2QFY2012 Result Update | Steel

November 8, 2011

Monnet Ispat
Performance highlights

BUY
CMP Target Price
% chg (yoy)
27.1 14.1 (298)bp 17.3

`443 `528
12 Months

Particulars (` cr) Net sales EBITDA EBITDA margin (%) Net profit

2QFY12
459 119 26.1 77

2QFY11
361 105 29.0 66

1QFY12
427 116 28.9 73

% chg (qoq)
7.3 2.8 (280)bp 5.2

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

Steel 2,848 0.3 682/430 25539 10 17,570 5,289 MNET.BO MISP@IN

Source: Company, Angel Research

Robust top-line performance: For 2QFY2012, Monnet Ispat (MIL) reported net sales growth of 27.1% yoy to `459cr. Growth was mainly driven by the 30.8% increase in sponge iron realization to `21,002/tonne and the 43.7% yoy increase in structural steel realization to `32,176/tonne. Net realization on power sales dipped by 32.1% yoy to `2.9/unit during the quarter. EBITDA grew by 14.1% yoy: Raw-material cost as a percentage of sales increased to 59.8% in 2QFY2012 compared to 56.1% in 2QFY2011. Hence, EBITDA increased by only 14.1% yoy to `119cr, while EBITDA margin contracted by 298bp yoy to 26.1%. Net profit grew by 17.3% yoy to `77cr during the quarter. Progress on captive coal blocks satisfactory: MIL had received stage-II of forest clearance for its Utkal mine (reserves of 117mn tonnes) during 2QFY2012. The company will now sign the mining lease for Utkal coal block since it has received all approvals. The company expects to sign the mining lease for Mandakini coal block in 2HFY2013. The company reiterated that both the coal blocks would be ready for production before the completion of the power plant. Outlook and valuation: MIL is on the verge of a massive expansion in its steel business. The long-term stock performance will be determined by the timely expansion of the 1.5mtpa steel plant and unlocking of value in Monnet Power, which is implementing the 1,050MW power project. Although there could be some delays in the commencement of these projects, most of these projects would be backed by captive resources, thus ensuring robust profitability. Hence, we recommend Buy on the stock with a target price of `528. Key financials (Standalone)
Y/E March (` cr) Net sales % chg Adj. net profit % chg EPS (`) EBITDA margin (%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 49.4 4.4 32.1 14.1

Abs. (%) Sensex MIL

3m 3.4

1yr (15.7)

3yr 73.6

(5.3) (29.1) 199.2

FY2010

FY2011

FY2012E

FY2013E

1,481 (4.4) 288 24.1 44.7 31.3 9.9 1.4 18.2 13.0 2.1 6.8

1,574 6.3 285 (0.9) 44.3 29.6 10.0 1.4 15.1 9.6 2.7 9.2

1,973 25.4 304 6.8 47.3 26.3 9.4 1.2 13.7 8.0 2.4 9.3

2,960 50.0 425 39.7 63.5 29.5 7.0 1.0 16.7 11.0 1.9 6.3 Bhavesh Chauhan
Tel: 022- 39357800 Ext: 6821 bhaveshu.chauhan@angelbroking.com

Please refer to important disclosures at the end of this report

Monnet Ispat | 2QFY2012 Result Update

Exhibit 1: 2QFY2012 performance (Standalone)

Y/E March (` cr) Net sales Raw material % of net sales Power & fuel % of net sales Staff cost % of net sales Other expenditure % of net sales Total expenditure % of net sales Operating profit OPM (%) Other operating income EBITDA EBITDA margin (%) Interest Depreciation Other income Exceptional items Profit before tax % of net sales Tax % of PBT Net profit
Source: Company, Angel Research

2QFY12 459 274 59.8 14 3.1 21 4.5 30 6.6 339 73.9 119 26.1 0 119 26.1 12 19 7 0 96 20.9 19 19.7 77

2QFY11 361 202 56.1 10 2.7 18 4.9 26 7.2 256 71.0 105 29.0 0 105 29.0 12 18 7 0 82 22.7 16 19.9 66

yoy (%) 27.1 35.4 43.0 16.8 16.5 32.5 14.1 14.1 (2.4) 1.4 (11.2) 17.1 16.1 17.3

1QFY12 427 248 58.0 13 3.1 21 5.0 28 6.6 311 72.8 116 27.2 0 116 27.2 13 19 11 0 96 22.4 23 23.5 73

qoq (%) 7.3 10.5 5.8 (3.1) 7.0 9.1 2.8 2.8 (11.8) 0.3 (40.6) 0.2 (16.1) 5.2

Robust 2QFY2012 top-line performance

MILs net sales grew strongly by 27.1% yoy to `459cr for 2QFY2012. Growth was mainly driven by the 30.8% increase in sponge iron realization to `21,002/tonne and the 43.7% yoy increase in structural steel realization to `32,176/tonne. The companys sponge iron production grew by 14.6% yoy to 186,557 tonnes and its power production grew by 10.9% yoy to 238mn units. The companys sponge iron sales volumes grew by 1.8% yoy to 159,906 tonnes, while power sales volumes declined by 11.4% yoy to 176mn units. Net realization on power sales dipped by 32.1% yoy to `2.9/unit during the quarter.

Exhibit 2: Quarterly production volume

(tonnes) Sponge iron Steel (basic) Steel (structural) Ferro alloy Power (mn units) 2QFY11 797 2,088 215 3QFY11 1,610 461 2,600 228 4QFY11 20,701 18,989 2,596 272 1QFY12 2QFY12 yoy (%) qoq (%) 14.6 (5.8) 10.9 12.5 4.1 0.0 (9.5) 13.7 19,075 19,005 2,173 209 19,855 1,966 238 162,851 163,357 190,360 165,857 186,557

19,010 2,284.9

Source: Company, Angel Research

November 8, 2011

Monnet Ispat | 2QFY2012 Result Update

Exhibit 3: Quarterly sales volume

(tonnes) Sponge iron Steel (basic) Steel (structural) Ferro alloy Power (mn units) 2QFY11 499 4,665 2,100 198 3QFY11 82 544 1,796 210 4QFY11 16,756 2,604 235 1QFY12 17,086 1,542 175 2QFY12 yoy (%) qoq (%) 1.8 33.0 269.9 (2.4) (11.4) 6.2 1.0 32.9 0.2 664 17,255 2,049 176 157,026 148,242 155,196 150,578 159,906

Source: Company, Angel Research

Exhibit 4: Quarterly average realization

(`/tonne) Sponge iron Steel (basic) Steel (structural) Ferro alloy Power (`/unit) 2QFY11 16,059 23,836 22,399 52,747 4.3 3QFY11 17,831 28,694 9,443 56,829 3.4 4QFY11 19,617 31,357 54,729 3.1 1QFY12 19,776 31,693 52,270 3.4 2QFY12 yoy (%) qoq (%) 21,002 25,904 32,176 63,397 2.9 30.8 8.7 43.7 20.2 (32.1) 6.2 1.5 21.3 (15.0)

Source: Company, Angel Research

EBITDA grew by 14.1% yoy

Raw-material cost as a percentage of sales increased to 59.8% in 2QFY2012 compared to 56.1% in 2QFY2011. Average iron ore cost increased by 23.1% yoy (but declined by 9.7% qoq) to `6,202/tonne in 2QFY2012. Hence, EBITDA increased only 14.1% yoy to `119cr, while EBITDA margin contracted by 298bp yoy to 26.1% during the quarter. Interest expenses declined by 2.4% yoy to `12cr and other income decreased by 11.2% yoy to `7cr. Consequently, net profit grew by 17.3% yoy to `77cr.

Exhibit 5: EBITDA margin trend

500 400 300 200 100 0 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 Net revenue (LHS) yoy growth (RHS) 30 25 20 15

Exhibit 6: Net profit trend

80 76 72 25 20 15 10 5 0 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 Net Profit (LHS) Net margin (RHS)

(`cr)

(%)

5 0 (5) (10)

64 60 56

Source: Company, Angel Research

Source: Company, Angel Research

Progress on coal blocks satisfactory

MIL had received stage-II of forest clearance for its Utkal mine (reserves of 117mn tonnes) during 2QFY2012. The company will now sign the mining lease for Utkal coal block since it has received all approvals. The company expects to sign the mining lease for Mandakini coal block in 2HFY2013. The company reiterated that both the coal blocks would be ready for production before the completion of the power plant.
November 8, 2011

(%)

10

(`cr)

68

Monnet Ispat | 2QFY2012 Result Update

Investment rationale
Steel expansion of 1.5mn tonnes: MIL is setting up a 1.5mn steel plant through the BF-EAF route. Total capex for the project is pegged at `3,000cr. The plant is expected to begin progressive commissioning in late FY2012. However, full benefits of these facilities would be witnessed in FY2014. Significant value unlocking lies ahead in Monnet Power: MIL is setting up a 1,050MW (2x525) power plant through Monnet Power. The plant is being set up at a cost of `5,000cr, with equity contribution of `1,200cr and the balance being funded through debt. MIL has diluted a 12.5% stake to Blackstone for a consideration of `275cr, thus valuing the total equity stake at `2,200cr. We expect the plant to be operational in FY2014. With captive coal blocks backing this project, we expect robust profitability from the power business.

November 8, 2011

Monnet Ispat | 2QFY2012 Result Update

Outlook and valuation

MIL is on the verge of a massive expansion in its steel business. The long-term stock performance will be determined by the timely expansion of the 1.5mtpa steel plant and unlocking of value in Monnet Power, which is implementing the 1,050MW power project. Although there could be some delays in the commencement of these projects, most of these projects would be backed by captive resources, thus ensuring robust profitability. Hence, we recommend Buy on the stock with a target price of `528, valuing the steel business at 5.0x FY2013E EV/EBITDA and investment in Monnet Power at 2.0x P/BV.

Exhibit 7: SOTP valuation

Steel business Stake in Monnet Power Target price (`)
Source: Company, Angel Research

5.0x FY2013E EV/EBITDA 2.0x P/BV

265 263 528

Exhibit 8: Revision of estimates

(` cr) Net sales EBITDA EBITDA margin (%) PBT Net income Net margin (%)
Source: Bloomberg, Angel Research

Earlier estimates FY12E

1,973 552 28.0 365 286 14.5

Revised estimates FY12E

1,973 519 26.3 389 304 15.4

Upgrade/(downgrade) (%) FY12E

0.0 (6.0) (167)bp 6.6 6.6 96bp

FY13E
2,960 872 29.5 500 391 13.2

FY13E
2,960 872 29.5 544 425 14.4

FY13E
0.0 0.0 0bp 5.0 5.0 69bp

Exhibit 9: EPS Angel forecast vs. consensus

Year (`) FY2012E FY2013E
Source: Bloomberg, Angel Research

Angel forecast
47.3 63.5

Bloomberg consensus
46.1 58.3

Variation (%)
2.6 8.8

November 8, 2011

Monnet Ispat | 2QFY2012 Result Update

Exhibit 10: EV/EBITDA band

9,000 8,000 7,000 6,000 5,000
(`cr)

4,000 3,000 2,000 1,000 0

Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
Jan-11 Jan-11

Oct-05

Oct-06

Oct-07

Oct-08

Oct-09

Oct-10

2x

5x

8x

11x

14x

Source: Bloomberg, Angel Research

Exhibit 11: P/E band

1,200 1,000 800 600 400 200 0
Apr-07 Oct-05 Oct-08 Apr-10 Jul-06 Jul-09 Oct-11 Oct-11 Jan-05 Jan-08

(`)

5x

10x

15x

20x

Source: Bloomberg, Angel Research

Exhibit 12: P/BV band

1,200 1,000 800 600 400 200 0
Apr-07 Oct-05 Oct-08 Apr-10 Jul-06 Jan-05 Jan-08 Jul-09

(`)

5x

10x

15x

20x

Source: Bloomberg, Angel Research

November 8, 2011

Oct-11

Monnet Ispat | 2QFY2012 Result Update

Exhibit 13: Recommendation summary

Companies Godawari Power Sarda Energy Prakash Ind. Monnet Ispat CMP Target Price (`) (`) Reco. Mcap Upside (` cr) (%) P/E (x) FY12E FY13E P/BV (x) FY12E FY13E EV/EBITDA (x) FY12E FY13E RoE (%) FY12E FY13E RoCE (%) FY12E FY13E

122 122 46 443

190 61 528

Buy Buy Buy

385 436 613 2,848

56 12 34 19

3.5 9.3 2.4 9.4

2.2 8.4 2.1 7.0

0.5 0.6 0.3 1.2

0.4 0.6 0.3 1.0

3.8 6.7 3.0 9.3

2.6 4.9 2.6 6.3

14.8 7.0 14.7 13.7

20.0 7.3 14.7 16.7

14.8 4.5 11.3 8.0

18.2 5.3 11.5 11.0

137 Accum.

Source: Company, Angel Research

November 8, 2011

Monnet Ispat | 2QFY2012 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 charges Other income (% of PBT) Share in profit of asso. Recurring PBT % chg Extra. Inc/(Expense) PBT (reported) Tax (% of PBT) PAT (reported) Add: Earnings of asso. Less: Minority interest Extra. Expense/(Inc.) PAT after MI (reported) ADJ. PAT % chg (% of Net sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2008 1,319 160 1,159 1,159 81.7 907 679 135 41 52 252 44.6 21.7 44 207 47.0 17.9 16 30 13.4 221 32.9 221 53.8 24.4 166 166 166 23.3 14.3 43.0 29.4 13.4 FY2009 1,711 162 1,549 1,549 33.6 1,174 911 136 61 66 375 48.7 24.2 65 309 49.1 20.0 71 48 16.6 286 29.7 16 271 55.0 20.3 216 216 232 39.4 15.0 47.4 45.4 54.6 FY2010 1,567 86 1,481 1,481 (4.4) 1,017 735 146 73 62 464 23.8 31.3 72 392 26.8 26.5 74 32 9.1 350 22.1 184.2 331 60.4 18.2 269 269 288 24.1 19.4 56.1 46.2 1.7 FY2011 1,696 122 1,574 1,574 6.3 1,108 862 44 74 129 465 0.3 29.6 73 392 (0.1) 24.9 50 22 6.2 365 4.3 365 79.6 21.8 285 285 285 (0.9) 18.1 48.8 45.8 (0.9) FY2012E FY2013E

2,128 155 1,973 1,973 25.4 1,453 1,084 126 84 160 519 11.6 26.3 75 444 13.3 22.5 79 25 6.3 389 6.8 389 85 21.8 304 304 304 6.8 15.4 47.3 47.3 6.8

3,193 233 2,960 2,960 50.0 2,088 1,537 189 126 237 872 67.9 29.5 118 755 69.9 25.5 238 27 5.0 1.0 544 39.7 544 119 21.8 425 425 425 39.7 14.4 66.1 63.5 34.2

November 8, 2011

Monnet Ispat | 2QFY2012 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 Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net Block Capital work-in-progress Goodwill Investments Current assets Cash Loans & advances Other Current liabilities Net current assets Mis. exp. not written off Total assets 1,212 175 1,037 266 138 1,035 371 338 327 199 836 2,278 1,366 240 1,127 310 216 1,222 246 683 294 232 991 83 2,725 1,439 311 1,128 721 545 1,143 205 590 348 268 874 18 3,288 48 1,020 1,068 21 1,098 91 2,278 48 1,238 1,286 1,325 114 2,725 54 1,592 1,646 27 1,495 120 3,288 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

64 2,026 2,090 2,672 141 4,903 1,477 383 1,094 1,513 550 2,092 688 853 550 345 1,747 4,903

64 2,293 2,357 3,672 141 6,170 3,077 459 2,618 713 550 2,683 1,159 853 670 394 2,289 6,170

64 2,680 2,744 4,672 141 7,558 4,377 576 3,800 413 550 3,289 1,465 853 970 494 2,794 7,558

November 8, 2011

Monnet Ispat | 2QFY2012 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 adv. Other income Cash flow from investing Issue of equity Inc./(Dec.) in loans Dividend paid Others Cash flow from financing Inc./(Dec.) in cash Opening cash bal. Closing cash bal. 23 (359) 380 94 475 81 290 371 6 (270) 40 133 28 69 75 (125) 371 246 15 (799) 151 216 28 58 281 (40) 246 205 FY2008 FY2009 FY2010 221 44 (246) (23) 30 (34) (289) (94) 271 65 (280) 45 31 70 (199) (77) 331 72 78 61 64 478 (485) (330) FY2011 FY2012E FY2013E

362 74 (348) (27) 86 (25) (831) (5) 22 (814) 10 1,177 (135.3) 1,322 483 205 688

389 75 (71) 85 309 1,000 38 962 471 688 1,159

544 118 (200) 119 343 1,000 38 962 306 1,159 1,465

(800) (1,000)

(800) (1,000)

November 8, 2011

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Monnet Ispat | 2QFY2012 Result Update

Key ratios
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 (`) 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 (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest coverage FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

15.1 10.1 2.0 1.1 2.3 10.8 1.2 43.0 29.4 43.9 5.0 226.8 17.9 75.6 0.7 9.6 1.2 0.5 14.2 10.6 15.8 20.0 1.1 145 33 43 58 0.5 2.3 12.7

9.7 7.1 1.7 1.1 1.9 8.0 1.1 47.4 45.4 61.9 5.0 268.2 20.0 79.7 0.7 11.2 4.6 0.7 15.7 12.4 16.2 18.2 1.2 80 26 50 49 0.7 2.3 4.4

9.9 6.7 1.4 1.1 2.1 6.8 1.0 56.1 44.7 65.9 5.0 307.1 26.5 81.8 0.5 11.5 4.3 0.4 14.8 13.0 17.3 18.2 1.1 112 32 60 49 0.4 1.6 5.3

10.0 7.9 1.4 1.1 2.7 9.2 0.9 48.0 44.3 55.7 5.0 324.8 24.9 78.2 0.4 8.4 1.9 0.7 12.9 9.6 15.5 15.1 1.1 146 44 81 68 0.7 3.1 7.9

9.4 7.5 1.2 1.1 2.4 9.3 0.8 47.3 47.3 59.0 5.0 366.2 22.5 78.2 0.4 7.5 2.0 0.8 12.2 8.0 12.7 13.7 0.9 146 44 81 73 0.8 3.8 5.6

7.0 5.2 1.0 1.1 1.9 6.3 0.7 66.1 63.5 84.4 5.0 426.4 25.5 78.2 0.5 10.6 4.5 1.0 16.6 11.0 15.1 16.7 0.8 146 44 81 65 1.0 3.0 3.2

November 8, 2011

11

Monnet Ispat | 2QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

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

Monnet Ispat 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%)

November 8, 2011

12