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Bhushan Steel Equity Research

HomeCompanyBhushan Steel Equity Research

 

Date of Research – 13 January 2016

Price – Rs. 40.80

About the Company

Incorporated in 1987, Bhushan Steel Limited (“Bhushan Steel” or the “Company“) is India’s 3rd largest secondary steel producer with an existing steel production capacity of 2 Million Tons Per Annum (“MTPA”). BSL’s products include, galvanized coil and sheet, high tensile steel strapping, corrugated sheets, galume sheets and coils, hardened & tempered steel strips, billets, sponge iron and precision tubes.

The Company has three manufacturing units one each in Sahibabad (Uttar Pradesh), Khapoli (Maharashtra) and at Meramandali in Orissa. The Company’s sales network is spread across many countries including.

Production Capacity

Sahibabad Plant: The Plant was commissioned in 1987 and has production capacity of 4, 75,000 Metric Tonne (MT) per annum.

Khopoli Plant: The Plant was commissioned in 2004 and has production capacity of 4, 25,000 Metric Tonne (MT) per annum.

Meramandali Plant: The Company is currently implementing a project to set up an integrated steel plant of 2.3 MTPA capacity.

Bhushan Steel serves diversified industries including automobiles, domestic appliances and general engineering industries. The Company’s customers includes Maruti Udyog, Hindustan Motors, Hyundai Motors, Mahindra & Mahindra, Ashok Leyland, LG Electronics, Whirlpool, Videocon, Samsung Electronics, Godrej, Voltas, Lloyd, Electrolux Group, Crompton Greaves, BHEL, L&T and many others.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 10,744.27 9,675.83 10,645.77 11,802.64   
Expenses 7,433.89 6,986.02 8,473.40 9,716.72   
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 3,310.38 2,689.81 2,172.37 2,085.92   
Depreciation 830.86 963.96 938.40 1,099.75   
Finance Costs 1,287.44 1,663.30 2,494.03 4,582.30   
Other income 17.37 29.12 11.84 22.66   
PBT 1,209.45 91.67 (1,258.22) (3,573.47)   
Tax 305.11 33.37 (1.12) (734.48)   
PAT (before Minority Interest and share of Associates) 904.34 58.30 (1,257.10) (2,838.99)   
Profit/ (loss) attributable to Minority Interest (2.36) (0.31) (0.29) 0.05   
Share of profit / (loss) of Associates (0.24) (0.53) (0.04) 72.35   
Consolidated Profit / (Loss) for the year 906.94 59.14 (1,256.77) (2,911.39)   

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 30.81 27.80 20.41 17.67   
Net Profit Margin Ratio 8.42 0.60 (11.81) (24.05)   

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 128.41 145.48 149.02 175.51 226.80
Preference shares issued by subsidiary 383.01 101.59 33.31
Reserves & Surplus 7,444.31 9,080.86 9,012.56 7,710.62 4,431.36
Net worth (shareholders funds) 7,955.74 9,302.32 9,194.89 7,886.14 4,658.16
Minority Interest 89.16 32.97 33.01
Long term borrowings 15,528.78 26,897.08 25,566.10 30,927.72 32,326.02
Current liabilities 7,605.59 7,264.55 12,806.98 12,091.10 15,820.77
Other long term liabilities and provisions 1,506.10 75.94 2,166.93 639.82 640.57
Deferred Tax Liabilities 1,038.82 1,375.19 1,374.07 639.59
Total Liabilities 33,724.18 43,539.88 51,110.10 52,951.82 54,118.13

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 24,951.18 30,996.95 38,466.27 39,351.10 39,636.67
Noncurrent Investments 348.08 382.79 382.97 373.01 300.67
Current assets 5,553.38 8,066.77 10,457.39 11,668.98 12,431.84
Long term advances and other noncurrent assets 2,871.54 4,093.37 1,803.47 1,558.72 1,748.95
Total assets 33,724.18 43,539.88 51,110.10 52,951.82 54,118.13

Efficiency Analysis

  (%)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 12.76 13.17 7.74 5.59 5.64
ROE / RONW 12.76 9.93 0.64 (15.94) (60.95)

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 10,744.27 9,675.83 10,645.77 11,802.64   
Growth (%) 7.86 % (9.94 %) 10.02 % 10.87 %   
PAT (Rs. Cr.) 906.94 58.30 (1,257.10) (2,838.99)   
Growth (%) (10.63 %) (93.55 %) (2,256.26 %) –   
Earnings Per Share – Basic (Rs. ) 41.52 2.10 (55.97) (129.30)   
Earning Per Share – Diluted (Rs. ) 41.52 2.10 (55.97) (129.30)   
Price to Earnings 11.03 199.36 –   

Dividend History

The Company has maintained an average dividend yield of 0.15 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Bhushan Steel’s average current ratio over the last 5 financial years has been 0.88 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Bhushan Steel’s average long term debt to equity ratio over the last 5 financial years has been 3.68 which indicate that the Company is operating with a high level of debt.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Bhushan Steel’s average interest coverage ratio over the last 5 financial years has been 1.68 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Bhushan Steel reported a promoter holding of 58.60 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 4.79 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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