Strong top-line growth: For 4QFY2011, BSL reported net sales growth of 22.2% yoy and 1.2% qoq to `1,966cr on account of a) higher sales volumes, which grew by 8.3% yoy but declined by 9.0% qoq to 425kt and b) an increase in blended realisations by 10.3% yoy and 7.1% qoq to `48,284/tonne. Flat product sales volume increased by 14.5% yoy but declined by 8.8% qoq to 335kt, while long product sales volume fell by 10.8% yoy and 9.8% qoq to 90kt. In 4QFY2011, the 1.9mn-tonne hot strip mill produced 56kt of hot rolled (HR) coils.
Strong profitability growth: During 4QFY2011, BSL’s EBITDA increased by 43.7% yoy and 12.1% qoq to `602cr. This was mainly due to captive consumption of HR coils, which led to raw-material cost (as a percentage of net sales) declining to 49.8% from 60.8% in 4QFY2010. Hence, EBITDA/tonne increased to US$315 in 4QFY2011, compared to US$237 in 4QFY2010 and US$256 in 3QFY2011. Interest expenses increased by 140.8% yoy and 30.3% qoq to `133cr. Thus, net profit grew by 19.5% yoy and 2.7% qoq to `288cr.
Outlook and valuation: At the CMP, the stock is trading at 9.4x FY2012E and 8.2x FY2013E EV/EBITDA, a significant premium over its peers. Although we expect sales volume growth of 24.8% over FY2011–15E, we believe it is too early to play the volume growth story of BSL as strong volume growth is expected only post FY2013. Further, although BSL uses a combination of BF-EAF technology to produce steel, rising prices of iron ore and coal will affect its margins. Moreover, BSL’s debt-equity ratio remains high. Hence, we downgrade the stock to Neutral from Accumulate.
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