Bhushan Steel : Is it time to "boo-shun" steel?

Over the past one year, Bhushan Steel shares rose 58.5%. The BSE Metal index fell 3.9%.

Its foray into the high margin and fast growing automobile and white goods segment augured well for the company as it helped it to capitalise on higher steel prices. The company’s revenues grew at a CAGR (compounded annual growth rate) of 19.8%, profits rose at an even faster pace of 34% during the decade 2000-2010.

So far so good.

[caption id=“attachment_32657” align=“alignleft” width=“380” caption=“While the expansion plan is a well thought out strategy by the company, loans raised by the company is a cause for concern. Reuters”]  [/caption]

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While the expansion plan is a well thought out strategy by the company, loans raised by the company for the aforesaid expansion is a cause for concern, as, such an amount leads to considerable pressure on the balance sheet of the company.

A domestic research firm has envisaged a total fund requirement of upto Rs 7,000 crore for the next two years. Therefore, an ideal solution for the company would be to seek infusion of equity to ease its high financial leverage and also meet the rest of its capex plans.

While the company has given guidance of raising $1 bn through equity, considering the investor appetite currently in the market, it may be difficult to achieve that target.

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Strong fundamentals led the scrip of Bhushan Steel to out-perform the BSE Metals index over the last one year, however, it seems to be losing its flavour as many domestic brokerage firms have downgraded the stock. Angel Broking and Motilal Oswal hold a ’neutral’ view, while PINC research has downgraded it to sell.

Further, with steel prices cooling off and demand dwindling from construction and automobiles sectors, the upside to this stock seems capped.

Bhushan Steel was acquired by Brij Bhushan Singal and family in 1987. Since then, it has come a long way and is today the third largest secondary steel producer in India. It has, three manufacturing units, located at Uttar Pradesh, Maharashtra and Orissa. They produce a wide range of products like cold rolled closed annealed, galvanized coil and sheets, color coated coils, wire rods, etc.

Backward integration led the company to embark on an ambitious organic growth strategy way back in 2005. Post the commissioning of its phase-2 expansion, its total hot rolled (HR) steel capacity increased to 2.2 mtpa and is expected to increase further by three million tonnes to 5.3 mtpa by 2012-13.

For FY13, analysts expect operating margins to expand owing to the commissioning of its plant. However, rise in depreciation expenses coupled with high interest outgo will lead to a contraction of margins at the net level.

The Rs 9,377 crore market cap company was trading 3.7% lower at Rs 441.6 per share as on 27 June, 2011.

If you are shareholders or retail investors looking to pick your stock look out for the following:

•Revenues rose by 24%, operating profits rose at a faster pace of 34% for the year ended March 2011.

•EPS is expected to decline to Rs 33.5 per share at the end of FY13 from Rs 47 at the end of March 2011.

•Imports from China and Russia continue to be an area of concern.

•Cost of production is low owing to the use of a combination of BF-EAF technology to produce steel.

•Leader in the automobile and white goods segment.

•Maruti lowers its sales growth forecast to 8% from 13% earlier.

•Domestic steel industry capacity is expected to increase by 24 mtpa owing to the commissioning of capacities by JSW, Tata Steel, SAIL, etc during the FY11-13.

Private equity players / bankers /consultants watch out for:

•Co plans to raise $1 bn through equity infusion.

•Cash on hand is Rs 131 crore at the end of March 2010.

•Meager FII holding at 2.5%.

•Co is planning to set up capacities in West Bengal and Karnataka. Private Equity (PE) funds can take advantage of this opportunity and approach the company.