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MANOJ JHAVERI SHARE & STOCK

BROKING PVT. LTD.


11TH FLOOR, P.J.TOWER, DALAL STREET, MUMBAI-400 001
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MSP Steel and Power Ltd


CMP (Rs) – 02/09/10 50
Target Price (Rs) 120
BSE Code 532650
NSE Code MSPL
Market cap (Rs Cr) 230
Promoter holding (%) 72
Industry Metals-Steel

Structurally strong………….
MSP Steel and Power (MSPSPL) has lined up an aggressive capex of Rs 8 Bn to increase

capacities of pellets, sponge iron and power along with coal washery and railway siding .

The expanded capacities would fuel strong revenue growth on the back of increased

domestic demand and improvement in the product prices. MSPSPL’s backward

integration would lead to higher level of operational efficiency and eventually lead to

improvement in operating margin.

We expect sales and net profit to grow at a CAGR of 148% and 161% respectively over

FY09-FY12E. Considering the high growth in revenues and earnings going forward,

MSPSPL appears to be trading at very attractive valuations of 2.3x its FY12E earnings of

Rs 18.8. We expect the stock to get re-rated owing to robust growth in earnings in its core

business and higher contribution from the power segment which would diversify its

revenue stream and mitigate volatility of earnings going forward. We have valued the

stock at 6x FY12E earnings with a target price of Rs 113.

.
Company Profile
MSP is a medium sized integrated steel manufacturer in Eastern India. In 1968, Mr. Puranmal
Agrawal and Mr. Suresh Kumar Agrawal jointly promoted Adhunik Rollers Pvt. Ltd. In 1993 it was
renamed MSP Steel & Power Limited (MSP). The company produces sponge iron and long
products. In the longs segment, it offers a wide range of products like billets, TMT, structurals
(angles, channel, bloom and beam). It also has a captive power generation plant to support its
captive requirements. Its manufacturing facilities are located at Jamgaon, Raigarh in
Chhattisgarh.

Due to improved demand scenario the company has been able to improve its capacity utilization
over the last two years.
Installed Capacity
capacity Production Utilization
FY09 FY10 FY09 FY10
Pellet 300000 16486 144643 N.A. 48%
Sponge Iron
(MT) 192000 124896 155851 65% 81%
Mild Steel
Billets 144100 95078 107579 66% 75%
Construction
Bars 80000 56506 68385 71% 85%
Structure
mill 128000 1099 0% 0%
Power 190080000 137088268 161783321 72% 85%

In FY10, Majority of MSP’s revenues have been generated from TMT bars, billets and sponge iron.

FY10

Power
Ingot Billet 0.3%
29.8%
TMT bar
48.0%

Sponge iron
21.9%

Source : Company, MJSSB Research

The group has multi industry presence with seven operational companies, which are into the
production of steel intermediaries, steel products, ferro alloys, power, industrial and medical
oxygen, and cement. Each company caters to separate set of geography and has its own
individual clients with no virtual overlapping. MSPSPL is the leading operating entity of the MSP
Group. It accounted for 35% of the group’s revenues of Rs 12 bn in FY10.
Investment Rationale
 Aggressive capacity expansion to drive revenue growth
 Backward integration and scaling up of power capacity to boost operating
margins.
 MSPSL is trading at very attractive valuations of 2.6x its FY12E earnings of

Rs 20.14. We expect the stock to get re-rated and value the stock at 6x

FY12E earnings with a target price of Rs 120.

Capacity expansion to fuel revenue growth


MSP has embarked on a aggressive expansion spree and plans to spend Rs 814 crore over
FY10-12. The capex is expected to be funded through a mix of internal accruals and preference
shares issued to promoters, and debt funds in the ratio of 1:2. The company has already spent
Rs 280 crore till March 2010, which includes debt to the tune of Rs 190 crore. MSP is currently
focusing on strengthening its backward integration by increasing the production capacity for
sponge iron, pellets and power. MSP is also increasing the coal washing capacity to support
increased usage of coal and is modernizing & extending its railway siding.

Expansion details
proposed Post-
Existing expansion expansion Capex Completion
Division capacity capacity capacity (Rs Cr) date

Phase I
Sponge Iron (MT) 192000 115500 307500 233.3 Oct- 10
Coal washery 345600 383525 729125 April- 11
CPP/Thermal power plant
(MW) 24 18 Oct-10

Phase II
Sponge Iron (MT) 307500 115500 423000 180 Oct-11
Railway siding (KM) 2.4 2 4.4 Mar-12

Phase III
CPP/Thermal power plant
(MW) 42 34 76 175.2 July-11

Phase IV
Pellet (MT) 300000 600000 900000 226 Oct-11

Total capex 814.5

Sales to grow at a rapid pace


Source : Company, MJSSB Research
Integrated operations to improve margins and profitability

MSP, a mid-sized integrated player, is present across the value chain of steel production. This
helps it withstand pricing pressures effectively and benefit from the lower cost of production
compared to non-integrated producers. Small integrated players earned EBITDA margins of 14-
16% in FY09 compared to non-integrated players’ 8-9%. The operating cost for integrated
players like MSPSPL is lower by 2500-3000 per tonne compared to the non integrated
players thereby boosting its EBITDA margin. We expect the company report a CAGR of
161% over FY09-FY12E to Rs 108.9 crore on the back of improved EBITDA margins.

Strong growth in EBITDA

Source : Company, MJSSB Research


EBITDA margin to improve

Source : Company, MJSSB Research

Net Profit growth to accelerate


EPS to increase multifold over FY10-FY12E

Source : Company, MJSSB Research

Merchant power - the additional sweetener

MSP has an installed power generation capacity of 24 MW as against the requirement of 19-20
MW for its captive purposes. With the ongoing capacity expansion, the installed capacity is
expected to be 76 MW by FY12, of which 31-33 MW will be required to support the expanded
manufacturing capacity. MSP plans to merchant the additional power units to support its EBITDA
margins. We expect Power division to contribute substantially from FY13 onwards providing
support to the revenue and EBITDA margin of the company.

Financials (Rs crore)


FY12E FY11E FY10 FY09 FY08
Net Sales 887.37 664.59 388.74 404.75 360.72
% Growth 33 71 -4 12
Other Income 5.00 5.00 7.11 9.11 14.77
Total Income 892.37 669.59 395.85 413.86 375.49
Total Expenditure 629.27 505.71 324.65 337.86 293.34
PBIDT 263.10 163.88 71.20 76.00 81.95
% Growth 60 130 -6 -7
PBIDTM (%) 29.65% 24.66% 18.32% 18.78% 22.72%
Interest 62.58 32.54 20.40 19.42 14.15
PBDT 200.52 131.34 50.80 56.58 67.80
Depreciation 34.84 17.60 12.57 7.41 7.34
PBT 165.68 113.74 38.23 49.17 60.46
Tax 48.67 33.80 6.17 9.28 13.78
PAT 117.01 79.94 32.05 38.89 46.66
% Growth 46 149 -17 -17
Equity (no of shares) 5.80 5.80 5.80 5.80 5.80
EPS (Rs.) 20.14 13.76 5.52 6.87 8.03
Target PE 6
Target Price 113

Source : Company, MJSSB Research


Valuation
We expect sales and net profit to grow at a CAGR of 148% and 161% respectively over

FY09-FY12E. Considering the high growth in revenues and earnings going forward,

MSPSPL appears to be trading at very attractive valuations of 2.6x its FY12E earnings of

Rs 20.14. We expect the stock to get re-rated owing to robust growth in earnings in its

core business and higher contribution from the power segment which would diversify its

revenue stream and mitigate volatility of earnings going forward. We have valued the

stock at 6x FY12E earnings with a target price of Rs 120.

MSPSPL-Price comparison with sensex

Disclaimer :- This report has been prepared only for Information purpose only and is not a solicitations , or an offer to
buy or sell any securities.

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