Bhushan Steel: Rising Interest Cost Dents Bottomline For June Quarter 2012
DSIJ Intelligence / 01 Aug 2012
Bhushan Steel Ltd, one of the secondary steel players announced its result for the June quarter 2012. The company was able to keep it head high during the quarter despite weakening macro environment.
Bhushan Steel Ltd, one of the secondary steel players announced its result for the June quarter 2012. The company was able to keep it head high during the quarter despite weakening macro environment. The net sales of the company grew by 27.31 per cent on a YoY basis to Rs 3,841 while the net profit stood almost at a flat level at Rs 205 crore, down by 1.90 per cent as compared to the same period last year. This jump in the topline was due to higher sales volume and flat realisation during the quarter. The steel prices during the quarter remained almost flat as compared to Q4FY12.
| Financial Performance For The June Quarter 2012 | |||||
|---|---|---|---|---|---|
| Particulars | Jun-12 | Jun-11 | YoY | Mar-12 | QoQ |
| Sales | 2,841.3 | 2,231.8 | 27.3 | 2,836.8 | 0.2 |
| Raw Material | 1,669.6 | 1,429.6 | 16.8 | 1,550.8 | 7.7 |
| Operating Profit | 862.3 | 661.0 | 30.4 | 897.6 | -3.9 |
| Interest | 377.8 | 215.7 | 75.2 | 299.4 | 26.2 |
| Depreciation | 206.6 | 150.9 | 36.9 | 165.8 | 24.6 |
| Net Profit / Loss | 206.0 | 210.0 | -1.9 | 330.9 | -37.8 |
| OPM (%) | 30.3 | 29.6 | 0.7 | 31.6 | -4.1 |
| NPM (%) | 7.2 | 9.4 | -22.8 | 11.6 | -37.8 |
Despite the decent sales volume and flat realisation, the net profit of the company declined by 2 per cent YoY to Rs 205.97 crore. The main reason attributable to the fall was the huge debt in the company’s balance sheet as on 31st March 2012. Its large gross debt of Rs 19,000 crore (including Rs 2,000 crore of working capital) resulted in a significant increase (75 per cent YoY and 26 per cent QoQ) in interest cost at Rs 377 crore during the quarter. This was coupled with the pressure of higher depreciation (Rs 200 crore, up by 30 per cent QoQ) due to the nature of the expansion phase the company is going through. We believe the rising debt in the books of accounts should peak out during FY14, assuming that the ongoing projects move ahead on schedule.
However, if we look at the operating performance, the company has actually done quite well. Despite the rise in raw material cost (up by 17 per cent YoY), the operating profit has grown by 30 per cent on a YoY basis to Rs 862 crore. The operating margins have improved by 73 bps on a YoY basis to 30.34 per cent, which is a quite appreciable. The higher raw material cost was largely on account of the increase in the coal cost in spite of the fall in coking coal prices in the international market. This was due to a 15 per cent fall in the rupee value which negated all the benefits. We believe with the company expansion plans the availability of high-grade coal will remain an issue for the company which will continue to bear some pressure in Medium to long term.
In conclusion, we believe that the overall performance of the company, despite the various macro challenges, has remained good enough. The major highlight of the result was the company’s operating performance. However, pressure on the bottomline continues to remain a cause for concern for the investors. And going forward, with higher interest outgo coupled with a soft demand for steel products as well as the expected fall in steel prices, the company may report weak numbers for the ongoing September quarter. Also, 32 per cent of the promoters’ holding is pledged and this is one of the major risks to the company’s financials and its fund-raising plan.
At its current market price of Rs 469 and with an annualised EPS of Rs 47.82, the scrip is trading at a PE multiple of 9.80x and EV/EBITDA of 9.64x. The current valuation at EV/EBITDA of 9.64x looks high given the huge amount of debt standing in the company’s books. Therefore, given the above mentioned concerns and higher valuations, we recommend investors to stay away from the scrip.
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