Q4FY2011 Update

Sector: Metals & Mining

RESEARCH
BSE Sensex : 18,336
BUY
MONNET ISPAT LTD. CMP Rs 510
TP Rs 612

Slight delay in growth projects - Not a major concern 13 May 2011

Monnet's Q4FY11 revenues at Rs4.5bn and EBITDA at Rs1.3bn Bikash Bhalotia +91-22-6618 6387
were flat YoY as improved steel performance was offset by bikash.bhalotia@pinc.co.in
lower power tariff (Rs3.1 in Q4FY11 vs. Rs4.3 in Q4FY10 & Rs3.4
in Q3FY11). OPM declined by 43bps to 29%. Net profit grew 6% Harleen Babber +91-22-6618 6389
YoY to Rs766mn on account of higher other income. harleen.babber@pinc.co.in
Segmental performance: Steel segment revenue grew 11.7% YoY
Dipti Vijaywargi +91-22-6618 6393
on account of higher blended realisations (up 21% YoY) despite a
11% YoY decline in volumes at 171kt. Power sales of 235mn units dipti.vijaywargi@pinc.co.in
were higher 6% YoY; however with 27% fall in tariff's to Rs3.1/kwh,
power segment revenues declined 21% to Rs872mn.
Iron ore cost drags steel margin: Despite increased DRI prices
(up 10% QoQ to Rs19.6/kg), steel margin declined by 200bps QoQ QUARTERLY SNAPSHOT (Rs mn)
on higher iron ore cost (Rs6,500/t in Q4 vs Rs4,600/t in Q3). Quarter Ended
Steel project delayed by a qtr: 1.4mn tpa integrated steel project Standalone Sep-10 Dec-10 Mar-11
is delayed by a qtr and now expected by Q4FY13. (pls ref pg3) Net Revenue 3,607 3,471 4,456
Monnet Power commissioning delayed too: Owing to a delay in YoY Gr. (%) 14.9 (6.7) 1.6
receiving environmental clearance, 1050MW power project of 87.5% Op. Profit 1,047 1,089 1,286
subsidiary Monnet Power is delayed by a qtr (ref pg 4 for details). OPM (%) 29.0 31.4 28.9
Focus on resource integration: Acquired Indonesian coal mine Adj. Net Profit 656 702 766
Result Review

for USD24mn. Received environmental clearance for Mandakini & YoY Gr. (%) 2.0 3.2 5.7
Utkal B2 coal blocks; forest clearance awaited. (pls ref pg4)
OUTLOOK
With 1.4mntpa expansion by FY13, Monnet is on the path of STOCK DATA
transforming from primarily sponge iron maker to an integrated steel
producer. We expect Monnet's steel EBITDA to grow at 60% CAGR Market Cap Rs34bn
over FY11-13E on volume growth (34% CAGR) and EBITDA/t Book Value per share Rs317
expansion from Rs4,600 in FY11 to Rs6,500 in FY13E. Foray in Shares O/S (F.V. Rs10) 67.2mn
merchant power in subsidiary Monnet Power (1,050MW project by Free Float 50.6%
FY14E, with access to captive coal) is additional growth trigger. Avg Trade Value (6 months) Rs37.8mn
VALUATIONS AND RECOMMENDATION 52 week High/Low Rs682/351
We have revised FY12E for MISP to factor in the delay in expansion Bloomberg Code MISP IN
project and higher steel and RM prices and introduce FY13 estimates Reuters Code MNET.BO
(pls ref pg5). Since FY12E financials do not reflect the benefits of
projects commissioned in FY12E, we revise our target EV/EBITDA
multiple to 6x (4.5x earlier) and value MISP standalone at Rs325.
We value 87.5% stake in Monnet Power Rs287/sh (based on stake PERFORMANCE (%)
sale to Blackstone), 23% disc to DCF-based fair value of Rs372. 1M 3M 12M
Maintain ‘BUY’ with a SOTP-based TP of Rs612. Absolute (1.8) (4.3) 26.4
KEY FINANCIALS Rs mn Relative 3.0 (8.5) 19.7

FY09 FY10 FY11 FY12E FY13E

Net Revenues 15,487 14,807 15,737 21,596 37,469 RELATIVE PERFORMANCE
YoY Gr.(%) 33.6 (4.4) 6.3 37.2 73.5
Op. Profit 3,747 4,640 4,655 5,654 8,622 Monnet Ispat Sensex Rebased
OPM (%) 24.2 31.3 29.6 26.2 23.0 700
Adj. Net Profit 2,127 2,879 2,851 3,134 4,404
YoY Gr. (%) 27.4 35.3 (1.0) 9.9 40.5 600

KEY RATIOS 500

Dil. EPS (Rs) 43.0 42.6 42.4 46.7 65.6
ROCE (%) 11.2 12.5 8.9 8.5 11.0 400
RoE (%) 17.9 19.3 15.0 13.7 16.6
300
PER (x) 7.9 5.2 5.3 4.8 3.4
May -10 Aug-10 Nov -10 Feb-11 May -11
P/ BV (x) 1.3 0.9 0.7 0.6 0.5
EV/ EBDITA (x) 6.0 4.7 3.2 4.5 4.2
1
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 RESEARCH

Monnet Ispat Ltd.

Exhibit 1 - Q4FY11 Quarterly Snapshot

Standalone (Rs mn) Q4FY11 Q4FY10 %YoY Q3FY11 %QoQ FY12E FY11 %YoY

Net Revenue 4,456 4,384 1.6 3,471 28.3 21,596 15,737 37.2

Operating Profit 1,286 1,284 0.2 1,089 18.0 5,654 4,655 21.5

OPM (%) 28.9 29.3 31.4 26.2 29.6

Other Income 65 12 451.3 85 (24.0) 269 225 20.0

EBITDA 1,350 1,295 4.2 1,174 15.0 5,923 4,879 21.4

Depreciation 180 178 1.2 189 (4.4) 1,022 735 39.1

Interest 181 175 3.3 54 236.9 984 498 97.7

PBT 989 942 5.0 932 6.2 3,917 3,647 7.4

Provision for tax 223 217 2.7 230 (2.9) 783 796 -1.6

Effective tax rate (%) 22.6 23.1 (2.2) 24.7 (8.5) 20.0 21.8 -8.4

Adjusted Net profit 766 725 5.7 702 9.1 3,134 2,851 9.9

NPM (%) 17.2 16.5 20.2 14.5 18.1

EPS for the period (Rs) 11.9 13.9 (14.2) 11.3 5.4 46.7 42.4 9.9
Source: Company, PINC Research

Exhibit 2 - Operating performance

Volumes Q4FY11 Q4FY10 %YoY Q3FY11 %QoQ FY12E FY11 %YoY

Production (tonnes)
Metallics 190,360 185,147 2.8 163,357 16.5 773,167 692,096 11.7
Steel 39,690 53,429 (25.7) 2,071 1,816.5 228,000 41,956 443.4
Ferro Alloys 2,596 - - 2,600 (0.2) 8,760 8,606 -
Coal 285,650 285,480 0.1 223,375 27.9 900,000 1,000,119 (10.0)
Power (mn units) 272 264 3.2 228 19.5 1,311 969 35.3
Sales (tonnes)
Metallics 155,196 164,291 (5.5) 148,242 4.7 533,128 630,061 (15.4)
Steel 16,756 28,479 (41.2) 626 2,576.7 227,512 41,561 447.4
Ferro Alloys 2,604 - - 1,796 45.0 5,340 7,438 -
Power (mn units) 235 222 5.7 210 11.8 1,015 865 17.4
Net revenue (Rs mn)
Metallics 3,044 2,583 17.9 2,643 15.2 9,787 10,721 (8.7)
Steel 525 734 (28.4) 8 6,905.3 6,885 1,197 475.1
Ferro Alloys 143 - 102 39.6 307 448
Power 732 949 (22.8) 713 2.7 4,567 3,376 35.3
Net Realisations (Rs/t)
Metallics 19,616 15,721 24.8 17,831 10.0 18,358 17,015 7.9
Steel 31,356 25,784 21.6 11,981 161.7 30,264 28,808 5.1
Ferro Alloys 54,724 - - 56,829 (3.7) 57,512 - -
Power (Rs/unit) 3.1 4.3 (27.0) 3.4 (8.1) 4.5 3.9 15.2

Source: Company, PINC Research

bikash.bhalotia@pinc.co.in 2
 RESEARCH
Monnet Ispat Ltd.

Exhibit 3 - Segmental Performance

Rs mn Q4FY11 Q4FY10 %YoY Q3FY11 %QoQ
Revenues
Power 872 1,101 (20.7) 770 13.2
Steel 3,704 3,317 11.7 2,756 34.4
Total 4,577 4,536 0.9 3,526 29.8
EBIT
Power 321 438 (26.7) 256 25.4
Steel 870 731 19.0 703 23.8
Total 1,195 1,162 2.9 954 25.3
EBIT Margins (%)
Power 36.8 39.8 33.2
Steel 23.5 22.0 25.5
Total 26.1 25.6 27.1
Source: Company, PINC Research
Note: The difference between total and sum of steel and power pertains to unallocatable items

Key concall takeaways

Capex update
z Increased the capex for 1.4mnt integrated steel plant to Rs32bn from Rs26bn due to
increase in pellet capacity to 2mn tpa. The company has already incurred Rs10bn out of
this and plans to incur Rs12bn in FY12 and remaining Rs10bn in FY13.
z The expansion have been delayed by a quarter. The revised timeline is as shown below:

Exhibit 4 - Monnet’s transformation from Metallics to Steel

By FY13
Metallics
DRI 1.02mnt
Pig Iron 0.6mnt
Q4FY13 Billet 1.9mnt
Steel
Coke 0.4mnt Structural 0.2mnt
Pellet 2mnt Bar mill 0.7mnt
Plate mill 0.7mnt
Others
Q1FY13 Ferro Alloys 58.4ktpa
Coke oven 0.4mnt
EAF-II 0.8mnt
Pellet 1.2mnt
Q4FY12 Plate mill 0.7mnt
Power 230MW
EAF-I 0.8mnt
Q3FY12 Bar mill 0.7mnt

Pig Iron 0.6mnt

Q1FY12 DRI 0.2mnt
Sinter
Power 80MW
Current
DRI 0.8mnt
Billet 0.3mnt
Structural 0.2mnt
Ferro Alloys 58.4ktpa
Power 150MW

Source: Company, PINC Research

Note: We have factored a further delay of one quarter in our estimates and expect last leg of expansion (coke oven & pellet plant)
to be commissioned in FY14

bikash.bhalotia@pinc.co.in 3
 RESEARCH
Monnet Ispat Ltd.

Monnet Power (87.5% subsidiary)

z Due to delay in obtaining environmental clearance for 1,050MW merchant power plant , the
company has guided for one qtr delay in project commissioning. Phase I (525MW) is now
expected in Jan-Feb’13 and phase II (525MW) in Mar-Apr’13.
z Out of the total capex of Rs51bn for the project, the company has already incurred Rs11.5bn.

Exhibit 5: Fund infusion in Monnet Power

Equity
Rs 3.0bn
Blackstone
Rs 1.0bn

Mezzanine debt
Rs 1.5bn

Debt
Rs 6.0bn

Source: Company, PINC Research

Status of captive mines

z The company has indicated their increased focus to securing access to captive raw materials
for their steelmaking as well as power projects. The status of various captive mines are as
shown below:

Exhibit 6: Status of captive mines

Mines status Reserves Environmental Forest
(mnt) clearance clearance Comment
Milupara, Chhattisgarh 86 Received Received Already operational with annual output of ~1.0mnt, meeting
coal requirement for DRI production
Utkal B2, Odisha 85 Received Awaiting; expected in Jul-Aug’11 Total land requirement: 298acres; Acquired: 160-170acres
Mandakini*, Odisha 290.5 Received Awaiting; 800acres of forest land Seeking government approval to increase mine capacity
but not much concern as the land from 7.5mnt to 15mnt
does not come under reserved
forest area
PT Sarwa Sembada Karya 65 Not a concern Not a concern Reserve based on exploration of 1,500 hectares out of
Bumi’s, Indonesia total 25,000 hectares; Mining expected to start in
15-18months for merchant sale
Iron ore mine -
Rameshwaram Steel 30 Awaiting Awaiting To get complete control by Dec’12

Source: Company, PINC Research * MIEL's stake 33.33%

bikash.bhalotia@pinc.co.in 4
 RESEARCH
Monnet Ispat Ltd.

Exhibit 7 - PINC’s revised assumptions and estimates

FY11 FY12E FY13E
Reported Earlier Revised % Chg Introducing

Sales volume ('000 t) 679 917 766 (16.5) 1,223

Revenue (Rs mn) 15,737 25,133 21,596 (14.1) 37,469
- Steel (incl. ferro alloys) 12,361 20,602 17,030 (17.3) 36,138
- Power 3,376 4,531 4,567 0.8 1,331
EBITDA (Rs mn) 4,655 6,935 5,654 (18.5) 8,622
OPM (%) 29.6 27.6 26.2 23.0
Adj. PAT (Rs mn) 2,851 4,016 3,134 (22.0) 4,404
EPS (Rs) 42.4 64.5 46.7 (27.7) 65.6
Target Price (Rs) 697 612 (12.2)
Source: Company, PINC Research

Exhibit 8 - SOTP target price sensitivity (Rs)

FY12E Benchmark HRC price estimate (USD/tonne)
650 700 760 800 850
EV/EBITDA (x)
Steel: FY12

4.5 394 436 486 519 560

5.0 428 473 528 564 609
5.5 461 511 570 609 659
6.0 495 548 612 654 708
6.5 528 585 654 700 757
Source: PINC Research

Exhibit 9 - Monnet Power DCF value sensitivity (Rs)*

FY14E merchant power tariff (Rs/unit)
3.5 4.0 4.5 5.0 5.5
Discount rate (%)
Monnet Power:

13.0% 399 435 470 506 541

14.0% 369 402 434 467 500
15.0% 341 372 402 433 463
16.0% 316 345 373 401 430
17.0% 294 320 347 373 399
Source: PINC Research; Note: * However, we value Monnet Power at Rs287/sh based on stake sale to Blackstone

bikash.bhalotia@pinc.co.in 5
 RESEARCH
Monnet Ispat Ltd.
Year Ended March (Figures in Rs mn)
Standalone Financials
Income Statement FY09 FY10 FY11E FY12E FY13E Cash Flow Statement FY09 FY10 FY11E FY12E FY13E
Net sales 15,487 14,807 15,737 21,596 37,469 Pre-tax profit 2,677 3,483 3,647 3,917 5,505
Growth (%) 33.6 (4.4) 6.3 37.2 73.5 Depreciation 653 717 735 1,022 1,653
Operating Profit 3,747 4,640 4,655 5,654 8,622 Total Tax Paid (550) (604) (796) (470) (661)
Other income 289 176 225 269 269 Chg in working capital (2,800) 760 (4,325) 666 (1,566)
EBITDA 4,036 4,816 4,879 5,923 8,891 Other operating activities (90) 1,463 518 715 1,463
Growth (%) 34.4 19.3 1.3 21.4 50.1 Cash flow from oper (a) (110) 5,819 (221) 5,850 6,395
Depreciation 653 717 735 1,022 1,653 Capital Expenditure (1,979) (4,842) (8,170) (12,000) (10,000)
EBIT 3,383 4,099 4,144 4,901 7,238 Chg in investments (729) (2,713) (429) (5,500) (1,667)
Interest Paid 706 616 498 984 1,733 Other investing activities 320 6 225 269 269
PBT (before E/o) 2,677 3,483 3,647 3,917 5,505 Cash flow from inv.(b) (2,388) (7,549) (8,375) (17,231) (11,398)
Tax Provision 550 604 796 783 1,101 Free cash flow (a+b) (2,499) (1,730) (8,597) (11,381) (5,003)
Adjusted Net Profit 2,127 2,879 2,851 3,134 4,404 Equity raised/(repaid) 5 1,165 2,163 525 -
E/o income/ (loss) 33 (188) - - - Debt raised/(repaid) 2,271 1,698 11,805 8,000 7,500
Reported Net Profit 2,160 2,691 2,851 3,134 4,404 Dividend (incl. Tax) (281) (334) (430) (430) (430)
Growth (%) 30.0 24.6 5.9 9.9 40.5 ther financing activities (706) (616) (498) (984) (1,733)
Diluted EPS (Rs) 43.0 42.6 42.4 46.7 65.6 Cash flow from fin (c) 1,290 1,912 13,041 7,111 5,337
EPS Growth (%) 10.2 (1.0) (0.4) 9.9 40.5 Net chg in cash (a+b+c) (1,209) 182 4,444 (4,270) 335

Balance Sheet FY09 FY10 FY11E FY12E FY13E Key Ratios FY09 FY10 FY11E FY12E FY13E
Equity Share Capital 480 545 644 672 672 OPM (%) 24.2 31.3 29.6 26.2 23.0
Reserves & surplus 11,557 16,001 20,671 23,872 27,846 Net Margin (%) 13.8 19.3 18.1 14.5 11.8
Shareholders' funds 12,037 16,546 21,314 24,543 28,517 Yield (%) 1.4 1.1 1.1 1.1 1.1
Total Debt 13,252 14,950 26,755 34,755 42,255 Net debt/Equity (x) 0.8 0.7 0.9 1.3 1.3
Deferred tax liability 1,140 1,196 1,256 1,569 2,010 Working Capital Days 50 51 68 55 50.0
Capital Employed 26,428 32,692 49,325 60,868 72,782 RoCE (%) 11.2 12.5 8.9 8.5 11.0
Net fixed assets 14,365 18,495 25,931 36,909 45,256 RoE (%) 17.9 19.3 15.0 13.7 16.6
Investments 1,149 3,861 4,291 9,791 11,458 EV/Net Sales (x) 1.4 1.5 1.0 1.2 1.0
Net working capital 1,505 1,976 3,064 2,813 4,458 EV/EBITDA (x) 6.0 4.7 3.2 4.5 4.2
Cash & Cash Eq. 3,463 3,645 8,089 3,819 4,153 PER (x) 7.9 5.2 5.3 4.8 3.4
Net other current assets 5,945 4,714 7,951 7,536 7,457 PCE (x) 6.1 4.2 4.2 3.6 2.5
Total Assets 26,428 32,692 49,326 60,868 72,782 Price/BV (x) 1.3 0.9 0.7 0.6 0.5

Note: Valuation ratios adjusted for value of Monnet Power FY10 onwards, EV based multiples adjusted by valuing capital WIP at book value

P/E:1-yr rolling forward multiple EV/EBIDTA: 1-yr rolling forward multiple

20 P/E Av . P/E EV/EBITDA Av . EV/EBITDA

Av g + 1std Av g - 1std Av g + 1std Av g - 1std
12
15
9

10
6

5
3

0 0
Apr-06 Jul-07 Oct-08 Feb-10 May -11 Apr-06 Jul-07 Oct-08 Feb-10 May -11

bikash.bhalotia@pinc.co.in 6
 RESEARCH

T E A M
EQUITY DESK
Sadanand Raje Head - Institutional Sales sadanand.raje@pinc.co.in 91-22-6618 6366
Technical Analyst

RESEARCH
Vineet Hetamasaria, CFA Head of Research, Auto, Cement vineet.hetamasaria@pinc.co.in 91-22-6618 6388
Nikhil Deshpande Auto, Auto Ancillary, Cement nikhil.deshpande@pinc.co.in 91-22-6618 6339
Tasmai Merchant Auto, Auto Ancillary, Cement tasmai.merchant@pinc.co.in 91-22-6618 6377
Vinod Nair Construction, Power, Capital Goods vinod.nair@pinc.co.in 91-22-6618 6379
Ankit Babel Capital Goods ankit.b@pinc.co.in 91-22-6618 6551
Hitul Gutka Power hitul.gutka@pinc.co.in 91-22-6618 6410
Subramaniam Yadav Construction subramaniam.yadav@pinc.co.in 91-22-6618 6371
Madhura Joshi Power madhura.joshi@pinc.co.in 91-22-6618 6395
Satish Mishra Fertiliser, Natural Gas, Engineering satish.mishra@pinc.co.in 91-22-6618 6488
Urvashi Biyani Fertiliser, Natural Gas, Engineering urvashi.biyani@pinc.co.in 91-22-6618 6334
Naveen Trivedi FMCG naveent@pinc.co.in 91-22-6618 6384
Rohit Kumar Anand IT Services rohit.anand@pinc.co.in 91-22-6618 6372
Ronak Bakshi IT Services ronak.bakshi@pinc.co.in 91-22-6618 6411
Namrata Sharma Media namrata.sharma@pinc.co.in 91-22-6618 6412
Sakshee Chhabra Media sakshee.chhabra@pinc.co.in 91-22-6618 6633
Bikash Bhalotia Metals, Mining bikash.bhalotia@pinc.co.in 91-22-6618 6387
Harleen Babber Metals, Mining harleen.babber@pinc.co.in 91-22-6618 6389
Dipti Vijaywargi Metals, Mining dipti.vijaywargi @pinc.co.in 91-22-6618 6393
Sushant Dalmia, CFA Pharma sushant.dalmia@pinc.co.in 91-22-6618 6462
Suman Memani Real Estate, Mid caps suman.memani@pinc.co.in 91-22-6618 6479
Abhishek Kumar Real Estate, Mid caps abhishek.kumar@pinc.co.in 91-22-6618 6398
C Krishnamurthy Technical Analyst krishnamurthy.c@pinc.co.in 91-22-6618 6747

SALES
Rajeev Gupta Equities rajeev.gupta@pinc.co.in 91-22-6618 6486
Ankur Varman Equities ankur.varman@pinc.co.in 91-22-6618 6380
Himanshu Varia Equities himanshu.varia@pinc.co.in 91-22-6618 6342
Shailesh Kadam Derivatives shaileshk@pinc.co.in 91-22-6618 6349
Ganesh Gokhale Derivatives ganeshg@pinc.co.in 91-22-6618 6347
DEALING
Mehul Desai Head - Sales Trading mehul.desai@pinc.co.in 91-22-6618 6303
Naresh Panjnani Co-Head - Sales Trading naresh.panjnani@pinc.co.in 91-22-6618 6333
Amar Margaje amar.margaje@pinc.co.in 91-22-6618 6327
Ashok Savla ashok.savla@pinc.co.in 91-22-6618 6321
Sajjid Lala sajjid.lala@pinc.co.in 91-22-6618 6337
Raju Bhavsar rajub@pinc.co.in 91-22-6618 6322
Kinjal Mehta kinjal.mehta@pinc.co.in 91-22-6618 6333
Chandani Bhatia chandani.bhatia@pinc.co.in 91-22-6618 6324
Hasmukh D. Prajapati hasmukhp@pinc.co.in 91-22-6618 6325
Kamlesh Purohit kamlesh.purohit@pinc.co.in 91-22-6618 6357
SINGAPORE DESK
Amul Shah amul.shah@sg.pinc.co.in 65-6327 0626
DIRECTORS
Gaurang Gandhi gaurangg@pinc.co.in 91-22-6618 6400
Hemang Gandhi hemangg@pinc.co.in 91-22-6618 6400
Ketan Gandhi ketang@pinc.co.in 91-22-6618 6400
COMPLIANCE
Rakesh Bhatia Head Compliance rakeshb@pinc.co.in 91-22-6618 6400
 Infinity.com
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