Liabilities 144 151 194 185 178Total Current Liabilities 560 614 579 756 780L.T. Bank & Non-Bank Loans 732 751 715 706 700Other Loans 13 30 26 25 24Total Long-Term Liabilities 745 781 741 731 724Deferred Liabilities 316 294 264 251 242Foreign Currency Liabilities 1,136 1,269 1,162 1,162 1,162Peso Liabilities 485 421 422 577 585Total Liabilities 1,621 1,689 1,584 1,739 1,747EquityTotal Majority Interest 1,081 1,241 1,339 1,500 1,702Minority Interest 92 102 102 114 130Total Equity 1,173 1,343 1,441 1,614 1,832E Santander Central Hispano Investment estimate.Sources: Company reports and Santander Central Hispano Investment.


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Figure 37. Imsa – Income Statement, 2000-2004E (Constant Pesos as of December 2002)2000 2001 2002E 2003E 2004E

Sales 23,230 22,101 26,920 29,681 31,541COGS 18,120 17,156 21,041 23,448 24,917Depreciation 942 1,023 1,140 1,084 1,152Operating Profit 2,378 2,089 2,916 3,364 3,725Operating Margin 10.2% 9.5% 10.8% 11.3% 11.8%EBITDA 3,320 3,112 4,075 4,481 4,858EBITDA Growth -15.3% -6.3% 30.9% 10.0% 8.4%EBITDA Margin 14.3% 14.1% 15.1% 15.1% 15.4%Total ICF 417 5 815 638 497Interest Paid 966 663 480 547 535Interest Earned 53 57 68 (6) (2)Forex Loss (Gain) 98 (252) 785 368 273Monetary Gains (594) (348) (382) (283) (313)Earnings after ICF 1,961 2,084 2,102 2,725 3,228Other Income (Expenses) (407) (256) (170) (147) (127)Earnings before Taxes 2,368 2,339 2,272 2,543 3,355Tax Provision 660 639 619 977 1,141Non-Consolidated Subs. - - - - -Earnings before Extra. Items 1,709 1,700 1,653 1,566 2,215Extraordinary Items - - - - -Minority Interest 212 151 141 142 166Net Income (Majority) 1,497 1,549 1,512 1,754 2,048Cash Earnings Normalized 1,927 2,039 2,936 2,882 3,087Net Income Normalized 985 1,016 1,778 1,765 1,953Earnings per ADR 2.66 2.75 2.69 3.11 3.64Normalized Earnings per ADR 1.75 1.80 3.16 3.13 3.47Cash Earnings (Norm) / ADR 3.42 3.62 5.22 5.12 5.48E Santander Central Hispano Investment estimate.Sources: Company reports and Santander Central Hispano Investment.

Figure38. Imsa – Cash Flow Statement, 2000-2004E (Constant Pesos as of December 2002)2000 2001 2002E 2003E 2004E

Net Majority Earnings 1,497 1,549 1,512 1,754 2,048Depreciation 942 1,023 1,140 1,084 1,152Other Non-Cash Items (496) (600) 403 85 (40)Change in Working Capital 595 (21) (291) (934) (382) Cash Flow from Operations 2,538 1,950 2,764 1,989 2,779Change in Financing Activities (3,969) (3,395) (4,413) (3,355) (3,909) Cash Flow from Financing (3,969) (3,395) (4,413) (3,355) (3,909)Capex 1,265 1,452 1,576 1,313 1,312 Cash Flow Investing 1,265 1,452 1,576 1,313 1,312Net Cash Flow (166) 7 (73) (53) 182Previous Cash Position 827 586 484 422 413Closing Cash 612 508 439 428 281E Santander Central Hispano Investment estimate.Sources: Company reports and Santander Central Hispano Investment.

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Figure 39. Imsa – Balance Sheet, 2000- 2004E (Constant Pesos as of December 2002)2000 2001 2002E 2003E 2004E

AssetsCash & S-T Investments 612 508 439 428 281Net Accounts Receivable 3,417 3,495 4,113 4,535 4,537Inventory 5,443 5,272 4,442 6,839 6,843Other Current Assets 637 915 963 926 893Total Current Assets 10,110 10,190 9,957 12,727 12,555Other Investments 637 915 963 926 893Net Fixed Assets 16,820 16,778 18,151 18,979 19,026Other Assets 2,368 2,195 2,148 2,148 2,114Total Assets 29,297 29,163 30,257 33,855 33,695LiabilitiesAccounts Payable 2,857 3,041 2,046 3,973 3,975S.T. Bank & Non-Bank Loans 1,509 1,416 1,801 1,796 1,759Taxes Payable - - - - -Other Current Liabilities 1,509 1,448 1,943 1,868 1,802Total Current Liabilities 5,875 5,906 5,789 7,637 7,536L.T. Bank & Non-Bank Loans 7,669 7,223 7,150 7,131 6,984Other Loans 137 288 264 254 245Total Long-Term Liabilities 7,806 7,511 7,414 7,385 7,228Deferred Liabilities 3,315 2,832 2,639 2,538 2,448Foreign Currency Liabilities 11,907 12,202 11,620 11,731 11,545Peso Liabilities 5,089 4,046 4,222 5,828 5,668Total Liabilities 16,996 16,249 15,842 17,560 17,213EquityTotal Majority Interest 11,332 11,932 13,395 15,143 15,316Minority Interest 969 982 1,020 1,153 1,166Total Equity 12,301 12,914 14,414 16,296 16,482E Santander Central Hispano Investment estimate.Sources: Company reports and Santander Central Hispano Investment.


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APPENDIX IFigure 40. Mexican Conglomerates – Sector Valuation Parameters, November 14, 2002.

Company Ticker Price 2001 2002E 2003E 2004E 2001 2002E 2003E 2001 2002E 2003E 2001 2002E 2003E 2001 2002E 2003E 2001 2002E 2003EBorg Warner Inc. BWA 45.93 4.2 4.1 4.0 3.6 8.2 7.9 14.3 1.1 1.0 0.9 13.4% 14.0% 14.0% 7.8% 12.3% 11.7% 16.6% 18.0% 17.8%Dana Corp. DCN 11.53 3.6 3.5 3.5 3.2 342.5 9.3 7.7 0.6 0.6 0.6 6.9% 9.0% 9.2% 0.2% 6.4% 8.1% 11.6% 14.9% 15.5%Delphi Auto DPH 7.71 2.7 2.2 2.1 1.8 19.6 9.6 7.0 1.9 1.7 1.4 5.9% 7.0% 8.0% 9.5% 17.9% 20.0% 26.2% 33.0% 34.4%Eaton Corp. ETN 72.70 5.2 5.8 5.1 4.2 21.7 16.2 12.4 2.0 1.9 1.7 12.7% 13.0% 13.5% 9.4% 11.8% 13.9% 18.3% 17.7% 19.4%Lear Corporation LEA 37.22 3.5 4.2 3.6 2.9 14.9 8.7 7.2 1.5 1.3 1.1 7.2% 7.0% 7.5% 10.3% 15.0% 15.2% 23.0% 18.9% 20.8%Magna Int'l MGA 53.15 3.0 2.6 2.5 2.2 8.5 7.7 6.8 1.1 1.0 0.9 11.7% 11.5% 12.0% 13.0% 13.0% 13.1% 23.3% 24.0% 23.9%Tower Auto, Inc. TWR 5.35 3.4 3.0 2.5 2.0 8.1 3.9 3.1 0.4 0.3 0.3 11.1% 12.0% 12.5% 4.5% 8.9% 10.3% 15.6% 17.6% 19.8%Autoparts Avg. 3.6 3.6 3.3 2.9 nm 9.0 8.4 1.2 1.1 1.0 9.8% 10.5% 11.0% 7.8% 12.2% 13.2% 19.2% 20.6% 21.7%Amer. Standard Cos. ASD 73.25 6.3 6.8 6.3 5.6 15.9 14.4 12.9 NM 21.4 8.4 12.6% 11.5% 11.5% NM 149.0% 65.3% 41.7% 34.4% 32.9%Elcor Corp. ELK 17.20 10.5 6.4 5.4 4.0 37.6 19.1 15.6 2.0 2.0 1.8 8.2% 11.5% 12.5% 5.4% 10.3% 11.6% 9.9% 18.8% 21.4%Masco Corp. MAS 21.28 8.5 7.7 6.6 4.9 18.0 13.8 11.4 2.4 2.2 1.9 16.0% 17.0% 17.5% 13.2% 15.7% 17.0% 16.1% 18.4% 20.6%Building Prod. / Tile Avg. 8.4 7.0 6.1 4.8 23.8 15.8 13.3 2.2 8.5 4.1 12.3% 13.3% 13.8% 9.3% 58.3% 31.3% 22.6% 23.8% 25.0%Avery Dennison AVY 61.78 9.5 8.8 8.6 8.6 24.9 22.7 20.6 6.5 5.8 5.1 14.9% 16.0% 16.0% 26.2% 25.7% 24.6% 31.1% 31.6% 29.9%Fuller FULL 29.75 5.6 5.4 5.0 4.7 19.0 18.8 16.3 1.9 1.8 1.7 11.1% 12.5% 13.0% 10.2% 9.8% 10.4% 20.4% 21.3% 21.9%Rohm and Haas ROH 33.37 6.6 5.8 5.2 4.7 38.7 21.1 15.9 1.9 1.8 1.8 17.2% 21.0% 22.5% 5.0% 8.8% 11.2% 14.2% 17.2% 19.4%Chemicals / Specialties Avg. 7.2 6.7 6.3 6.0 27.5 20.8 17.6 3.5 3.2 2.8 14.4% 16.5% 17.2% 13.8% 14.8% 15.4% 21.9% 23.4% 23.7%Dow Chemical Dow 27.85 7.6 9.0 6.7 5.8 57.5 25.3 13.9 2.5 2.3 2.0 10.4% 8.0% 12.0% 4.4% 9.1% 14.4% 13.4% 9.7% 14.4%Dupont DD 42.78 8.4 8.4 7.0 6.3 34.7 26.7 19.4 3.0 3.1 2.7 14.1% 15.0% 17.0% 8.6% 11.5% 13.8% 16.0% 15.6% 18.5%Eastman Chemical EMN 38.10 4.2 4.0 14.6 6.2 26.4 18.9 12.6 2.1 2.0 0.2 14.0% 15.0% 16.5% 8.1% 10.3% 1.4% 20.1% 20.8% 4.8%Solutia SOI 3.77 2.7 4.8 4.0 3.2 16.4 7.5 3.5 NM NM NM 9.9% 6.0% 9.0% NM NM NM 32.6% 10.5% 15.4%Wellman INC WLM 11.48 4.8 4.1 3.4 2.9 33.2 12.2 8.7 0.6 0.6 0.5 6.5% 9.0% 11.0% 1.8% 4.7% 6.3% 8.8% 11.1% 12.7%Cabot Corp CBT 25.15 4.2 4.7 3.9 3.4 11.6 14.1 10.8 1.7 1.6 1.5 17.5% 18.5% 19.5% 14.3% 11.2% 13.9% 19.5% 18.4% 21.8%Potash Corp POT 66.10 7.3 7.3 6.3 5.4 28.3 32.7 19.1 1.6 1.6 1.5 23.4% 22.5% 25.0% 5.8% 4.9% 7.9% 13.2% 12.3% 14.7%Chemicals / Basic-Diverse Avg. 5.6 6.0 6.5 4.7 29.7 19.6 12.6 1.9 1.8 1.4 13.7% 13.4% 15.7% 7.2% 8.6% 9.6% 17.6% 14.1% 14.6%Owens-Illinois OI 14.51 4.9 3.9 3.8 3.5 5.9 8.6 8.6 1.0 1.4 1.3 19.1% 25.0% 24.5% 16.6% 16.3% 14.7% 13.0% 18.8% 18.9%Crown Cork CCK 6.69 4.2 3.5 2.8 2.1 NM 11.2 5.8 1.0 1.0 0.9 11.3% 13.0% 14.0% NM 9.0% 14.8% 12.8% 16.8% 20.4%Ball Corp. BLL 47.43 6.8 5.5 5.0 4.3 25.9 16.3 14.8 5.4 4.6 4.1 10.8% 13.0% 13.0% 21.0% 28.3% 27.4% 24.2% 30.8% 32.9%PPG Industries PPG 48.81 6.7 6.3 6.0 5.2 21.9 16.3 14.6 2.8 2.6 2.4 15.1% 17.0% 17.5% 12.6% 16.1% 16.5% 21.9% 23.3% 23.7%Glass and Packaging Avg. 5.6 4.8 4.4 3.8 17.9 13.1 11.0 2.6 2.4 2.1 14.1% 17.0% 17.3% 16.7% 17.4% 18.3% 18.0% 22.4% 24.0%Libbey LBY 24.55 5.2 5.1 4.6 4.2 9.5 8.9 8.3 2.3 1.9 1.6 19.1% 19.5% 20.5% 23.8% 21.0% 19.6% 13.3% 23.7% 23.8%Oneida OCQ 11.80 7.3 6.8 5.6 4.1 57.1 25.9 11.4 1.5 1.5 1.3 9.1% 9.5% 10.5% 2.7% 5.8% 11.3% 10.8% 12.1% 14.4%Newell Rubbermaid NWL 30.82 7.7 8.1 7.4 6.5 26.8 19.8 17.5 3.4 3.2 2.8 14.8% 14.5% 15.5% 12.6% 16.0% 16.2% 19.3% 19.7% 20.4%Glass Ware Avg. 6.7 6.7 5.9 4.9 31.1 18.2 12.4 2.4 2.2 1.9 14.3% 14.5% 15.5% 13.0% 14.2% 15.7% 14.5% 18.5% 19.5%British American TobaccBTI 20.55 4.7 6.1 5.6 5.6 13.4 16.4 14.7 2.9 2.7 2.6 14.3% 10.5% 10.5% 21.3% 16.2% 17.7% 28.2% 20.5% 22.4%Gallaher Group GLH 41.52 11.9 10.5 9.6 8.4 19.6 16.3 1.5 NM NM NM 9.2% 9.0% 9.0% NM NM NM 21.4% 24.1% 25.5%Philip Morris MO 38.59 4.8 4.4 4.0 3.6 9.7 8.4 8.1 4.2 4.1 3.8 21.2% 22.0% 21.5% 43.6% 48.3% 46.4% 46.3% 48.0% 49.7%UST INC UST 31.61 6.4 6.3 6.1 5.6 10.8 10.5 10.7 9.1 8.3 7.4 52.5% 52.0% 51.5% 84.6% 78.5% 69.0% 58.4% 60.9% 61.2%Tobacco Avg. 6.9 6.8 6.3 5.8 13.4 12.9 8.8 5.4 5.0 4.6 24.3% 23.4% 23.1% 49.8% 47.6% 44.4% 38.6% 38.4% 39.7%Belden Inc BWC 14.57 4.3 3.9 3.3 2.7 10.5 12.1 9.8 1.1 1.1 1.0 10.0% 11.0% 12.0% 11.0% 8.8% 10.0% 16.6% 18.3% 21.0%Andrew Corp. ANDW 9.80 3.4 5.6 3.9 3.1 13.0 35.6 14.2 1.3 1.1 1.0 14.5% 9.5% 12.5% 10.3% 3.0% 6.9% 22.5% 9.8% 15.3%Hubbell Inc HUB/A 33.15 9.7 8.3 7.5 6.5 24.3 21.0 18.2 2.6 2.6 2.5 12.0% 14.0% 14.5% 12.2% 13.7% 15.3% 17.2% 20.0% 21.8%Ind. Electric-Cable Avg. 5.8 5.9 4.9 4.1 15.9 22.9 14.1 1.7 1.6 1.5 12.2% 11.5% 13.0% 11.2% 8.5% 10.8% 18.8% 16.0% 19.4%Mueller Industries MLI 27.75 4.4 4.0 3.4 2.9 14.0 10.8 8.7 1.4 1.2 1.1 14.5% 15.5% 16.5% 10.0% 11.3% 12.5% 20.8% 22.0% 23.9%International Aluminum IAL 17.90 3.4 4.4 3.4 2.6 16.5 44.8 17.5 0.6 0.6 0.6 6.9% 5.0% 7.0% 3.7% 1.4% 3.7% 11.9% 8.2% 12.1%Trinity Industries TRN 18.40 9.3 5.6 4.3 2.9 51.6 NM 45.8 0.8 0.8 0.8 8.5% 5.5% 7.5% 1.6% NM 1.8% 20.1% 16.7% 21.1%Alcoa AA 23.28 5.4 6.3 5.0 4.3 15.6 19.1 10.7 1.9 1.8 1.6 15.4% 14.5% 18.5% 11.9% 9.4% 15.0% 20.1% 16.7% 21.1%Ind. Metal-Transf. Avg. 5.6 5.1 4.0 3.2 24.4 24.9 20.7 1.2 1.1 1.0 11.3% 10.1% 12.4% 6.8% 7.4% 8.2% 18.2% 15.9% 19.6%Commercial Metals CMC 16.21 3.5 2.7 2.6 2.7 17.5 10.1 9.1 1.0 1.0 0.9 6.3% 7.5% 7.5% 5.6% 9.6% 9.6% 18.6% 24.6% 24.5%Nucor Corp. NUE 45.31 4.6 3.9 3.4 2.8 31.2 19.6 12.6 1.6 1.5 1.4 11.3% 13.5% 14.5% 5.1% 7.7% 11.0% 17.3% 21.4% 23.9%Ryerson Tull RT 6.93 7.9 5.0 2.5 2.2 NM NM 8.7 NM NM 13.3 0.0% 1.0% 3.0% NM NM 3.6% 0.0% 3.4% 10.8%Steel Technologies STTX 19.95 6.0 5.1 4.8 4.1 27.2 16.7 14.6 1.6 1.4 1.3 7.8% 8.1% 8.3% 6.0% 8.5% 9.0% 15.0% 17.0% 17.5%Worthington Ind. WOR 17.71 8.9 7.5 6.1 5.2 42.5 24.8 16.8 2.3 2.5 2.3 7.4% 10.0% 12.0% 5.5% 10.1% 13.6% 13.6% 18.2% 22.8%Steel / General Avg. 6.2 4.8 3.9 3.4 29.6 17.8 12.4 1.6 1.6 3.8 6.6% 8.0% 9.1% 5.5% 9.0% 9.4% 12.9% 16.9% 19.9%Posco PKX 23.48 4.0 3.8 3.5 3.2 13.7 10.5 7.9 1.1 1.0 0.9 21.7% 22.0% 24.0% 8.2% 9.8% 10.9% 15.6% 16.6% 16.8%AK Steel AKS 7.41 3.6 3.6 2.4 2.2 NM 159.8 5.9 0.8 0.8 0.7 8.9% 8.5% 13.5% NM 0.5% 12.2% 13.9% 13.9% 22.9%U.S. Steel Corp. X 12.55 3.7 3.1 2.8 2.5 12.4 7.4 5.7 0.4 0.5 0.4 0.0% 8.0% 11.0% NM 1.3% 7.8% 0.0% 12.6% 18.1%Steel / Integrated Avg. 3.8 3.5 2.9 2.6 13.0 59.2 6.5 0.8 0.8 0.7 10.2% 12.8% 16.2% 8.2% 3.8% 10.3% 9.8% 14.4% 19.3%Barrick Gold ABX 15.45 6.9 6.4 6.3 6.1 33.7 26.7 28.1 2.5 2.6 2.4 36.2% 43.5% 43.0% 7.5% 9.7% 8.7% 17.4% 20.1% 19.2%Newmont Mining NEM 24.15 7.2 7.2 6.6 6.4 212.4 44.5 30.4 3.2 1.4 1.4 24.5% 40.0% 41.0% 1.5% 3.1% 4.5% 14.1% 11.3% 12.4%Placer Dome PDG 9.50 5.4 5.8 5.8 5.6 28.5 31.1 29.6 2.3 2.2 2.1 34.9% 35.5% 35.5% 8.1% 7.1% 7.1% 18.9% 18.1% 17.9%Minig / Prec. Metals Avg. 6.5 6.5 6.3 6.0 91.6 34.1 29.4 2.7 2.1 2.0 31.9% 39.7% 39.8% 5.7% 6.7% 6.8% 16.8% 16.5% 16.5%Hormel Foods HRL 22.80 7.1 6.9 6.0 5.2 17.4 16.3 13.2 3.2 2.8 2.4 9.5% 10.0% 11.0% 18.3% 17.1% 18.2% 25.6% 24.4% 26.3%Heinz HNZ 33.15 7.6 7.0 6.6 5.8 13.8 13.0 12.1 7.4 6.3 5.4 20.3% 20.5% 20.5% 53.5% 48.5% 44.3% 25.4% 27.9% 29.3%Dean Foods DF 36.88 9.8 6.1 5.5 4.6 25.8 11.4 10.4 2.2 1.8 1.5 8.7% 9.4% 9.4% 8.5% 15.7% 14.7% 10.3% 16.9% 17.5%Smithfield Foods SFD 16.58 4.4 5.0 4.0 3.5 9.3 11.6 8.3 1.3 1.2 1.1 7.6% 6.1% 7.0% 14.4% 10.5% 13.1% 19.5% 16.4% 19.4%Pilgrim´s Pride "B" CHX 7.91 3.5 3.9 2.9 2.3 7.7 21.6 8.1 0.9 0.8 0.7 6.8% 5.5% 6.5% 11.0% 3.8% 9.2% 18.5% 14.9% 19.3%Tyson Foods "A" TSN 12.49 8.8 4.8 4.2 3.5 49.5 11.7 9.8 1.3 1.2 1.1 6.0% 5.5% 6.0% 2.6% 10.1% 11.1% 8.1% 15.9% 18.3%Food Avg. 6.9 5.6 4.9 4.1 20.6 14.3 10.3 2.7 2.3 2.0 9.8% 9.5% 10.1% 18.0% 17.6% 18.4% 17.9% 19.4% 21.7%

FV/EBITDA P/E P/BV Operating Margin ROE ROCE

Sources: Bloomberg, Value Line. NM Not meaningful.

41

APPENDIX IIFigure 41. Imsa – Steel Companies Comparative Valuation

Price Op. Margin (% Sales) P/E FV/EBITDACompany Ticker (US$) 2001 2002E 2003E 2001 2002E 2003E 2001 2002E 2003ESteel / GeneralCommercial Metals CMC 16.2 6.3% 7.5% 7.5% 17.5 10.1 9.1 3.5 2.7 2.6Nucor Corp. NUE 45.3 11.3% 13.5% 14.5% 31.2 19.6 12.6 4.6 3.9 3.4Ryerson Tull RT 6.9 0.0% 1.0% 3.0% NM NM 8.7 7.9 5.0 2.5Steel Technologies STTX 20.0 7.8% 8.1% 8.3% 27.2 16.7 14.6 6.0 5.1 4.8Worthington Ind. WOR 17.7 7.4% 10.0% 12.0% 42.5 24.8 16.8 8.9 7.5 6.1Average 6.6% 8.0% 9.1% 29.6 17.8 12.4 6.2 4.8 3.9Steel / IntegratedPosco PKX 23.5 21.7% 22.0% 24.0% 13.7 10.5 7.9 4.0 3.8 3.5AK Steel AKS 7.4 8.9% 8.5% 13.5% NM 159.8 5.9 3.6 3.6 2.4U.S. Steel Corp. X 12.6 0.0% 8.0% 11.0% 12.4 7.4 5.7 3.7 3.1 2.8Average 4.5% 8.3% 12.3% 12.4 83.6 5.8 3.6 3.3 2.6Latam SampleSiderar ERAR 1.4 1.7% 19.8% 21.0% NM 18.3 5.9 8.1 5.3 3.7Siderca ERCA 1.8 17.2% 25.3% 22.7% 14.7 6.4 9.9 6.2 4.9 5.2Acesita ACES4 0.2 14.1% 10.7% 19.8% NM NM 4.0 7.3 7.5 4.3Belgo Mineira BELG4 94.5 24.9% 25.7% 25.9% 5.1 5.2 5.1 3.6 4.4 4.0Cosipa CSPC4 0.1 15.6% 19.7% 28.2% NM NM 3.5 13.3 7.1 5.0Gerdau GGB 8.7 22.5% 27.4% 32.2% 5.6 2.9 3.5 3.3 3.2 2.5CSN SID 12.1 28.1% 25.8% 30.9% 9.1 NM 3.7 4.5 3.7 3.0CST CSTB4 9.2 10.7% 20.0% 21.2% NM NM 7.5 5.5 3.6 3.4Usiminas†§ USIM5 1.5 29.5% 24.3% 28.5% 6.2 NM 1.3 4.4 3.6 2.8Cia. Acero del CAP 8.5% 8.5% 9.3% NM NM 11.2 7.6 7.0 6.4 Average 17.3% 20.7% 24.0% 8.1 8.2 5.6 6.4 5.0 4.0Mexican IndustrialGcarso Gcarso 2.38 8.4% 14.9% 15.5% 17.8 5.8 5.1 6.3 4.9 4.3Desc DES 8.00 8.0% 8.3% 9.0% 46.4 9.6 7.6 6.5 5.8 5.3Gissa GissaB 1.37 13.3% 15.2% 15.9% 8.9 7.4 6.6 2.9 3.8 3.6Imsa IMY 12.73 9.4% 10.2% 11.4% 5.5 5.7 4.9 4.7 4.3 3.8Vitro VTO 2.50 9.2% 9.3% 10.0% 20.1 NM 4.7 3.7 4.5 3.9Average 9.7% 11.6% 12.3% 19.7 0.9 5.8 4.9 4.7 4.2Imsa Prem/Disc to: Steel Gral. 44% 27% 26% -82% -68% -61% -23% -12% -2% Steel Integrated * 112% 23% -7% -56% -93% -16% 30% 28% 46% Latam Steel -45% -51% -53% -33% -30% -12% -26% -15% -6% Conglomerates -3% -12% -8% -72% NM -16% -2% -8% -9%

NM not meaningful. Sources: Value Line, Company reports and Santander Central Hispano Investment. * Excludes Posco.† SCHI has managed or co-managed a public offering of this company's securities in the past 12 months.§ SCHI has received compensation for investment banking services from this company in the past 12 months.

2002-0180

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Key to Investment Codes (12- to 24-Month Horizon)

Rating Definition

% ofCompanies

Covered withThis Rating

% of Companies that SCHIhas Provided InvestmentBanking Services in the

Past 12 MonthsStrong Buy Expected to outperform the market more than 15%. 13.92% 30.00%Buy Expected to outperform the market 5%-15%. 27.22% 20.00%Hold Expected to perform within a range of 5% above or below the local market. 36.71% 40.00%Underperform Expected to underperform the market 5%-15%. 6.96% --Sell Expected to underperform the market more than 15%. 2.53% --Under Review 12.66% 10.00%Target prices are current year-end unless otherwise specified. Recommendations are based on a total return basis (expected shareprice appreciation + prospective dividend yield) unless otherwise specified.

Ratings are established when the firm sets a target price and/or when maintaining or reiterating the rating. Ratings may not coincide with theabove methodology due to price volatility. Management reserves the right to maintain or to modify ratings on any specific stock and will disclosethis in the report when it occurs.

Given the significant impact that the devaluation of the Argentine peso and other continuing macroeconomic events on Argentine corporations, wehave temporarily changed the methodology for establishing Argentine recommendations. Our new temporary benchmark is the yield to maturity(YTM) of the Global 27 bond plus a 5.5% equity risk premium as a proxy for the expected market return by year-end 2002.

For the Andean countries, our benchmark is the simple average of the country risk of each country plus the 10 year U.S. T-Bond yield plus 5.5% ofequity risk premium. For additional information about our rating methodology, please call (212) 350-3974.

This report has been prepared by Santander Central Hispano Investment Securities Inc. (“SCHI”) (a subsidiary of Santander Investment S.A.,which is wholly owned by Banco Santander Central Hispano, S.A. ("Santander")), on behalf of itself and its affiliates (collectively, GrupoSantander) and is provided for information purposes only. This document must not be considered as an offer to sell or a solicitation of an offer tobuy any relevant securities (i.e., securities mentioned herein or of the same issuer and/or options, warrants, or rights with respect to or interests inany such securities). Any decision by the recipient to buy or to sell should be based on publicly available information on the related security and,where appropriate, should take into account the content of the related prospectus filed with and available from the entity governing the relatedmarket and the company issuing the security. This report is issued in Spain by Santander Central Hispano Bolsa, Sociedad de Valores, S.A. (SCHBolsa), and in the United Kingdom by Santander Central Hispano S.A., London Branch (Santander London), which is regulated by the FinancialServices Authority in the conduct of investment business in the UK. This report is not being issued to private customers. SCHI, SantanderLondon, and SCH Bolsa are members of Grupo Santander.

The information contained herein has been compiled from sources believed to be reliable, but, although all reasonable care has been taken toensure that the information contained herein is not untrue or misleading, we make no representation that it is accurate or complete and it shouldnot be relied upon as such. All opinions and estimates included herein constitute our judgment as at the date of this report and are subject tochange without notice. From time to time, Grupo Santander and/or any of its officers or directors may have a long or short position in, or otherwisebe directly or indirectly interested in, the securities, options, rights or warrants of companies mentioned herein.

SCHI’s foreign affiliates may (a) have managed or co-managed a public offering of the subject companies securities in the past 12 months; (b)have received compensation for investment banking services from the subject companies in the past 12 months; or (c) expects to receive orintends to seek compensation for investment banking services from the subject companies in the next three months.

Grupo Santander may from time to time perform services for or solicit business from any company mentioned in this report. Grupo Santander orany other persons do not accept any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. Thisreport may not be reproduced, distributed, or published by any recipient for any purpose.

Any U.S. recipient of this report (other than a registered broker-dealer or a bank acting in a broker-dealer capacity) that would like to effect anytransaction in any security discussed herein should contact and place orders in the United States with SCHI, which, without in any way limiting theforegoing, accepts responsibility (solely for purposes of and within the meaning of Rule 15a-6 under the U.S. Securities Exchange Act of 1934) forthis report and its dissemination in the United States.

© 2002 by Santander Central Hispano Investment Securities Inc. All Rights Reserved.

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Initiation of Coverage - Banco · PDF fileBook Value Per ADR US$19.01 ... IMSA IPC Sources: ... 12 International