3QFY2013 Result Update | Steel

January 28, 2013

Sarda Energy and Minerals

Performance highlights
Quarterly Performance (Standalone)
Particulars (` cr) Net sales EBITDA EBITDA margin (%) Adj. net profit
Source: Company, Angel Research

ACCUMULATE
CMP Target Price
Investment Period

`131 `148
12 months

3QFY13 370 71 19.3 27

3QFY12 285 65 22.7 28

% chg (yoy) 29.9 10.7 (334)bp (3.3)

2QFY13 351 72 20.6 28

% chg (qoq) 5.4 (0.9) (124)bp (2.3)

Stock Info Sector Market Cap (` cr) Net Debt (`cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Steel 468 654 1.3 156/111 21,175 10 20,103 6,075 SAEM.BO SEML@IN

For 3QFY2013, Sarda Energy (SEML) reported a strong growth in net sales; however, its PAT declined 3.3% yoy due to higher interest costs. We maintain our Accumulate rating on the stock. Revenue growth driven by higher steel sales: During 3QFY2013, SEMLs net sales grew by 29.9% yoy to `370cr driven by a healthy performance from the steel business (+52.7% yoy to `275cr). Ferro alloy sales volumes on the other hand were down by 13.5% yoy to 14,014 tonne but the realizations improved by 19.0% yoy to `64,521/tonne. Billets sales volume increased by 215.7% yoy to 6,522 tonne; pellet sales increased significantly by 293.1% yoy to 79,144 tonne. EBITDA growth muted by lower Ferro Alloy segment profits: Despite 29.9% yoy growth in top-line, EBITDA grew only 10.7% yoy due to lower realizations from Steel segment. EBITDA margins fell by 334bp yoy to 19.3%. The companys interest costs increased by 23.4% yoy to `18cr and the other income was lower by 59.4% yoy to `4cr which led to the net profit falling by 3.3% yoy to `27cr. Outlook and valuation: We believe that SEML is well poised to benefit from a) backward integration into coal and iron ore, b) commercial production of pellets and c) increased power and ferro alloy production. Moreover, firm sponge iron and pellet prices should lead to higher capacity utilization in FY2014, thereby leading to higher sales volumes. We recommend Accumulate on the stock with a target price of `148, valuing the stock at 3.5x FY2014E EV/EBITDA.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 66.5 7.2 6.5 19.8

Abs. (%) Sensex SEML

3m 7.9 (0.6)

1yr 16.6 6.7

3yr 23.3 (32.6)

Key financials (Standalone)

Y/E March (` cr) Net sales % chg Net profit % chg FDEPS (`) OPM (%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2011 875 67.4 43 133.3 12.0 13.4 10.9 0.7 7.9 5.0 1.0 7.7

FY2012 1,100 25.7 52 19.4 14.4 12.5 9.1 0.6 6.9 4.5 0.8 6.6

FY2013E 1,442 31.1 105 103.1 29.2 19.0 4.5 0.5 12.2 13.0 0.7 3.5

FY2014E 1,494 3.6 114 8.6 31.7 19.1 4.1 0.5 11.9 12.4 0.6 3.3

Bhavesh Chauhan
Tel: 022- 39357600 Ext: 6821 E-mail: Bhaveshu.chauhan@angelbroking.com

Vinay Rachh
Tel: 022- 39357600 Ext: 6841 Vinay.rachh@angelbroking.com

Please refer to important disclosures at the end of this report

Sarda Energy | 3QFY2013 Result Update

Exhibit 1: 3QFY2013 Performance (Standalone)

(` cr) Net sales Raw material % of net sales Staff cost % of net sales Other expenditure % of net sales Total expenditure % of net sales Operating profit OPM (%) EBIDTA EBITDA margins (%) Interest Depreciation Other income Exceptional items Profit before tax % of net sales Tax % of PBT Profit after tax Adj.Profit after tax % of net sales
Source: Company, Angel Research

3QFY13 370 220 59.5 12 3.3 69 18.5 301 81.3 69 18.7 71 19.3 18 16 4 40 10.9 13 33.3 27 27 7.3

3QFY12 285 163 57.1 10 3.5 50 17.4 222 78.0 63 22.0 65 22.7 15 17 9 41 14.5 13 32.4 28 28 9.8

yoy % 29.9 35.4 20.7 38.4 35.4 10.2 10.7 23.4 (5.1) (59.4) (1.9) 1.0 (3.3) (3.3)

2QFY13 351 215 61.2 12 3.4 54 15.4 281 80.0 70 20.0 72 20.6 18 16 3 41 11.8 14 33.5 28 28 7.9

qoq % 5.4 2.5 2.8 26.6 7.2 (1.4) (0.9) 2.0 3.6 16.7 (2.6) (3.1) (2.3) (2.3)

9MFY2013 1,058 635 60.1 36 3.4 194 18.4 865 81.8 193 18.2 201 19.0 55 48 13 111 10.5 37 32.9 75 75 7.1

9MFY2012 790 496 62.8 29 3.7 124 15.7 656 83.0 135 17.1 136 17.2 26 46 15 43 5.4 14 32.6 29 29 3.7

yoy % 33.9 28.1 23.2 56.6 31.9 42.7 48.1 113.1 4.3 (11.2) 159.0 161.9 157.5 157.5

Exhibit 2: Quarterly production volume

(tonnes) Sponge iron Billets+ ingots Ferro alloys Power (mn units) Pellet Wire rods 3QFY11 51,466 26,624 16,195 112 45,848 12,899 4QFY11 57,995 28,133 14,580 148 54,464 23,355 1QFY12 61,914 23,425 13,876 140 56,144 9,979 2QFY12 56,886 24,999 15,878 132 71,497 21,186 3QFY12 60,238 16,433 17,798 155 126,899 22,254 4QFY12 66,382 29,812 16,819 149 93,062 32,297 1QFY13 68,811 30,093 16,035 145 34,081 29,148 2QFY13 72,667 24,243 17,068 143 126,973 27,587 3QFY13 66,861 29,184 12,311 128 146,663 29,746

Source: Company, Angel Research

January 28, 2013

Sarda Energy | 3QFY2013 Result Update

Exhibit 3: Quarterly sales volume

(tonnes) Sponge Iron Billets+ingots Ferro alloys Power (mn units) Wire rods Pellet Source: Company, Angel Research 3QFY11 23,937 11,644 16,441 7 13,881 0 4QFY11 30,579 5,611 16,016 42 19,037 3,705 1QFY12 39,356 9,716 14,622 40 12,237 15,671 2QFY12 36,552 9,798 16,438 20 15,056 1,381 3QFY12 35,780 2,066 16,197 42 21,907 20,131 4QFY12 36,996 3,701 17,837 25 25,323 8,759 1QFY13 2QFY13 3QFY13 44,331 6,619 17,928 28 23,717 3,131 44,331 4,256 17,248 21 19,168 55,379 38,082 6,522 14,014 22 25,261 79,144

Exhibit 4: Quarterly segment-wise sales performance

(` cr) Steel Ferro Alloys Others Less: Intersegment Net sales Source: Company, Angel Research 3QFY11 109 105 15 (15) 214 4QFY11 139 92 15 (2) 245 1QFY12 162 79 14 (1) 254 2QFY12 157 89 7 (1) 251 3QFY12 180 90 16 1 287 4QFY12 200 93 10 2 305 1QFY13 208 128 10 (5) 341 2QFY13 3QFY13 236 110 7 (1) 353 275 90 8 (1) 372

Exhibit 5: Quarterly segment-wise EBIT performance

(` cr) Steel Ferro Alloys EBIT 3QFY11 11 9 19 4QFY11 18 6 24 1QFY12 22 7 29 2QFY12 24 10 34 3QFY12 29 5 34 4QFY12 53 9 61 1QFY13 27 33 60 2QFY13 36 19 54 3QFY13 55 11 66

Source: Company, Angel Research

Revenue growth driven by higher steel sales

During 3QFY2013, SEMLs net sales grew by 29.9% yoy to `370cr driven by healthy performance from steel business (+52.7% yoy to `275cr). Ferro alloy sales volumes were down by 13.5% yoy to 14,014 tonne but the realizations improved by 19.0% yoy to `64,521/tonne. However, billets sales volume increased by 215.7% yoy to 6,522 tonne; pellet sales also increased significantly by 293.1% yoy to 79,144 tonne.

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Sarda Energy | 3QFY2013 Result Update

Exhibit 6: Quarterly net sales trend

400 350 300 250 40.5 245 254 17.2 298 251 25.5 285 33.4 21.8 337 351 39.6 32.7 29.9 370 45 40 35 30 20 15 10 5 0 25

(` cr)

150 100 50 0

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

Net sales (LHS)

Source: Company, Angel Research

yoy change (RHS)

Healthy operating performance in 3QFY2013

Despite a 29.9% yoy growth in top-line, the EBITDA grew by only 10.7% yoy due to lower realizations from the Steel segment. The EBITDA margin fell by 334bp yoy to 19.3%. The companys interest costs increased by 23.4% yoy to `18cr and the other income was lower by 59.4% yoy to `4cr which led to the net profit falling by 3.3% yoy to `27cr.

Exhibit 7: Quarterly EBITDA trend

80 70 60 50 65 73 58 72 71 30 25 20 31

(` cr)

30 20 10 0

10 5 0

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

EBITDA (LHS)

EBITDA margin (RHS)

Source: Company, Angel Research

January 28, 2013

3QFY13

(%)

40

37

35

3QFY13

15

(%)

200

Sarda Energy | 3QFY2013 Result Update

Exhibit 8: Adjusted net profit trend

40 35 30 28 23 14 9 20 28 27 25 20 15 10 5 0 37 14 12 10

(` cr)

6 4 2 0

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

Adj. Net profit(LHS)

Source: Company, Angel Research

Adj. Net margin (RHS)

Investment rationale
Restart of captive iron ore mine to lower costs: In the recent past, SEML has not been able to procure iron ore from its captive mine at Rajnandgaon on account of Naxal activity in the region. Although there is lack of clarity on the timeline for the re-commencement of this mine, we believe commencement of production from the mine should result in significant savings. Power capacity to increase: SEML plans to set up a greenfield power plant of 350MW at Raigarh in two phases. The company has already acquired over 250 acres for the same. Although the public hearing is already complete, the consent to establish it is pending yet. We have not factored the financial estimates from this power plant in our forecast model as there are a few regulatory hurdles to be cleared.

January 28, 2013

3QFY13

(%)

Sarda Energy | 3QFY2013 Result Update

Outlook and valuation

We believe that SEML is well poised to benefit from a) backward integration into coal and iron ore, b) commercial production of pellets and c) increased power and ferro alloy production. Moreover, firm sponge iron and pellet prices should lead to higher capacity utilization in FY2014, thereby leading to higher sales volumes. We recommend Accumulate on the stock with a target price of `148, valuing the stock at 3.5x FY2014E EV/EBITDA.

Exhibit 9: EV/EBITDA
5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0

(` cr)

Source: Bloomberg, Angel Research

Exhibit 10: P/E band

1,000 900 800 700 600
(` )

500 400 300 200 100 0

Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-07 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Source: Bloomberg, Angel Research

January 28, 2013

Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13
4.0x 8.0x 12.0x 16.0x 20.0x

3x

8x

13x

18x

Sarda Energy | 3QFY2013 Result Update

Exhibit 11: P/BV band

700 600 500
(`)

400 300 200 100 0

Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Jan-13 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12

0.5x
Source: Bloomberg, Angel Research

1.0x

1.5x

2.0x

Exhibit 12: Recommendation summary

Companies Godawari Prakash CMP Target price (`) 112 47 131 (`) 143 62 Buy Buy Reco. Mcap Upside (` cr) 349 637 468 28 32 13 P/E (x) 4.0 3.5 4.5 3.3 2.9 4.1 P/BV (x) 0.4 0.3 0.5 0.3 0.3 0.5 EV/EBITDA (x) 4.6 3.7 3.5 3.5 2.8 3.3 RoE (%) 10.9 10.2 12.2 11.4 11.1 11.9 RoCE (%) 13.4 8.7 13.0 13.7 10.1 12.4 (%) FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E

SEML

148 Accum.

Source: Company, Angel Research

Company Background
SEML is a Raipur-based steel and ferro alloy manufacturer. The products manufactured by the company include sponge iron, steel billets, steel ingots, wire rods, ferro alloys, iron ore pellets etc. The company has a captive thermal coal mine for manufacturing sponge iron. It also has several (non-operational currently) iron ore and coal mines which are under various stages of clearances.

January 28, 2013

Sarda Energy | 3QFY2013 Result Update

Profit & Loss Statement (Standalone)

Y/E March (` cr) Gross sales Less: Excise duty Net Sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT % chg Extraordinary Inc/(Expense) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) Extraordinary Expense/(Inc.) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) FY2009 FY2010 FY2011 1,032 (83) 949 949 51.8 726 618 91 17 223 32.4 23.5 28 195 33.4 20.6 5 4 1.9 194 39.6 (45) 149 26 17.4 123 123 168 38.7 17.7 49.4 49.0 556 (33) 523 523 (44.9) 446 369 58 19 77 (65.6) 14.7 39 38 (80.6) 7.3 13 7 22.4 32 (83.3) 45 77 14 18.1 63 63 18 (89.0) 3.5 5.4 5.4 946 (71) 875 875 67.4 758 579 148 31 117 52.7 13.4 58 60 56.9 6.8 15 20 31.0 64 97.6 6.5 71 21 29.8 50 50 43 133.3 4.9 12.0 12.0 FY2012 FY2013E FY2014E 1,197 (96) 1,100 1,100 25.7 963 684 238 41 137 17.4 12.5 73 64 7.8 5.8 22 22 34.0 64 0.3 64 13 20.0 52 52 52 19.4 4.7 14.4 14.4 1,559 (117) 1,442 1,442 31.1 1,168 842 275 50 274 99.2 19.0 65 209 225.5 14.5 72 20 12.6 156 142.5 156 52 33.0 105 105 105 103.1 7.3 29.2 29.2 1,615 (121) 1,494 1,494 3.6 1,208 872 285 51 285 4.2 19.1 69 217 3.8 14.5 70 23 13.3 1.0 170 8.6 170 56 33.0 114 114 114 8.6 7.6 31.7 31.7

January 28, 2013

Sarda Energy | 3QFY2013 Result Update

Balance Sheet (Standalone)

Y/E March (` cr.) SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Share Warrants Minority Interest Total Loans Other Long Term liabilities Long Term Provisions Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Long term loans and adv. Other non-current assets Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 498 147 352 355 73 352 35 199 118 57 295 1,075 612 185 427 373 66 282 25 91 166 96 186 1,053 926 240 686 126 152 111 1 406 2 99 305 161 244 1,320 1,030 299 732 111 213 188 1 456 1 159 296 179 277 1,523 1,170 364 807 86 213 188 1 553 14 159 354 164 389 1,685 1,310 432 878 76 213 188 1 620 68 159 367 166 454 1,811 34 479 513 533 28 1,075 34 531 565 460 29 1,053 36 658 694 582 1 8 36 1,320 36 772 808 655 2 8 50 1,523 36 864 900 725 2 8 50 1,685 36 965 1,001 750 2 8 50 1,811 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

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Sarda Energy | 3QFY2013 Result Update

Cash Flow statement (Standalone)

Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec. in Fixed Assets (Inc.)/Dec. in Investments (Inc.)/Dec. in loans and advances Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2009 FY2010 FY2011 149 28 (1) 47 22 201 (234) (52) (73) (359) 94 12 (15) 97 (61) 96 35 77 39 33 (7.7) 16 126 (133) 6 72 (55) (36) 12 14 (61) 9 15 25 71 58 (183) 5.8 10 (58) (80) (76) (35) (191) 92 (9) 12 29 227 (23) 25 2 FY2012 FY2013E FY2014E 104 63 62 13.6 16 227 (95) (56.2) 74.1 (77) (81) 12 57 (151) (1) 2 1 156 65 (99) 52 70 (115) (115) 70 13 57 13 1 14 170 69 (10) 56 172 (130) (130) 25 13 12 54 14 68

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Sarda Energy | 3QFY2013 Result Update

Key Ratios (Standalone)

Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total Assets Per Share Data (Rs) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio (%) Asset turnover (x) RoIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating RoE Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) 0.8 1.9 42.5 0.7 4.8 3.0 0.6 3.7 3.9 0.5 3.2 3.0 0.6 1.8 2.9 0.5 1.6 3.1 2.3 38 7 3 47 0.9 106 10 40 80 1.1 108 18 32 74 1.1 75 14 32 70 1.3 75 14 32 59 1.2 75 14 32 70 21.4 24.5 26.9 3.6 3.9 11.7 5.0 5.6 7.9 4.5 5.2 6.9 13.0 15.1 12.2 12.4 14.5 11.9 20.6 82.6 1.2 20.2 0.9 0.8 36.3 7.3 81.9 0.5 3.2 2.1 0.7 4.0 6.8 70.2 0.8 3.9 2.0 0.6 5.1 5.8 80.0 0.9 4.1 2.8 0.5 4.9 14.5 67.0 1.0 10.1 7.0 0.6 11.8 14.5 67.0 1.0 9.7 6.4 0.5 11.3 49.4 49.0 57.6 3.0 150.8 5.4 5.4 16.8 3.0 165.8 12.0 12.0 28.1 3.0 193.5 14.4 14.4 34.8 3.0 225.4 29.2 29.2 47.3 3.0 251.1 31.7 31.7 50.8 3.0 279.3 2.7 2.3 0.9 2.3 0.9 3.9 0.8 24.0 7.8 0.8 2.3 1.6 10.6 0.8 10.9 4.6 0.7 2.3 1.0 7.7 0.7 9.1 3.8 0.6 2.3 0.8 6.6 0.6 4.5 2.8 0.5 2.3 0.7 3.5 0.6 4.1 2.6 0.5 2.3 0.6 3.3 0.5 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

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Sarda Energy | 3QFY2013 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Sarda Energy No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

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