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VISA STEEL LTD.

Q4 FY 2008 update BUY

RESEARCH Sector Metals I CMP Rs 52 I Target Rs 85

KEY HIGHLIGHTS
STOCK DATA
Visa Steel Ltd (VSL) registered excellent growth with revenue
Market Cap Rs5.7bn. rising by 85% to Rs2.6bn. OPM expanded by 1,160bps to 17.8%
Book Value per share Rs32
while net profits surged by 30x to Rs210mn.
Eq Shares O/S (F.V. Rs.10) 110mn.
Median Vol (12 mths) 194,897 (BSE+NSE) The key attribute to this robust performance was an overall
52 Week High/Low Rs 65/31
buoyancy in realisations being witnessed in the commodities.
Bloomberg Code VISA.BO
Reuters Code VISA.IN z Healthy coke and ferro chrome volumes

Coke production witnessed a staggering 90% growth to ~60k mt in


SHAREHOLDING PATTERN (%) Q4FY08. Gradual ramp up of ferro alloy facility post commissioning in
Qtr. Ended Sep-07 Dec-07 Mar-08
Nov’07 drove ferro alloy production to ~10.3k mt in Q4FY08. Sales
Promoters 72.7 72.7 72.7 volumes for the former stood at ~56k mt while the latter clocked sales
MFs/FIs - - - volumes of ~5.4k mt. Hot metal production is not comparable as VSL
FIIs 11 5.6 7.5 undertook a shutdown for maintenance purposes.
PCBs 4.5 6.7 4.4
Indian Public 11.8 15.0 15.4 z Significant OPM expansion

OPM expanded by 1,160bps to 17.8% on a YoY basis as a result of


STOCK PERFORMANCE (%) healthy realizations for coke and ferro chrome. Consequently, operating
profits also increased by 437% to Rs465bn. The overall improved
1M 3M 12M
performance resulted in net profit rising by ~30x to Rs210mn.
Absolute (3.7) 33.3 62.5
Relative 4.7 40.9 51.7
z Capacity expansion as per schedule

The upcoming 300k tpa DRI plant and 50MW of power (of proposed
STOCK PRICE PERFORMANCE 75MW) is expected to go on stream by the end-Q1FY09. This should
contribute significantly towards volume growth in FY09 and FY10. Also,
VSL BSE (Rebased) the 500k tpa special/stainless steel plant will be commissioned by FY10.
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VALUATIONS AND RECOMMENDATION
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50 At the CMP of Rs52, the stock trades at a P/E of 3x and EV/EBITDA of


3.5x FY10 estimates. We see volume growth emanating post completion
35 of the DRI unit in Q1FY09. This, coupled with lower power cost through
20 captive power plant provide ample earnings visibility. We remain positive
Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 on the stock and reiterate our ‘BUY’ recommendation with a 12- month
price target of Rs85.

KEY FINANCIALS (STANDALONE) KEY RATIOS


Quarter Ended Yr Ended (March) Yr Ended (March)
Rs mn
Sep-07 Dec-07 Mar-08 2006 2007 2008 2009E 2010E 2006 2007 2008 2009E 2010E
Net Sales 1,531 1,963 2,619 3,868 5,312 6,808 14,629 19,143 Dil. EPS (Rs) 1.1 1.9 3.9 13.3 17.1

YoY Gr (%) 2.2 54.0 85.1 53.5 37.3 28.2 114.9 30.9 ROCE (%) 11.8 8.6 11.2 23.4 24.3

Op. Profits 142 237 465 360 396 919 2,730 3,768 RONW (%) 6.5 6.7 13.0 35.6 33.5

Op. Marg.(%) 9.3 12.1 17.8 9.3 7.5 13.5 18.7 19.7 P/E(x) 46.1 27.8 13.3 3.9 3.0

Net Profits 35 136 210 124 205 431 1,467 1,881 EV/Sales (x) 1.3 1.7 2.0 0.9 0.6

Eq Capital 1,100 1,100 1,100 1,100 1,100 1,100 1,100 1,100 EV/EBDIT (x) 13.9 19.4 14.4 4.8 3.1

Analyst - Kamran Khan I kamran.khan@pinc.co.in I Tel: +91-22-6618 6391 11 June 2008 1


PERFORMANCE OVERVIEW
VSL’s performance in Q4FY08 was driven by increased sales of coke and ferro alloys,
which currently command buoyant realisations. Net sales stood at ~Rs2.6bn, a YoY rise
of 85%. The blast furnace could not contribute towards this growth as it undertook a
refurbishment shutdown. The production sales and realisation details are as depicted in
the table below.

Production and Sales volumes (‘000 MT)


Buoyant performance was Q4FY08 Q4FY07 YoY(%) Q3FY08 QoQ(%)
led by increased sales of Production
Hot metal 0.61 46.3 (98.68) 28.0 (97.8)
coke and ferro alloys...
Coke 59.8 31.5 89.8 50.6 18.1
Ferro Chrome 10.3 - - 7.8 32
Sales
Hot metal 8.5 58.1 (85.3) 25.1 (66)
Coke 56.2 - - 32.0 75.6
Ferro Chrome 5.3 - - 2.41 -
Realisation (Rs/mt)
Hot metal 18.0 13.7 31.4 17.7 1.7
Coke 19.5 - - 16.0 21.8
Ferro Chrome 67.5 - - 53.6 26.0
Source: Company

VSL has sufferred losses of Rs 24 mn due to foreign exchange fluctuations which are
reflected in other income. Interest (+86% YoY) and depreciation (+76% YoY) rose due
to capitalisation of the ferro chrome facilities to Rs 54 mn and Rs 59 mn. However
,despite these losses and increase in capital charges, net profits surged more than
30x to Rs 210 mn (YoY).
Raw material linkages
Visa currently sources chrome ore and coking coal requirements from Orissa Mining
Corporation (OMC) and Millenium Coal Pty (Australia). Iron ore is procured from OMC
and Sesa Goa. It has been allotted a captive coal block (Patrapar, Thalcher) which is
expected to commence operations over the next 18-20 months.Chrome ore will be
sourced from Ghotaringa Minerals Ltd (89% subsidiary), which is currently prospecting
for chrome ore deposits. It has also signed an MoU with the Orissa government for an
iron ore mine.
OUTLOOK
The blast furnace, post the maintenance shutdown will ramp up quickly and is expected
OPM to improve to 18.7% to reach optimum utilisation levels by Q2FY09. Moreover, the coke oven batteries as well
and 19.7% in FY09 and as ferro alloy capacities are expected to contribute significantly towards revenue growth
FY10 respectively... and profitability. The 300k mt sponge iron plant along with 50MW CPP will aid in generating
additional volume growth. We expect VSL’s net sales to grow by 114% in FY09 and 30%
in FY10 to Rs14.7bn and Rs19.1bn. Its OPM to improve by 520bps to 18.7% in FY09 and
100bps to 19.7% in FY10. This should result in net profit growing by 240% in FY09 and
28% in FY10 to Rs1.4bn and Rs1.8bn.
VALUATIONS AND RECOMMENDATION
At the CMP of Rs52 the stock trades at a P/E of 3x and EV/EBITDA of 3.5x FY10 estimates.
Post completion of Orissa project it would become a fully integrated low-cost player in
special/stainless steel sector with captive linkages for coke, ferro chrome and power.
This would provide it a competitive cost advantage over its peers. Hence, we maintain
our ‘BUY’ recommendation with a 12-month price target of Rs85.

Company description
Visa Steel has its manufacturing facilities located in Kalinganagar (Orissa) and presently
manufactures pig iron, ferro chrome and coke. It is also setting up captive power
plants and sponge iron kilns. The metallics are proposed to be used captively once the
0.5mn tpa special/stainless steel plant becomes operational.
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Financial Results for the quarter & year ended 31 March 2008 (Standalone)
Quarter Ended Year Ended
Particulars (Rs Mn)
31/03/08 31/03/07 Gr % 31/03/08 31/03/07 Gr %

Net Sales 2,619 1,415 85.1 6,808 5,312 28.2

Total Expenditure 2,154 1,328 62.2 5,889 4,916 19.8

(Inc)/dec in Stock in Trade 95 305 (872) 316

Consumption of Raw Material 1,200 456 163.3 2,742 1,838 49.2

Staff cost 68 8 756.2 140 49 185.4

Cost of Trading Goods 383 453 (15.6) 2,977 2,296 29.7

Other Expenses 408 106 284.8 902 416 116.7

Operating Profit 465 87 437.0 919 396 131.9

Other income (23) 45 (150.4) 20 67 (69.8)

PBDIT 443 132 236.0 939 464 102.6

Interest (Net) 54 29 86.2 85 23 272.3

Depreciation 59 33 76.3 183 98 87.0

PBT & Extra-ordinary itmes 330 70 374.0 671 343 95.7

PBT 330 70 374.0 671 343 95.7

( - ) Provision for current tax 44 8 431.9 84 39 115.4

( - ) Provision for deferred tax (net) 76 53 43.7 151 94 61.2

( - ) FBT - 2 (78.5) 5 5 (7.8)

Net Profit 210 7 3,123.3 431 205 110.3

Equity Capital 1,100 1,100 1,100 1,100

Reserves ( excl rev res) - - 2,378 2,067

Basic EPS for the period (Rs.) 1.9 0.1 3.9 1.9

Book Value(Rs) - - 32 29

OPM (%) 17.8 6.1 13.5 7.5

NPM (%) 8.0 0.5 6.3 3.9

Exp as % of sales 82.2 93.9 86.5 92.5

RM Consumed 64.0 53.8 71.2 83.8

Staff cost 2.6 0.6 2.1 0.9

Other Expenses 15.6 7.5 13.2 7.8

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Year Ended March (Figures in Rs mn)

Income Statement 2005 2006 2007 2008 2009E 2010E

Revenues 2,520 3,868 5,312 6,808 14,629 19,143


Growth (%) - 53 37 28 115 31

Total Expenditure 2,390 3,508 4,916 5,889 11,899 15,375

Operating Profit 130 360 396 919 2,730 3,768

Growth (%) - 176.3 10.0 131.9 197.1 38.0

Interest & dividend income - 6 67 20 50 50

EBIDT 130 367 464 939 2,780 3,818

(-) Interest 7 118 23 85 250 550

(-) Depreciation 5 50 98 183 341 581

PBT & extraordinary items 119 199 343 671 2,189 2,687

(-) Tax provision 53 75 138 240 722 806

Net Profits 66 124 205 431 1,467 1,881

Growth (%) - 89.3 65.7 110.1 239.9 28.2

Fully diluted Eq. sh. O/s (mn no) 75 110 110 110 110 110

Book Value (Rs) 11 27 29 32 43 59

Basic EPS (Rs) 0.9 1.1 1.9 3.9 13.3 17.1

Diluted EPS (Rs) 0.9 1.1 1.9 3.9 13.3 17.1

Balance Sheet 2005 2006 2007 2008E 2009E 2010E

Equity Share Capital 750 1,100 1,100 1,100 1,100 1,100

Reserves & Surplus 91 1,860 2,066 2,378 3,667 5,369

Net worth 841 2,960 3,166 3,478 4,767 6,469

Total Debt 742 1,860 4,986 8,523 8,973 8,473

Deferred Tax liability 49 104 198 349 425 502

Capital Employed 1,633 4,924 8,349 12,350 14,165 15,444

Fixed Assets 1,051 2,530 6,220 11,510 12,870 12,388

Net current assets 581 2,270 2,016 726 1,181 2,942

Investments - 9 9 9 9 9

Misc exp. - 117 105 105 105 105

Total Assets 1,633 4,925 8,350 12,350 14,165 15,444

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Year Ended March (Figures in Rs mn)

Cash Flow Statement 2005 2006 2007 2008E 2009E 2010E

PBT & Extraord. items 119 199 343 671 2,189 2,687
PBT & extraordinary items 119 199 343 671 2,189 2,687
Depreciation 5 50 98 183 341 581
Provision for gratuity - - 53 - - -
Liabilities no longer required written back - (6) (2) - - -
Unrealisaed foreign Exchange (22) (33) (17) - - -
(Profit)/loss on sale of investment - - - - - -
Interest & dividend inc. (31) (31) (166) (20) (50) (50)
Interest paid 29 92 206 85 250 550
Misc Exp W/off 0 2 27 - - -
Tax paid (5) (18) (15) (89) (646) (729)
(Inc)/Dec in working capital (171) 566 (686) 302 126 (787)
Cash from operations (78) 822 (158) 1,132 2,209 2,252
Net capital expenditure (948) (1,437) (3,496) (5,474) (1,700) (100)
Net investments (0) (9) - - - -
Interest recd 23 21 104 20 50 50
Cash from investing activities (925) (1,425) (3,392) (5,453) (1,650) (50)
Issue of eq. shares 449 350 - - - -
Refund of share application money 601 1,104 3,125 3,537 450 (500)
Change in debt - 1,645 - - - -
Share Issue Exps/ Refund - (50) (83) - - -
Dividend paid - - - (119) (178) (178)
Interest paid (29) (121) (251) (85) (250) (550)
Cash from financing activities 1,022 2,929 2,792 3,333 22 (1,228)
Inc/Dec. in cash 19 2,326 (759) (988) 581 974

Key Ratios 2005 2006 2007 2008E 2009E 2010E

OPM (%) 5.2 9.3 7.5 13.5 18.7 19.7

ROACE (%) 8.7 11.8 8.6 11.2 23.4 24.3

ROANW (%) 7.8 6.5 6.7 13.0 35.6 33.5

Sales/Total Assets (x) 1.5 0.8 0.7 0.5 1.1 1.4

Debt:Equity (x) 0.9 0.6 1.6 2.5 1.9 1.3

Current Ratio (x) 1.6 2.1 2.1 1.3 1.2 1.5

Debtors (days) 71.9 43.9 29.1 30.0 32.0 35.0

Inventory (days) 104.8 96.4 87.6 85.0 80.0 85.0

Net working capital (days) 102.1 (19.8) (28.9) (35.0) (43.0) (25.0)

EV/Sales (x) 1.8 1.3 1.7 2.0 0.9 0.6

EV/EBIDT (x) 34.4 13.9 19.4 14.4 4.8 3.1

P/E (x) 59.5 46.1 27.8 13.3 3.9 3.0

P/BV (x) 4.6 1.9 1.8 1.6 1.2 0.9

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Team

Equity Desk Ashwani Agarwalla - Agro Products /Fertilizers


ashwania@pinc.co.in 91-22-66186482
R. Baskar Babu - Head - Equity Broking
baskarb@pinc.co.in 91-22-66186465 Milind Raginwar - Cement
milind.raginwar@pinc.co.in 91-22-66186395
Gealgeo V. Alankara - Head - Institutional Sales
alankara@pinc.co.in 91-22-66186466 Abhishek Gangwani -Associate - Electronics / Hardware
abhishekg@pinc.co.in 91-22-66186385
Sachin Kasera - Co-Head - Domestic Equities
sachink@pinc.co.in 91-22-66186464 Naveen Trivedi - Associate - Speciality Chemicals
naveent@pinc.co.in 91-22-66186384
Sailav Kaji - Head - Derivatives & Strategist
sailavk@pinc.co.in 91-22-66186344 Abhinav Bhandari - Associate - Real Estate / Construction
abhinavb@pinc.co.in 91-22-66186371

Research Anand Rajgarhia - Associate - Shipping / Logistics


anandr@pinc.co.in 91-22-66186377
Sameer Ranade - Capital Goods / Utilities
sameerr@pinc.co.in 91-22-66186381
Sales:

Sujit Jain - Real Estate / Construction Anil Chaurasia Alok Doshi


sujitj@pinc.co.in 91-22-66186379 91-22-66186483 91-22-66186484

Amol Rao - Hospitality / Pipes / Packaging Sapna Mehta Sundeep Bhat


amolr@pinc.co.in 91-22-66186378 91-22-66186485 91-22-66186486

Nirav Shah - Sugar / Textiles


niravs@pinc.co.in 91-22-66186383 Dealing:

Rishabh Bagaria - Auto / Auto Ancilliary Chandrakant Ware / Shivkumar R / Ashok Savla
rishabhb@pinc.co.in 91-22-66186391 idealing1@bloomberg.net 91-22-66186326

Ruchir Desai - Technology Raju Bhavsar / Manoj Parmar / H Prajapati / Pratiksha


ruchird@pinc.co.in 91-22-66186372 idealing1@bloomberg.net 91-22-66186323

Syed Sagheer - Logistics / Light Engineering


syeds@pinc.co.in 91-22-66186390 Directors

Chandana Jha - Banking / Financial Services Gaurang Gandhi


chandanaj@pinc.co.in 91-22-66186398 gaurangg@pinc.co.in 91-22-66186400

Rahhul Aggarwal - Metals Hemang Gandhi


rahhula@pinc.co.in 91-22-66186388 hemangg@pinc.co.in 91-22-66186400

Dipti Solanki - Media Ketan Gandhi


diptis@pinc.co.in 91-22-66186392 ketang@pinc.co.in 91-22-66186400

Faisal Memon - Metals Rakesh Bhatia - Head Compliance


faisalm@pinc.co.in 91-22-66186389 rakeshb@pinc.co.in 91-22-66186400
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