Metals and Mining - Pre Conference Note

8/7/2019 Metals and Mining - Pre Conference Note

1/15

Pre- Conference note:

Jagdish Agarwal

[email protected]

+91 22 6612 1381

Goutam Chakraborty

[email protected]

+91 22 6612 1275

Venue: Trident, Nariman Point, Mumbaith th

Date: 8 and 9 February, 2011


2/15

Emkay Research 03 February, 2011 2

Metals and Mining - Pre Conference Note

Companies

JSW Steel .................................................................................................................................................................3

Hindustan Zinc ...........................................................................................................................................................5

Hindalco ....................................................................................................................................................................7

Godawari Power & Ispat .............................................................................................................................................9

Sarda Energy & Minerals ......................................................................................................................................... 11

Essel Mining............................................................................................................................................................13


3/15

EmkayYour success is our success

JSW Steel

Growing bigger; Accumulate

Com

panyUpdate

mkay Global Financial Services Ltd.

n Strong brownfield expansion and takeover of Ispat to fuel

volume growth with stronger presence in the South and

Western regions

n Better raw material integration with US coking coal coming in

during FY12 to ease pressure off the EBITDA level

n Completion of projects including coke oven batteries, 300 MW

CPP, beneficiation plant and sinter plant etc would help the

company to reduce the cost of production

n We remain positive on the stock, as margins are likely to

expand post integration. We maintain our earnings estimates

and target price with Accumulate rating

Focus remains on speedy expansion

As India's steel demand is forecast to grow by ~13% according to the Worldsteel Association,

the challenge before the industry remains to cater to this with a bigger and secured market

share. JSW Steel's recent step to acquire majority stake and management control in Ispat

Industry has been the biggest example of that. The company would now be having access

to Ispat's 3.3 mtpa capacity that has a strong presence in the Western and Southern Indian

markets. Also, JSW has been the highest bidder for the Bellary Steel's assets including

steel making equipments and 700 acre land for a consideration of Rs 2.1 bn, which we

believe should be seen as a strategic investment for future expansion of the Vijaynagar

facility. This is also important in the context of the problem being faced by the companies in

terms of land acquisition, getting required licenses, clearances etc. Along with the inorganic

growth, the company has been consciously focusing on its brownfield expansion projects

and with the commissioning of 3.2 mtpa capacity by March 2011 at Vijaynagar it would bea 11 mt entity. When many players are finding it difficult to expand through greenfield

projects, JSW Steel has been in the process to build 10 mtpa new integrated capacity in

West Bengal. The work for the initial 4.5 mtpa capacity is likely to start during the Q1FY12.

As the company's aim remains to a 32 mtpa entity by 2020, we believe the recent steps are

in the right direction.

Better raw material integration to improve margin

Low raw material integration has been a concern for the company. At present only ~20% of

its total iron ore requirement has been captive, rest being purchased from NMDC and local

players in Bellary region of Karnataka. Further for coking coal, currently the company is

currently fully dependant on the imports from Australia and the US. However, it has bought

coking coal mines in US with a total resource of 123 mt. The company has reiterated its

plan to produce 1 mn tonne in FY12 with gradual ramp up to 3 mt in the third year. We

believe, this along with setting up of sinter plant, iron ore beneficiation plant, coke oven

batteries and captive power plants the company would be able to improve its margins

going forward.

Financials and Valuations

Over past four years, till FY10, the topline led by higher volume, grew at an impressive

CAGR of 31%, which we expect to be maintained in the next couple of years too. Botttom

line growth on the other hand has been 16% CAGR between FY06- FY10, which we expect

to improve to 27% in next 2 years, due to stable margins. On the balance sheet front, better

debt repayment the consolidated d/e stands at 0.74 at the end of Q3FY11, which the

management don't see going above 1.

At the CMP of Rs 903, the stock is trading at 8.7x FY12E EPS and 5.5x FY12E EV/ EBITDA.

We maintain our target price of Rs 1060/ share with Accumulate rating valuing the company

6xFY 12EV/ EBITDA.

eco Previous Recoccumulate Under Review

MP Target Prices903 Rs1,060

PS change FY11E/12E (%) NA

arget price change (%) NA

fty 5,432

ensex 18,090

rice Performance

%) 1M 3M 6M 12M

bsolute (23) (33) (20) (10)

el. to Nifty (13) (24) (20) (18)

ource: Bloomberg

elative price chart

3 February, 2011

ource: Bloomberg

tock detailsector Metals & Mining

oomberg JSTL@IN

quity Capital (Rs mn) 2231

ace Value(Rs) 10

o of shares o/s (mn) 223

2 Week H/L 1,400/852

arket Cap (Rs bn/USD mn) 201/4,387

aily Avg Volume (No of sh) 1275065

aily Avg Turnover (US$mn) 30.1

hareholding Pattern (%)

Dec-10 Sep-10 Jun-10omoters 37.7 45.0 45.0

/NRI 47.3 35.6 34.8

stitutions 4.6 6.5 6.1

ivate Corp 3.3 4.7 5.1

ublic 7.1 8.3 8.9

ource: Capitaline

50

60

70

80

90

00

Feb-10 Apr -10 Jun -10 Aug -10 O ct -10 Dec-10

Rs

-30

-20

-10

0

10

20%

JSW Steel (LHS) Rel to Nifty (RHS)


4/15



Financial tables (Consolidated)

Income Statement (Rs. Mn)

(Year Ending Mar 31) FY09 FY10 FY11E FY12E

Net Sales 140,013 182,025 230,941 311,082

Growth (%) -44.1 30.0 26.9 34.7

Expenditure 129,530 148,506 186,457 248,085

Raw Materials 104,231 122,429 152,535 202,978

Employee Cost 5,186 4,795 6,648 9,332

Other Exp 20113 21282 27274 35774

EBITDA 10,483 33,519 44,484 62,998

Growth (%) -87.2 219.8 32.7 41.6

EBITDA margin (%) 7.5 18.4 19.3 20.3

Depreciation 9878 12987 14174 15830

EBIT 605 20,532 30,309 47,167

EBIT margin (%) 0.4 11.3 13.1 15.2

Other Income 1018 4194 2330 3111

Interest expenses 11556 11080 11266 13163PBT -9,934 13,646 21,373 37,115

Tax 726 6467 7251 11506

Effective tax rate (%) -7.3 47.4 33.9 31.0

Adjusted PAT -10,660 7,179 14,123 25,609

(Profit)/loss from

JV's/Ass/MI -322 0 0 0

Adjusted PAT after MI -10,338 7,179 14,123 25,609

Growth (%) -129.2 -169.4 96.7 81.3

Net Margin (%) -7.4 14.1 14.3 15.1

E/O items -7947.8 0 0 0

Reported PAT -18,286 7,179 14,123 25,609

Growth (%) -151.7 -139.3 96.7 81.3

Balance Sheet (Rs. Mn)


Equity share capital 1871 1871 2231 2406

Reserves & surplus 73,280 87,911 145,636 165,927

Net worth 75,150 89,781 147,867 168,333

Minority Interest 2731 2187 2187 2187

Secured Loans 123,450 127,355 129,355 133,355

Unsecured Loans 30,794 27,190 17,190 7,190

Loan Funds 154,244 154,545 146,545 140,545

Net deferred tax liability 12769.2 16848 16847.8 16847.8

Total Liabilities 341,670 354,063 435,895 495,818

Gross Block 278,943 284,090 305,115 379,285

Less: Depreciation 9,878 12,987 14,174 15,830

Net block 183,092 214,528 233,354 302,523

CWIP 95852 110844 113219 95469Investment 3,966 6,282 16,282 16,282

Current Assets 50,929 54,700 105,506 91,260

Inventories 29,246 28,667 35,432 47,728

Sundry debtors 3,991 6,964 8,858 11,932

Cash & bank balance 5,093 3,030 46,178 17,562

Loans & advances 12,428 16,038 15,038 14,038

Other current assets 0 0 0 0

Current lia & Prov 82,628 80,727 76,626 101,953

Current liabilities 81,799 78,078 76,626 101,953

Provisions 829 2,649 0 0

Net current assets -42,957 -33,213 -2,418 -50,099

Total Assets 341,670 354,063 435,895 495,819

Key Ratios


Profitability (%)

EBITDA Margin 100.0 22.9 19.3 20.3

Net Margin -13.1 3.9 6.1 8.2

ROCE 4.3 9.4 7.6 10.2

ROE -7.5 17.8 10.0 15.2

Per Share Data (Rs)

EPS -55.3 71.6 66.5 106.5

CEPS -44.9 90.4 126.8 172.3

BVPS 401.8 480.0 662.7 699.6

DPS 1.5 1.2 1.4 1.4

Valuations (x)

PER 63.3 13.0 14.0 8.7

P/CEPS -20.1 10.0 7.1 5.2

P/BV 2.3 1.9 1.4 1.3

EV / EBITDA 2.3 7.7 6.9 5.5

Gearing Ratio (x)

Net Debt/ Equity 2.1 1.7 1.0 0.8

Net Debt/EBIDTA 14.2 4.5 2.3 2.0

Cash Flow (Rs. Mn)


PBT (Ex-Other income) -10,951 9,452 19,044 34,004

Depreciation 9,878 12,987 14,174 15,830

Interest Provided 11,556 11,080 11,266 13,163

Other Non-Cash items 7,934 -1,663 -11,714 -19,900

Chg in working cap 26,781 -4,710 11,852 18,565

Tax paid 726 6,467 7,251 11,506

Operating Cashflow 45,924 33,613 51,873 73,168

Capital expenditure 136,036 75,193 80,852 102,071

Free Cash Flow 181,960 108,806 132,725 175,240

Other income 152 128 0 0

Investments 874 -2,033 -10,000 0

Investing Cashflow -58,409 -29,323 -45,200 -90,000

Equity Capital Raised 0 -99 48,361 175

Loans Taken / (Repaid) 16,082 11,223 2,000 4,000

Interest Paid -11,556 -11,080 -11,266 -13,163

Others -3,719 -16,885 -13,886 -15,959

Financing Cashflow 12,363 -5,762 36,474 -11,784

Net chg in cash -122 -2,062 43,147 -28,615

Opening cash position 5,215 5,093 3,030 46,178Closing cash position 5,093 3,030 46,178 17,562

Source: Company, Emkay Research

JSW Steel


5/15


Hindustan Zinc

The jewel in the crown; Not Rated

Com

panyUpdate


n Hindustan Zinc (HZL) is the largest integrated zinc producer in

the world with the current combined (zinc and lead) metal

production capacity of 964,000 tpa

n Silver, as a by-product along with zinc and lead is likely to be a

key growth driver going forward with the plan to ramp up the

production capacity to 500 tpa in FY12 (exit)

n HZL remains in the lowest quartile of the global cost curve

with the net zinc metal cost without royalty being US$792/

tonne in Q3FY11

n HZL has been a cash rich company with strong balance sheet.

At the end of Q3FY11, the cash/ share stands at Rs 310

HZL: The largest integrated zinc producer in the world

HZL has a combined zinc and lead metal production capacity of 964,000 tpa, which makes

it the largest integrated zinc and lead producer in the world. Currently zinc production

capacity stands at 879,000 tpa while, lead production capacity remains at 85,000 tpa. With

the likely commissioning of 100 ktpa lead smelter at Dariba Smeting complex in Q4FY11,

the total zinc and lead capacity of HZL to increase to 1.064 mtpa. HZL has four mines in

Rajasthan, India- Rampura Agucha, Rajpura Dariba, Sindesar Khurd and Zawar of which

Rampura Agucha is the world's largest zinc mine with a capacity of 6 mtpa. The total ore

production capacity of the company remains at 8.6 mtpa. At present Rampura Agucha mine

contributes ~80% of the total ore production at HZL. Total reserves remains at 102 mn

tonnes with average zinc grade of 11.9%.

Silver to be the key value driver

Silver, being a by-product contributes directly to the bottomline of the company and

production is being ramped up to 500 tonnes or 16.1 mn ounce in FY12 (exit) from current

~200 tonnes. This looks more promising with the commencement of trial production at

the new 1.50 mtpa mill at the silver rich Sindesar Khurd mine during the end of the

Q3FY11. We believe with the rise in physical demand and "financial investment" in this

space silver prices to remain firm going forward which could possibly act as a major

growth driver for HZL.

Margin to remain strong on low cost structure

HZL remains in the lowest quartile of the global cost curve with the cost of production in the

main Rampura Agucha mine falling in the lowest decile of the global cost curve. During the

Q3FY11, cost of production without royalty for the company remained at US$792/ tonne. We

believe this remains one of the strengths of the company to remain insulated to any sharp

correction in zinc/ lead prices to a large extent. The low cost structure of HZL helps it enjoy

better margins at the EBITDA level in the range of 50- 60% (57% in Q3FY11). Despite likely

rise in costs, we believe the company to maintain similar margins on higher LME and also

better contribution from the silver business going forward.


HZL has a total cash of Rs 131 billion at the end of Q3FY11. Its topline grew by 20% CAGR

over past 5 years to Rs 80.2 bn in FY10, whereas, the bottomile grew by 29% CAGR during

the same period to Rs 40.4 bn. At the CMP of RS 1271, the stock is trading at 13x FY10 EPSand 9.3x FY10 EV/ EBITDA. We don't have an active coverage on the stock, however, being

a subsidiary of Sterlite Industry we value HZL at 6xFY12 EV/ EBITDA which translates to

Rs110/ share attributable to our target price of Rs 205 for Sterlite Industries.

eco Previous Recoot Rated NA

MP Target Prices1,271 NA



fty 5,432

ensex 18,090

rice Performance

%) 1M 3M 6M 12M

bsolute (9) (2) 15 12

el. to Nifty 3 11 16 1

ource: Bloomberg

elative price chart

3 February, 2011

ource: Bloomberg


oomberg HZ@IN


ace Value(Rs) 10


2 Week H/L 1,438/900






/NRI 1.7 1.7 2.0



ublic 30.5 30.7 30.7

ource: Capitaline

00

05

10

15

20

25

F eb -10 Apr -10 Jun -10 Aug -10 O ct -10 Dec-10

Rs

-30

-20

-10

0

10

20%

Hindustan Zinc (LHS) Rel to Nifty (RHS)


6/15



Financial tables


(Year Ending Mar 31) FY07 FY08 FY09 FY10

Net Sales 85,474 78,955 56,803 80,170

Growth (%) 120.4 -7.6 -28.1 41.1

Expenditure 21,405 25,171 29,461 33,469

Raw Materials 3,457 6,106 8,273 7,992

SG&A expenses 8,602 7,333 5,745 8,261

Employee Cost 2,631 3,174 3,790 4,860

Other Exp 6715 8558 11653 12357

EBITDA 64,069 53,784 27,342 46,701

Growth (%) 174.8 -16.1 -49.2 70.8

EBITDA margin (%) 75.0 68.1 48.1 58.3

Depreciation 1561 2205 2853 3343

EBIT 62,508 51,579 24,489 43,358

EBIT margin (%) 73.1 65.3 43.1 54.1

Other Income 2313 8516 9312 7222Interest expenses 284 242 219 439

PBT 64,537 59,853 33,582 50,141

Tax 20119 15893 6306 9727

Effective tax rate (%) 31.2 26.6 18.8 19.4

Adjusted PAT 44,418 43,961 27,276 40,414

(Profit)/loss from

JV's/Ass/MI 0.00 0.00 0.00 0.00

Adjusted PAT after MI 44,418 43,961 27,276 40,414

Growth (%) 201.7 -1.0 -38.0 48.2

Net Margin (%) 52.0 55.7 48.0 50.4

E/O items -671.9 -1240 -452.3 -342.2

Reported PAT 43,746 42,721 26,824 40,072

Growth (%) 199.4 -2.3 -37.2 49.4



Equity share capital 4225.30 4225.30 4225.30 4225.30


Net worth 76,271 118,482 143,576 181,240

Minority Interest 0.00 0.00 0.00 0.00

Secured Loans 0 0 83 0

Unsecured Loans 4 4 4 605

Loan Funds 4 4 87 605

Net deferred tax liability -3006.3 -4596.8 -5588.6 -7112.3


Gross Block 34,998 51,818 58,555 82,407


Net block 22,356 36,972 41,049 61,641

Capital work in progress 6349.90 4654.60 11083.90 11129.60Investment 44,033 63,325 69,289 109,492

Cu rrent Assets 14,810 27,117 37,841 19,956

Inventories 4,993 5,181 5,457 4,517

Sundry debtors 5,566 4,437 1,649 1,518


Loans & advances 3,054 3,871 3,542 4,642


Current lia & Prov 8,268 8,984 10,010 13,258

Current liabilities 6,418 7,749 8,028 9,863

Provisions 1,850 1,236 1,981 3,395

Net current assets 6,542 18,133 27,832 6,698

Total Assets 76,275 118,486 143,663 181,844

Key Ratios


Profitability (%)

EBITDA Margin 72.0 71.3 59.7 63.9

Net Margin 48.2 50.3 44.4 47.9

ROCE 111.6 61.7 25.8 31.1

ROE 80.4 45.2 20.8 24.9Per Share Data (Rs)

EPS 104.4 103.2 63.9 94.7

CEPS 108.0 108.4 70.6 102.6

BVPS 180.5 280.4 339.8 428.9

Valuations (x)

PER 5.4 5.1 7.0 12.7

P/CEPS 5.2 4.9 6.3 11.7

P/BV 3.1 1.9 1.3 2.8

EV / EBITDA 3.6 3.4 4.4 9.3

Gearing Ratio (x)


Cash Flow (Rs. Mn)


Opening cash 740 1,197 13,628 27,192

Operating Cashflow 46,046 41,020 25,419 42,104

Investing Cashflow -37,299 -28,203 -11,220 49,344

Financing Cashflow -8,290 -2,713 -2,113 -3,396

Net chg in cash 457 12,431 13,564 -17,917Closing cash 1,197 13,628 27,192 9,275

Source: Capitaline, Emkay Research

Hindustan Zinc


7/15


Hindalco

Strong growth pipeline; Not Rated

Com

panyUpdate


n Hindalco is the world's largest aluminium rolling company and

its copper smelter is the world's largest custom smelter at a

single location

n The topline of the company has seen a robust 47% CAGR over

past three years, whereas the PAT has grown by 13% CAGR

during the same period

n Strong domestic expansion plan in the aluminium division to

boost volume growth and thereby scalability. Domestic copper

business to aid topline growth

n With Novelis having rich product mix, main focus on beverage

can market and low cost domestic business, we see potential

value accretion going forward

Hindalco: a leader in aluminium and copper

Hindalco is one of the leading producers of aluminium and copper. The aluminium units

comprises the entire gamut of operations, from bauxite mining, alumina refining and

aluminium smelting to downstream rolling, extrusions, foils, along with captive power

plants and coal mines. The copper unit, Birla Copper on the other hand produces copper

cathodes, continuous cast copper rods and other by-products, such as gold, silver and

DAP fertilizers. The integrated facility at Renukoot houses an alumina refinery and an

aluminium smelter, along with facilities for the production of semi-fabricated products,

namely, redraw rods, flat rolled products and extrusions. The copper unit, is located at

Dahej in Gujarat, India. The unit has the unique distinction of being the largest single-

location copper smelter in the world. The smelter uses state-of-the-art technology and hasa capacity of 500,000 tpa. Hindalco acquired two Australian copper mines, Nifty and Mt.

Gordon, in 2003, which partially meets requirement of its custom smelter in India. The

acquisition of Novelis Inc. in 2007 positioned Hindalco among the top five aluminium

majors worldwide and the largest vertically integrated aluminium company in India.

Domestic expansion on track, to boost scalability

The company is in the process of expanding its domestic aluminium business significantly

over the next couple of years by way of both brownfield and greenfield projects with a total

project outlay of Rs 400 bn. The alumina capacity is being ramped up to 4.5 mtpa from

existing 1.5 mtpa, while aluminium capacity would grow up to 1.68 mtpa from existing

545,000 tonnes. Under the brownfield projects Hirakud smelter capacity is being ramped

up to 213 ktpa from existing 155 ktpa by Q4FY12 with a long-term plan to expand to 360

ktpa. Hirakud flat rolled product business is under the process of transformation by way of

transferring key equipment from Novelis and is likely to be completed by Q2FY12. The

Belgaum alumina capacity is also being increased to 316 ktpa from 138 ktpa by end of

CY11. Among the Greenfield projects, the Utkal alumina project comprises of 1.5 mtpa

alumina refinery with 900 MW captive co-gen power plant. The Mahan project includes

setting up of a 359 ktpa with 900 MW CPP by Q2FY 12 while, Aditya Aluminium with a similar

capacity as of Mahan project would be commissioned by Q3FY12.


Hindalco's topline and bottomline grew at a CAGR of 47% and 13% respectively to Rs 605

bn and 39 bn. At the CMP of Rs 235/ share the stock trades at 10.5xFY EPS. We feel thecompany due to its strong expansion and low cost structure on the back of raw material

integration would continue to see robust growth. Currently the stock is not under active

coverage.


MP Target Prices235 NA



fty 5,432

ensex 18,091

rice Performance

%) 1M 3M 6M 12M

bsolute (7) 8 39 54

el. to Nifty 6 22 40 39

ource: Bloomberg

elative price chart

3 February, 2011

ource: Bloomberg


oomberg HNDL@IN


ace Value(Rs) 1


2 Week H/L 252/129






/NRI 41.0 39.0 37.9



ublic 7.7 8.0 8.9

ource: Capitaline

eb -10 Apr -10 Jun -10 Aug -10 O ct -10 Dec-10

Rs

-20

-6

8

22

36

50%

Hindalco (LHS) Rel to Nifty (RHS)


8/15



Financial tables (Consolidated)



Net Sales 190,965 596,963 657,524 605,626

Growth (%) 61.3 212.6 10.1 -7.9

Expenditure 149,832 534,558 631,820 522,980

Raw Materials 128,118 434,497 468,931 398,181

SG&A Expenses 4,547 22,050 27,498 23,292

Employee Cost 5,716 4 3,415 53,404 50,650

Other Exp 11451 34597 81986 50857

EBITDA 41,133 62,405 25,705 82,646

Growth (%) 52.2 51.7 -58.8 221.5

EBITDA margin (%) 21.5 10.5 3.9 13.6

Depreciation 7793 24883 30295 27815

EBIT 33,340 37,522 -4,591 54,831

EBIT margin (%) 17.5 6.3 -0.7 9.1

Other Income 6399 10506 10822 18019Interest expenses 3135 18491 12280 11041

PBT 36,605 29,537 -6,049 61,808

Tax 9586 6408 -9538 18289


Adjusted PAT 27,019 23,130 3,488 43,519

(Profit)/loss from

JV's/Ass/MI -161.30 -1196.40 1350.60 -4263.80


Growth (%) 70.0 -18.3 -77.9 711.2

Net Margin (%) 14.1 3.7 0.7 6.5

E/O items -579.6 -398.2 417 -156.9

Reported PAT 26,278 21,535 5,256 39,098

Growth (%) 74.1 -18.0 -75.6 643.9





Net worth 128,184 172,844 157,591 215,451

Minority Interest 8566.80 16153.6012865.5017371.80

Secured Loans 72,589 109,030 130,246 107,627

Unsecured Loans 11,840 214,494 152,851 132,360

Loan Funds 84,429 323,524 283,098 239,987



Gross Block 142,709 421,117 462,196 456,221


Net block 92,364 347,067 318,157 290,005

CWIP 19169.50 24571.10 29494.50 58008.00I nve st men t 78,741 140,077 103,893 112,455

Current Assets 86,685 214,743 202,396 231,887

Inventories 48,123 111,109 85,241 112,754

Sundry debtors 15,485 6 7,174 66,733 65,437


Loans & advances 12,732 19,291 28,502 31,739


Current lia & Prov 44,106 172,222 172,282 180,161

Current liabili ties 30,530 111,108 109,458 130,992

Provisions 13,576 61,114 62,825 49,170


Total Assets 221,180 512,522 453,554 472,810

Key Ratios


Profitability (%)

EBITDA Margin 21.5 10.5 3.9 13.6

Net Margin 14.1 3.7 0.7 6.5

ROCE 20.8 13.0 1.1 15.3


EPS 25.7 18.5 1.8 22.5

CEPS 36.4 44.7 13.8 41.1

BVPS 122.9 139.8 92.6 112.5

Valuations (x)

PER 5.1 9.4 19.9 9.0

P/CEPS 3.6 3.9 2.6 4.9

P/BV 1.0 1.1 0.6 1.6

EV / EBITDA 4.7 7.0 9.6 5.6

Gearing Ratio (x)


Cash Flow (Rs. Mn)


Opening cash 10758 10101 17092 21831

Operating Cashflow 34260 53999 42903 49321

Investing Cashflow -63947 -176154 29149 -53567

Financing Cashflow 29031 129145 -67313 4284

Net chg in cash -656 6991 4739 38Closing cash 10101 17092 21831 21869

Source: Capitaline

Hindalco


9/15


Godawari Power & Ispat

Gearing up; Under Review

Com

panyUpdate


n Godawari Power and Ispat (GPIL), the flagship company of Hira

Group of Industries has diversified product portfolio including

long steel products, power, iron ore and coal mines

n GPIL has a total power capacity of 73 MW, which is not only

used for captive purpose but for commercial selling also

providing a hedging option for billets and ferro alloys

n The company has 15 mt iron ore reserve, of which one mine

with 7 mt reserve is operational and feeding its 600 ktpa pellet

plant for use in sponge iron and merchant selling

n We believe that the company would be a major beneficiary of

its backward integrated operation and access to merchant

sales of iron ore and power

Power business to hedge risk in billets and ferro alloys businessesWith the commissioning of 20 MW biomass based power plant, GPIL's total power capacity

rose to 73 MW during Q3FY11. Out of the rest 53 MW power capacity 11 MW is coal based

and 42 MW is waste heat gas based. This helps the company to keep its total operational

cost of producing power at a very lower level. Also, after meeting the requirement of its steel

division, rest of the power is sold to the grid and also on merchant basis contributing to

both top and bottom line of the company. The biggest advantage of the power business

however comes from the fact that it is used as a hedging option against adverse pricing

scenario in steel business. This has been particularly the case with its billets and ferro

alloys divisions, as both of these are power intensive products requiring ~1000 units and

~3800 units of power respectively to produce 1 tonne of each of these products. We believe

this provides GPIL a flexible business model to shuffle between its power and steelbusinesses according to the market scenario and thereby protects it from wide volatility in

operational performance.

Backward integration to boost margins

GPIL has got two iron ore mines in Chhattisgarh as of now with a cumulative total reserve

of 15 mt. Among the two mines, Ari Dongri with a reserve of 7 mt has been operational

already and has a target to produce 0.6 mtpa. The other mine i.e. Boria Tibu, which has a

reserve of 8 MT, is yet to commence its production. The management is confident of having

production from this mine shortly as all the necessary approvals are in place. Other than

iron ore, GPIL also has access to thermal coal. Along with a consortium of four other

companies, GPIL has been allotted a non-coking coal block in Chhattisgarh with a total

reserve of 243 mt, of which GPIL has ~26% share, which comes to a reserve of ~63 mt. Thecoal mine however, is yet to get final clearance and we feel at this stage it remains uncertain.

Despite this, we believe ramping up of iron ore production would help the company to

improve its margins going ahead.

Contribution of pellet plant to be more visible going forward

GPIL has set up its own pellet plant (0.6 mtpa) to convert its own iron ore fines for feeding

the sponge iron unit and selling the left over quantity on merchant basis. Its 75% subsidiary

ardent steel also has set up a similar capacity pellet plant for merchant use only. We

believe with ramping up of pellet production and robust realizations, GPIL would see

significant improvement in both its top and bottom line in FY12.

Financials and ValuationsGPIL's top and bottom line grew at CAGR of 29% and 17% respectively over past 6 years till

FY10, which we believe should grow by 17% and 26% respectively over next couple of

years till FY12 due to better margin. At the CMP of Rs 162, the stock is trading at 7.6xFY10

and looks attractive. The stock is under our review.

eco Previous Reconder Review NA




fty 5,432

ensex 18,091

rice Performance

%) 1M 3M 6M 12M

bsolute (22) (21) (31) (27)

el. to Nifty (11) (11) (31) (35)

ource: Bloomberg

elative price chart

3 February, 2011

ource: Bloomberg


oomberg GODPI@IN


ace Value(Rs) 10


2 Week H/L 320/161

arket Cap (Rs bn/USD mn) 5/110





/NRI 6.2 8.0 8.4



ublic 22.4 21.1 20.0

ource: Capitaline

0

5

0

5

0

5


Rs

-40

-26

-12

2

16

30%

Godawari Power (LHS) Rel to Nifty (RHS)


10/15



Financial tables



Net Sales 10,920 8,224 8,303 11,222

Growth (%) 35 -25 1 35

Expenditure 9,691 6,919 6,809 9,143

Raw Materials 8,718 5,960 5,710 8,046

Employee Cost 139 191 279 224

Other Exp 808 925 1109 872

EBITDA 1,229 1,305 1,494 2,079

Growth (%) -27 6 14 39

EBITDA margin (%) 11.3 15.9 18.0 18.5

Depreciation 285 342 426 481

EBIT 944 964 1,068 1,598

EBIT margin (%) 8.6 11.7 12.9 14.2

Other Income 114 40 12 16

Interest expenses 356 337 415 534PBT 702 666 664 1,080

Tax 88 106 122 177


Adjusted PAT 615 560 542 903

(Profit)/loss from

JV's/Ass/MI 0.00 0.00 0.00 0.00

Adjusted PAT after MI 615 560 542 903

Growth (%) -37 -8 -5 67

Net Margin (%) 5.6 6.8 6.5 8.0

E/O items 0 0 0 0

Reported PAT 615 560 542 903

Growth (%) -37 -8 -5 67



Equity share capital 269 269 269 269

Reserves & surplus 4188 4713 5176 6000

Net worth 4,457 4,983 5,445 6,269


Secured Loans 3,548 5,121 5,871 6,621


Loan Funds 3,548 5,181 5,931 6,681

Net deferred tax liability -18 -9 -9 -9

Total Liabilities 8105 10265 11478 13051

Gross Block 4953 7520 9458 10696

Less: Depreciation 887 1224 1650 2131

Net block 4,066 6,295 7,808 8,565

CWIP 2016 1938 2238 2538Investment 101 117 117 117

Current Assets 2230 2686 2177 2816

Inventories 1449 1728 1306 1753

Sundry debtors 311 372 373 501

Cash & bank balance 438 196 33 168

Loans & advances 470 587 498 561


Current lia & Prov 774 1005 934 1189

Current liabilities 588 818 746 1002

Provisions 186 187 187 187

Net current assets 1894 1877 1277 1794

Total Assets 8105 10265 11478 13051

Key Ratios


Profitability (%)

EBITDA Margin 11.3 15.9 18.0 18.5

Net Margin 5.7 7.0 6.5 8.0

ROCE 14.2 10.9 9.9 13.2

ROE 14.9 12.1 10.4 15.4

RoIC 16.5 14.2 12.5 16.5

Per Share Data (Rs)

EPS 23.1 21.2 20.1 33.5

CEPS 33.7 33.9 35.9 51.4

BVPS 165.4 184.9 202.1 232.6

DPS 2.5 2.5 2.5 2.5

Valuations (x)

PER 7.0 7.6 8.1 4.8

P/CEPS 4.8 4.8 4.5 3.2

P/BV 1.0 0.9 0.8 0.7

EV / EBITDA 0.7 1.1 1.2 1.0

Gearing Ratio (x)


Net Debt/EBIDTA 2.3 2.3 2.1 1.5

Cash Flow (Rs. Mn)


PBT (Ex-Other income) 588 626 653 1,064

Depreciation 285 342 426 481

Interest Provided 0 0 0 0

Other Non-Cash items 0 0 0 0

Chg in working cap 394 -226 437 -383

Tax paid -138 -103 -122 -173

Operating Cashflow 1,194 671 1,405 1,002

Capital expenditure -2,173 -2,499 -2,238 -1,538

Free Cash Flow -979 -1,828 -833 -537

Other income 0 0 0 0

Investments 102 5 0 0

Invest ing Cashflow -1,999 -2,488 -2,238 -1,538

Equity Capital Raised 0 0 0 0

Loans Taken / (Repaid) 623 1,632 750 750

Dividend Paid -793 -793 -793 -793

Others 67 25 0 0

Financing Cashflow 607 1,575 671 671

Net chg in cash -197 -242 -163 134

Opening cash position 635 438 196 33Closing cash position 438 196 33 168

Source: Company, Emkay Research

Godawari Power & Ispat


11/15


Sarda Energy & Minerals

Emerging from odds; Not Rated

Com

panyUpdate


n Sarda Energy & Minerals (SEML) is one of the lowest cost

producers of sponge iron, billets, ingots, TMT bars and largest

manufacturers and exporters of ferro alloys in India

n SEML has secured backward integration for both of its major

raw materials coal- with a reserve of 100 mt and iron ore- with

a reserve of 20 mt in Chattisgarh

n Stabilization of its pellet plant with a capacity of 0.6 mt likely

to boost margins going forward. Also, SEML is increasing its

power capacity from 78 MW currently by 350 MW by FY13

n We believe better backward integration and strong presence

into ferro alloy business with increasing power capacity would

help the company to perform better going ahead

Ferro alloy business to boost topline growth

Ferro-alloy prices have doubled in the last one year led by a rebound in demand from the

stainless steel producers and supply cuts from South Africa. The demand-supply situation

is likely to remain tight due to the continued power problem in South Africa and absence of

any major capacity addition globally. Moreover, the recovery in global demand for steel and

alloys especially in the developed countries is likely to help the company to maintain strong

growth path. Since Q1 FY11, the company has raised its capacity to 82,500tpa by restarting

its backup furnace. It is setting up 125,000 tpa ferro alloy capacity at Vizag along with

captive power plant of 80MW with permission of setting up additional 240 MW at an estimated

cost of Rs5.4bn. Project is expected to be commissioned by end of March 2012.

Strong backward integration to expand margins

SEML has been allotted coal mines at Karwahi near Raigarh district in Chattisgarh, with

estimated reserves of 100 mt. Coal from the its own mine would be mainly used for

sponge iron production. The company plans to preserve its captive resources before the

major power plants are commissioned and would continue to consume linkage coal for its

power plants over the next two years. The company has got a mining license of 1.2 mtpa

and it has been operational since Q3FY10. SEML was also granted an iron ore mine at

Rajnandgaon in Chattisgarh. The mine has an estimated reserves of 20 mt. The mine is

an open cast mine with 63% Fe grade and has a mining capacity of 1.5 mtpa. The mine has

been operational since FY06 and was able to extract 0.4mn tons of ore in FY09. However,

in FY10 mining activities in the area were stopped on account of Naxal and Maoists activities

in the area. The management expects that mine to restart soon and that couls be a potentialtrigger for the company, as it would lower the cost of production significantly.

Major value addition to come from pellet and power

SEML has set up a pellet plant (o.6 mtpa) with an aim to increase its backward integration.

Some portion of iron ore fines required for pelletisation will be met by the fines from its

captive mine and the rest will be bought from the local market. The company also has a

plan to increase its power capacity by 350 MW from 78 MW currently in a phased manner by

FY13. In the first phase, a 1x80MW power plant will be setup followed by 2x135MW in the

second phase.

Financials and ValuationsSEML has seen a topline growth of 12% CAGR over past three years, while bottmline

growth remained at 14% CAGR during the same time. We believe ongoing projects to add

value to both top and bottomline. At the CMP of Rs 231 the stock discounts its FY10

earnings by 12.7x.

3 February, 2011





fty 5,432

ensex 18,091

rice Performance

%) 1M 3M 6M 12M

bsolute (27) (11) (7) 13

el. to Nifty (18) 1 (8) (0)

ource: Bloomberg

elative price chart

ource: Bloomberg


oomberg SEML@IN


ace Value (Rs) 10


2 Week H/L (Rs) 382/172

arket Cap (Rs bn/USD mn) 9/189

aily Avg Vol (No of shares) 333117

aily Avg Turnover (US$ mn) 2.4



/NRI 11.7 6.6 6.7



ublic 9.8 10.5 10.5

ource: Capitaline

0

5

0

5

0

5


Rs

-20

-4

12

28

44

60%

Sarda Energy (LHS) Rel to Nifty (RHS)


12/15



Financial tables



Net Sales 3,642 6,213 9,488 5,228

Growth (%) 68.6 70.6 52.7 -44.9

Expenditure 2,944 4,517 7,680 4,470

Raw Materials 2,421 3,819 6,229 3,733

SG&A Expenses 181 253 363 160


Other Exp 270.80 335.30 914.90 382.30

EBITDA 698 1,696 1,808 758

Growth (%) 221.5 142.9 6.6 -58.1

EBITDA margin (%) 19.2 27.3 19.1 14.5

Depreciation 225.70 221.40 278.90 388.00

EBIT 473 1,475 1,529 370

EBIT margin (%) 13.0 23.7 16.1 7.1

Other Income 169.90 76.60 216.30 595.80Interest expenses 134.90 159.50 253.50 194.40

PBT 508 1,392 1,492 772

Tax 82.00 177.50 259.50 139.80


Adjusted PAT 426 1,214 1,232 632

(Profit)/loss from

JV's/Ass/MI 0.00 0.00 0.00 0.00

Adjusted PAT after MI 426 1,214 1,232 632

Growth (%) 255.0 185.2 1.5 -48.7

Net Margin (%) 11.7 19.5 13.0 12.1

E/O items -76.8 -10.1 77.5 -1.9

Reported PAT 349 1204.2 1,310 630

Growth (%) 287.8 245.1 8.8 -51.9





Net worth 2,082 4,015 5,133 5,646


Secured Loans 1,925 3,189 5,247 4,472


Loan Funds 2,087 3,233 5,330 4,595



Gross Block 2,955 3,312 4,984 6,116

Less: Depreciation 999 1,214 1,468 1,850

Net block 1,955 2,098 3,516 4,265

Capital work in progress 946.50 2552.10 3553.50 3733.40Investment 219 205 726 665

Current Assets 1,744 3,827 3,522 2,823

Inventories 683 1,499 996 1,520

Sundry debtors 483 669 183 144


Loans & advances 364 677 1,991 912


Current lia & Prov 530 1,234 573 959

Current liabilities 521 1,115 454 840

Provisions 9 120 120 120


Total Assets 4,169 7,253 10,463 10,241

Key Ratios


Profitability (%)

EBITDA Margin 19.2 27.3 19.1 14.5

Net Margin 11.7 19.5 13.0 12.1

ROCE 18.8 27.2 19.7 9.3


EPS 31.9 35.2 35.7 18.1

CEPS 49.2 41.7 43.9 29.4

BVPS 146.5 117.9 150.8 165.8

Valuations (x)

PER 4.8 8.9 1.8 10.5

P/CEPS 3.1 7.5 1.4 6.4

P/BV 1.1 2.7 0.4 1.1

EV / EBITDA 4.5 7.3 3.5 8.0

Gearing Ratio (x)


Cash Flow (Rs. Mn)


Opening cash 10 215 760 153


Investing Cashflow -599 -1956 -3594 -553

Financing Cashflow 35 1874 975 -612

Net chg in cash 204 546 -608 94Closing cash 215 760 153 247

Source: Capitaline

Sarda Energy & Minerals


13/15


Essel Mining

Hidden treasure; Not Listed

Com

panyUpdate


n Established in 1950 - Part of the Aditya Birla Group

n One of India's largest iron ore mining companies in the non-

captive private sector

n Largest producer of noble ferro alloys

n Ventured into wind power generation in 2005 by installing 75

MW windmills

Mining Division

The mining division has its iron ore operations in the mineral rich Barbil-Barajamda belt of

Odisha. The mines have a substantial resource base of superior quality iron ore with high

Fe (iron) content and bulk density. The Fe content varies between 63 to 66 per cent, which

makes it one of the good quality materials available in the country. Essel operates three

mining assets in Odisha - Jilling, Kasia and Koira.

The potential of the proven deposit, as well as the quality and quantity of reserves, are good

enough to sustain the mining operations for the next 20 years at the current operating

capacity. Essel Mining's roadmap includes exploring further mining acquisitions and

leveraging both greenfield as well as brownfield opportunities. Further, to capitalise on the

wealth of experience and expertise garnered in the mining sector, plans to venture into coal

mining are on the anvil. Several initiatives underway to further develop logistic infrastructure

for the long-term growth of the mining business.

Ferro-chem division

Established in 1980, the Ferro-chem division of Essel is located at Vapi in Gujarat. It is thelargest producer of high quality noble Ferro alloys in India. Its products include ferro-

molybdenum, ferro-vanadium and ferro-titanium. It commands over 40 per cent of the

market share in India.

The division also produces ferro-alloy powders and unfused V2O5. The division has

developed ferro titanium (35-40 per cent grade) through an internal R&D initiative. Noble

ferro alloys are used in the manufacture of alloy steels, high-speed steels and other

special grade steels, infusing the anti-abrasive and anti-corrosive properties to steel.

Additionally, these products find application in the manufacture of castings, electrodes and

act as a catalyst in the fertilizer industry

Wind power

Essel Mining forayed into power generation in 2005 by installing 75MW windmills at Dhule

in Maharashtra. This project has also been registered with UNFCCC as a clean development

mechanism project under the Kyoto Protocol, which entitles the project to get carbon credit

revenues for a period of ten years.

Financials

For FY09 the company reported revenue of Rs 32 bn and EBITDA of Rs 16.6 bn translating

to an EBITDA margin of 51.9%. The PAT for FY09 stands at Rs 9.9 bn.

The company has clocked a CAGR growth of 23% in its revenue over past three years to till

FY09. The bottomline of the company also witnessed a similar momentum and grew at

CAGR of 21% during the same period. EBITDA margin has been consistent near 50%.

3 February, 2011


14/15



Financial tables



Net Sales 17,306 18,584 23,055 32,002

Growth (%) 56.0 7.4 24.1 38.8

Expenditure 9,832 9,587 9,232 15,399

Raw Materials 2,209 2,438 1,318 2,537

SG&A Expenses 6,138 5,445 6,018 10,606


Other Exp 1267 1434 1540 1810

EBITDA 7,474 8,996 13,823 16,604

Growth (%) 36.9 20.4 53.6 20.1

EBITDA margin (%) 43.2 48.4 60.0 51.9

Depreciation 178.90 290.00 308.60 349.60

EBIT 7,295 8,706 13,514 16,254

EBIT margin (%) 42.2 46.8 58.6 50.8

Other Income 388.40 268.80 849.20 962.30Interest expenses 147.50 299.70 2083.20 2829.40

PBT 7,536 8,675 12,280 14,387

Tax 1895 2840 3915 4486


Adjusted PAT 5,641 5,836 8,365 9,901

(Profit)/loss from

JV's/Ass/MI 0.00 0.00 0.00 0.00


Growth (%) 56.8 3.5 43.3 18.4

Net Margin (%) 32.6 31.4 36.3 30.9

E/O items -21.1 24.7 -19.6 0.3

Reported PAT 5,620 5,860 8,346 9,901

Growth (%) 57.1 4.3 42.4 18.6





Net worth 11,521 17,345 25,699 38,257


Secured Loans 3,237 3,042 20,065 24,971

Unsecured Loans 1,465 5,008 0 150

Loan Funds 4,702 8,050 20,065 25,121



Gross Block 5,116 5,232 5,726 5,891

Less: Depreciation 405 688 932 1,256

Net block 4,712 4,544 4,794 4,635

Capital work in progress 30.20 78.50 205.30 407.80Investment 3,525 2,959 15,893 27,886

Current Assets 9,902 269 218 282

Inventories 1,102 920 1,950 1,690

Sundry debtors 1,365 722 1,542 1,303


Loans & advances 7,364 16,654 24,226 29,482


Current lia & Prov 1,556 840 2,773 2,111

Current liabilities 1,521 757 2,412 1,946

Provisions 35 83 361 166


Total Assets 16,223 25,395 45,763 63,377

Key Ratios


Profitability (%)

EBITDA Margin 44.3 48.7 60.9 52.4

Net Margin 31.8 30.7 34.7 29.5

ROCE 67.3 43.1 40.4 31.6


EPS 7341 11905 17069 19543

CEPS 11875 12498 17698 20256

BVPS 23512 35398 52446 71969

Valuations (x)

PER NA NA NA NA

P/CEPS NA NA NA NA

P/BV NA NA NA NA

EV / EBITDA NA NA NA NA

Gearing Ratio (x)


Cash Flow (Rs. Mn)


Opening cash 88 72 156 374


Investing Cashflow -8798 -9261 -20085 -17325

Financing Cashflow 3723 3098 10885 3615

Net chg in cash -17 814 219 -89Closing cash 72 886 374 286

Source: Capitaline

Essel Mining


15/15



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BUY Expected total return (%) (stock price appreciation and dividend yield) of over 25% within the next 12-18 months.ACCUMULATE Expected total return (%) (stock price appreciation and dividend yield) of over 10% within the next 12-18 months.HOLD Expected total return (%) (stock price appreciation and dividend yield) of upto 10% within the next 12-18 months.

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Documents

Metals and Mining - Pre Conference Note