Indian steel industry - changing dynamics

Metals | New Order

Metals: New order

Page No.

Executive Summary

....................................................................................................

FERROUS

..............................................................................................................

4-85

Indian steel industry - changing dynamics

...........................................................4-7

Expect temporary oversupply of finished steel in India

....................................

8-9

Tougher times for secondary producers

.........................................................

10-13

Greater challenges in iron ore mining / exports

............................................

14-20

Global iron ore prices to peak in 2011, with least supply growth

...............

21-29

Australia remains the main source for new coking coal supplies

...............

30-34

Steel producers remain vulnerable to global raw material shortage

..........

35-37

Ferrous Factories Map

.............................................................................................

Ferrous Minerals Map

.............................................................................................

Ferrous Large-caps

.............................................................................................

40-54

Tata Steel ........................................................................................ 41-43

JSW Steel ....................................................................................... 44-47

Sesa Goa ......................................................................................... 48-51

SAIL ............................................................................................... 52-54

Ferrous Mid-caps

................................................................................................

55-85

Mid-cap steel companies - struggling to maintain profitability

...................

56-58

Bhushan Steel ................................................................................. 59-62

Adhunik Metaliks ........................................................................... 63-66

Godawari Power & Ispat ............................................................... 67-69

Jai Balaji Industries ........................................................................ 70-72

Monnet Ispat ................................................................................... 73-76

Prakash Industries .......................................................................... 77-79

Sarda Energy & Minerals .............................................................. 80-82

Tata Sponge Iron ............................................................................ 83-85

NON-FERROUS

................................................................................................

86-105

Non-ferrous industry - getting new projects a challenge

..............................

87-92

Non-ferrous Factories Map

............................................................ 90

Non-ferrous Minerals Map.............................................................

Sterlite Industries ............................................................................ 93-96

Hindalco .......................................................................................... 97-99

Hindustan Zinc ........................................................................... 100-102

Nalco .......................................................................................... 103-105

Appendix: Vedanta Group site visit

.............................................................

106-115

March 2011

Metals | New Order

Metals

BSE Sensex: 18,328

S&P CNX: 5,494

10 March 2011

New order

In the Indian Metals space, we like steel and zinc. Primary steel producers will deliver

stronger volume growth over 12-15 months. The zinc business is also attractive due to

stronger growth in by-products like silver and lead, and bullish outlook on zinc prices.

The aluminum segment is facing challenges due to shortage of coal, rising input costs,

and project delays. The copper business in India is limited to custom smelting and is,

therefore, less significant.

Expect temporary oversupply of finished steel in India:

With 20mtpa capacity

likely to commission over the next 12-15 months, we expect temporary oversupply of

steel in India. Given a tough export market, primary producers will try to substitute

imports and crowd out secondary producers to sustain production at new capacities.

Margins will come under pressure.

Tougher times for secondary producers:

Secondary producers have to face the

additional challenge of sourcing coal and the requisite grade of iron ore for sponge iron

production due to dwindling supplies. Export of Indian iron ore fines is expected to

decline due to discouraging government policies. As the market for fines dries, the

supply of sponge iron grade iron ore, which requires additional crushing to achieve

smaller size of iron ore lumps, will decline.

Iron ore supply to ease in two years, coking coal market to remain tight for

four years:

Global finished steel consumption is likely to grow by 68m tons in 2011

and by 55m tons in 2012. This will drive demand for seaborne trade by 95m tons in

2011 and 77m tons in 2012 and demand for coking coal by 47m tons in 2011 and 38m

tons in 2012. Investment spurred by high margins will bring 730m tons of new iron ore

supplies over five years (v/s 1b tons of seaborne iron ore trade currently) and ease the

market.

Tata Steel and JSW Steel are our top picks:

Tata Steel's cash flows will grow on

the back of both volume growth and margin expansion. Sale of Teesside plant and

start of coking coal production in Mozambique and iron ore production in Canada are

other positives. JSW Steel will achieve the highest volume growth and is the most

efficient producer. We are downgrading SAIL to Sell due to widening competitive

disadvantage on labor cost, operating inefficiencies, and disappointing project

execution. As iron ore prices soften, SAIL will have nowhere to hide.

Buy Sterlite and Hindalco in the non-ferrous space:

Sterlite Industries is our top

pick in the non-ferrous space due to strong earnings growth in zinc, lead, silver and

energy businesses, though uncertainties over power sale, sourcing of coal and bauxite,

and minority stake buyouts continue to haunt. The outlook on zinc prices is bullish

primarily from the supply side, as a couple of large mines are expected to get depleted

over the next 2-3 years. We also like Hindalco due to the group's strong operating

cash flows. Utkal Alumina, though delayed a bit, will boost Hindalco's earnings.

Companies

Ferrous (Large-caps)

Tata Steel

JSW Steel

Sesa Goa

SAIL

Ferrous (Mid-caps)

Bhushan Steel

Adhunik Metaliks

Godawari Power & Ispat

Jai Balaji Industries

Monnet Ispat

Prakash Industries

Sarda Energy & Minerals

Tata Sponge Iron

Non-ferrous

Sterlite Industries

Hindalco

Hindustan Zinc

Nalco

March 2011

Metals | New Order

Indian steel industry - changing dynamics

Indian steel producers have had smooth sailing during the last decade, with demand growth

far exceeding supply growth. There was easy availability of raw material like coal and lump

ore. As a result, the steel producers enjoyed fat margins. The dynamics of the business are

now changing. Primary producers are bringing on stream ~20mtpa of capacity bunched

together over 12-15 months, which is unprecedented. Indian steel consumers will have a

greater choice of domestic supplies. However, it will no longer be smooth sailing for primary

steel producers. Ispat Industries, which shut operations in November 2010 for lack of working

capital, was the first casualty. Non-integrated producers like JSW Steel and SAIL will have to

prepare for lower margins in the face of constrained raw material supplies. Integrated

steel producers like Tata Steel are likely to continue enjoying high margins due to raw

material price pushed steel price increase in the global market.

Indian steel producers have

had smooth sailing during

the last decade, with

demand growth far

exceeding supply growth

A decade of smooth sailing, with demand growth exceeding supply growth

In the last decade, Indian steel producers had smooth sailing, as demand grew at a CAGR

of 8.3% against supply growth of 6%, leading to higher imports, stronger steel price

realization and superior margins. Supply growth lagged demand growth because the main

primary steel producers had underinvested due to varying reasons - delays in statutory

clearances, land acquisition issues, shortage of vendors, lack of new raw material linkages,

etc. JSW Steel is the only primary steel producer that multiplied its capacity ~5x from

1.6mtpa to 7.8mtpa. The capacity of other primary producers increased only marginally.

High realizations, benign raw material prices enabled fat margins

Secondary producers, helped by mushrooming of sponge iron capacities in mineral rich

states of Chhattisgarh, Orissa, Jharkhand and West Bengal, tried to bridge the gap and

many new names (e.g. Adhunik, Monnet, Jai Balaji, Prakash, Godawari and Sarda) emerged

and came out stronger by the end of the decade. Sponge iron production grew at a CAGR

of 23% over 2002-2008 due to availability of cheaper coal from Coal India and abundant

supply of sized iron ore from mines in Barbil. Strong Chinese demand for iron ore fines,

which was not consumed by Indian steel producers, helped in supply growth of sized ore.

This scenario is now changing.

EBITDA per ton (USD) for Indian steel producers

TATA Steel India

600

500

400

300

200

100

-100

SAIL

JSW Steel

Average for JSW & SAIL

Besides, there was easy

availability of raw material

like coal and lump ore

Source: Company/MOSL

March 2011

Metals | New Order

The situation is now

changing due to constrained

raw material supplies

Raw material cost pressure to tell on margins, going forward

1. Thermal coal is increasingly become difficult to source for sponge iron production

because Coal India has reduced linkages to the steel industry in the last few years due

to sharply rising demand from priority sectors like power and sluggish coal production

growth. The situation is likely to get worse, as large scale power capacities are expected

to get commissioned in the coming years, while Coal India's production is unlikely to

keep pace. Sponge iron producers are increasingly becoming dependent on costlier e-

auction and imported coal.

2. Sized iron ore (5-18mm) used in sponge iron production too has moved from abundance

to shortage, though India is still the third largest exporter of iron ore in the world. In the

last few years, a couple of pellet plants have come up to utilize iron ore fines in sponge

iron production through the relatively expensive pelletization process. The sponge iron

industry has lost negotiating power to select sized ore producers in Barbil. Deteriorating

supply of raw material has squeezed the margins of sponge iron producers and stifled

their growth.

3. Indian iron ore production too is likely to decline due to export ban in Karnataka and

increased focus of government agencies in enforcing mining and transportation

regulations to curb illegal mining. Production at a number of mines has declined, as

they are awaiting renewal of their mining licenses. Production at OMDC, which once

used to produce 4-5mtpa, has come to a grinding to halt. Exports too are declining

despite all-time high fob prices.

4. Indian steel producers have largely been consuming lump ion ore. The fines generated

during crushing were exported. Realizing the shortage of iron ore, Indian steel producers

have started investing in pellet plants to utilize fines. JSPL commissioned its 5mtpa

pellet plant in 2009. Tata Steel will be commissioning its pellet plant in 2011. A couple

of merchant pellet plants have also come up in Barbil. Some small pellet plants imported

from China were also put up, but these have been disasters. Pellets are more expensive

than lump ore in the market.

5. Coking coal imports are likely to grow at CAGR of 22% over FY10-FY13 to 44m tons

due to rising demand from ~20mtpa of new hot metal capacity. Sourcing coking coal

amidst the prevailing tight supply is challenging. Coking coal supply is often disrupted

by natural disasters.

De-rating unlikely despite margin compression

Steel stocks have been re-rated over the last 6-7 years, as EBITDA per ton increased

from under US$100 during FY01-FY03, to an average of US$130 during FY04-FY05 and

above US$200 during FY06-FY08. Valuation multiples expanded, aided not just by higher

margins but also consolidation. In 2005, steel stocks traded at one-year forward P/E multiples

of ~5x and EV/EBITDA of 2.5-3.5x. In the following three years, the P/E multiple expanded

to 7-10x and EV/EBITDA multiple to 6-7x. Following the financial crisis of 2008, the

market's focus shifted to normalized earnings and normalized multiples, because forecasting

earnings became a daunting task.

World steel consumption recovered fully in 2010, surpassing all-time high levels of 2007

(though the western world production is yet to recover fully; it is probable that these

countries have lost some production permanently). Margins too recovered to 80-90% of

Though the steel industry

is likely to witness

margin pressure…

…we do not expect a de-

rating of the sector…

March 2011

Metals | New Order

the pre financial crisis levels in 2010. Shortage of coking coal due to flooding of mines in

Australia, iron ore due to lack of new supplies, and change over to quarterly pricing will

put pressure on the margins of non-integrated Indian steel producers despite steel prices

moving up by US$150/ton in 2011. Will the compression of margins lead to a de-rating of

the sector? We do not think so.

…in a scenario of growing

global steel consumption

If the markets were to de-rate the sector, let's say to EV/EBITDA of 5x instead of 6.5x,

the enterprise valuations will move to US$750-800/ton based on new outlook of US$150-

160 EBITDA per ton for an Indian steel producer with no raw material linkage. This will

be at deep discount to replacement cost, which is now US$1,100-1,200/ton even in a low

cost country like India for a greenfield project. With return on investment (RoI) of a new

project falling to 7-8% on post tax basis, the incentive to set up capacities is low. Steel

demand is still expected to grow, while world capacity utilization remains low at 70-75%.

It is more logical for steel producers to acquire rather than build new capacities. It is not

surprising that JSW Steel acquired Ispat Industries despite not so attractive terms recently.

Sumitomo and Nippon have announced the intention of merging. Sector multiples are

unlikely to be de-rated in a scenario of growing global steel consumption.

JSW Steel and Tata Steel are our top picks

We expect global supply of iron ore to remain tight for two years and supply of coking coal

to remain tight for 4-5 years. Though global demand for steel is likely to grow 5.3% in

2011, peak shortage of both iron ore and coking coal will restrict steel production growth.

Steel capacity utilization still remains low at 73% v/s 85-90% during 2005-2007. This is

likely to put pressure on the margins of non-integrated steel producers dependent on imports

for both raw materials. Indian steel producers need to contend with temporary oversupply,

leading to further pressure on margins in FY12. However, margins of Indian steel producers

will still be higher than global peers.

JSW Steel and Tata Steel are our top picks in the Indian steel space. Tata Steel will

witness expansion of margins for the Indian business because globally steel prices will rise

by ~US$150/ton in FY12, led by higher raw material costs. This will drive margins by

~US$100/ton for its Indian business, which will be followed by strong volume growth in

FY13. Its European business, however, remains vulnerable. Start of iron ore and coking

coal production at Canada and Mozambique joint venture projects respectively in the

second half of FY12 will drive the group's margins.

We like JSW Steel due to aggressive volume growth, though margins for its Indian business

will remain under pressure due to non-integration of raw materials. However, coking coal

and iron ore production ramp-up in recently acquired coal mines in USA and iron ore

mines in Chile will drive group margins. A tailwind on US economy too augurs well for

turnaround of its plate and pipe mill in Texas. Sharp correction in the stock, driven by

coking coal concerns and de-rating due to acquisition of stake in Ispat Industries presents

a good buying opportunity.

While margins will be

under pressure, Indian steel

producers are likely to be

better placed than

global peers

Tata Steel's India business

will witness margin

expansion in FY12 followed

by volume growth in

FY13; Buy

We like JSW Steel due to

aggressive volume growth,

though margins for its

Indian business will remain

under pressure

March 2011

Metals | New Order

SAIL is likely to remain under pressure, as volume growth will pale in front of peers. Cost

inflation on account of annual wage hikes and higher repair and maintenance due to aging

plant and machinery will put pressure on margins. Captive iron ore mines remain the only

attraction in the stock over two years. Equity dilution on account of FPO will drag RoE

further.

Sesa Goa is a key beneficiary of strong iron ore prices. However, regulatory hurdles and

termination of third-party mining contract for Orissa operations have clouded volume growth.

If Karnataka lifts the ban on iron ore exports, the stock will get re-rated.

Among the mid-caps,

we like Godawari,

Prakash Industries, and

Adhunik Metaliks

Smaller steel producers are likely to get squeezed out of market due to shortage of thermal

coal and sized iron ore for sponge iron production. However, some of the smaller names

with operational mines will benefit. We like Godawari, Prakash Industries, and Adhunik

Metaliks, as they either have iron ore or thermal coal mines.

Valuations: Indian companies

Rating

Large-caps

Tata Steel

SAIL

JSW Steel

Sesa Goa

Mid-caps

Monnet Ispat

Godawari

Sarda Energy

Tata Sponge

Adhunik Metaliks

Bhushan Steel

Jai Balaji

Prakash Industries

Buy

Sell

Buy

Neutral

Buy

Neutral

Buy

Neutral

Buy

597

157

939

275

532

177

194

328

430

180

12,847

14,366

5,289

5,420

753

110

146

112

265

2,023

254

231

72.5

13.0

58.0

50.1

48.7

29.2

11.6

55.8

16.7

48.5

12.7

19.2

82.8 102.0

10.5

10.1

112.7 132.9

36.3

55.6

32.2

25.3

63.5

17.5

65.6

21.1

27.0

39.7

72.2

36.7

31.4

69.7

18.5

64.9

48.4

35.6

8.2

12.1

16.2

5.5

10.9

6.1

16.7

5.9

5.8

8.9

14.2

4.0

7.2

14.9

8.3

7.6

9.6

5.5

7.7

5.2

5.5

6.6

8.6

2.9

5.9

15.5

7.1

6.9

7.4

4.8

6.2

4.7

5.2

6.6

3.7

2.2

6.0

7.5

8.3

3.0

12.2

5.0

9.9

3.1

5.6

10.9

8.7

4.1

5.4

9.6

5.4

3.0

11.8

4.2

8.2

2.1

5.0

6.9

7.9

2.9

4.1

10.3

4.4

2.1

7.3

3.6

7.6

1.2

4.1

6.3

5.5

1.9

2.9

1.7

1.3

1.9

1.7

0.9

1.1

1.6

1.8

1.2

0.7

2.2

1.6

1.1

1.5

1.4

0.9

1.2

1.4

1.1

0.5

1.6

1.5

1.0

1.3

1.2

0.8

1.0

1.2

0.9

0.4

CMP MCAP

EPS (INR)

P/E (x)

EV/EBITDA (x)

P/BV (x)

(INR) (US$m) FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13E

CMP=current market price

Source: MOSL

March 2011

Metals | New Order

Expect temporary oversupply of finished steel in India

Over FY00-FY10, domestic steel consumption has grown at 8.3%, outpacing production growth

of 6%. As demand outpaced production, imports increased at a fast pace to ~7.2m tons in

FY10. With 20mtpa capacity likely to commission over the next 12-15 months, we expect

temporary oversupply. Domestic steel producers will have to look for export opportunities

- tough considering the current global economic environment - or work on pricing strategies

to substitute imports.

Over FY00-FY10, domestic

steel consumption grew at

8.3%, outpacing production

growth of 6%

Demand has outpaced domestic production during the last decade

With India's real GDP growing at a CAGR of 7.2% over FY00-FY10, domestic steel

consumption has grown at a CAGR of 8.3%. However, production grew at a CAGR of

6% over FY00-FY10, lagging demand growth due to lack of greenfield projects, slow

investment in capacity expansion, and postponement of private investment post the financial

crisis. As demand outpaced production, imports increased at a fast pace to ~7.2m tons in

FY10.

Growth in India's finished steel production has lagged consumption growth

Production

11%

Consumption

Exports (RHS)

Imports (RHS)

Source: MOSL

Capacity equivalent to

almost a third of the current

annual domestic production

is scheduled for

commissioning over the

next 12-15 months

Capacity of 20mtpa is likely to commission in 12-15 months…

Over the next 12-15 months, ~20mtpa of production capacity (equivalent to almost a third

of the current annual domestic production) is scheduled for commissioning in India. Essar

Steel has recently commissioned a 1.7mtpa blast furnace and 1.7mtpa of DRI capacity;

further, 1.2mtpa of Corex furnaces will add a total of 5mtpa capacity. JSW Steel will be

commissioning a 3mtpa blast furnace by March 2011. RINL will be commissioning a

3mtpa long product capacity by mid-2011. Tata Steel and SAIL will be commissioning

furnaces of 3mtpa each by the end of FY12. Electrosteel Casting will be bringing on

stream ~2mtpa of capacity in FY12. Bhushan Steel will be ramping up its 1.9mtpa HRC

mill, adding ~0.7mtpa of production in FY12.

March 2011

Metals | New Order

Expect domestic steel production to grow at ~11% over FY10-FY14 v/s 6% over FY00-FY10

Producers

FY10

SAIL

Tata Steel

RINL

JSW Steel

Essar Steel

Ispat

JSPL

Bhushan Steel

Others

Total

12.7

6.4

2.7

5.7

3.4

2.7

2.0

0.4

23.6

59.6

Production

FY11E FY12E FY13E

13.2

6.5

2.9

6.4

3.9

2.8

2.2

1.2

23.8

62.9

14.2

6.8

4.0

9.1

5.4

2.9

2.5

1.8

25.0

71.6

15.8

8.5

6.0

10.2

6.4

3.0

4.2

2.3

26.2

82.6

FY14E

17.9

9.1

6.5

10.7

7.4

3.2

4.7

3.5

27.5

90.5

CAGR

FY10-14

(%)

8.9

7.4

24.6

16.9

21.5

4.3

23.8

72.0

4.0

10.8

Flat

(%)

100

Products

Long Special

(%)

100

VAP

(%)

Source: MOSL

Though consumption growth

too is likely to accelerate,

we expect temporary

oversupply

…leading to temporary oversupply and possible pricing pressure

Given the planned capacity additions over FY10-14, we expect domestic finished steel

production to grow at ~11%. With accelerating real GDP growth, demand growth too is

likely to accelerate to 10% per annum. However, there would be a temporary oversupply

of finished steel in the domestic market. While we estimate incremental production at

8.8m tons in FY12 and 10.6m tons in FY13, we estimate incremental demand at 7.1m tons

in FY12 and 7.7m tons in FY13.

Expect domestic steel consumption to grow at ~10% over FY10-FY14

Real GDP

Steel consumption

CAGR 7.2%

CAGR 8.3%

CAGR 9%

CAGR 10%

Source: MOSL

Domestic steel producers

may have to price

aggressively to

substitute imports

Domestic steel producers will have to look for export opportunities - tough considering the

current global economic environment - or work on pricing strategies to substitute imports.

March 2011

Metals | New Order

Tougher times for secondary producers

Sponge iron (DRI) has played an important role in fueling the growth of crude steel production

in India during the last decade. However, the double impact of rising coal and iron ore cost

has squeezed margins for the sponge iron industry. As a result, sponge iron production

has stagnated in the last two years and may begin to decline. Constrained sponge iron

availability resulted in scrap imports surging 50% to 5.2m tons during FY08-FY10. However,

new pig iron supply from primary producers will provide an alternate to steel scrap imports

in coming years. This will lead to primary producers gaining market share from secondary

producers.

DRI production in India

grew at a CAGR of 23% over

2002-2008, driven by

reasonable spreads

Sponge iron, an important source of metallic, drying up

Sponge iron (also known as DRI - direct reduced iron) has played a very important role in

fueling the growth of crude steel production in India during the last decade. Sponge iron

production grew at a CAGR of 23% over 2002-2008, while finished steel production

growth was barely 6%. Sponge iron producers enjoyed reasonable spread between sponge

iron prices and raw material cost. Coal India provided linkages to the sponge iron industry

at fixed published prices, which were lower than free market prices. Until 2007/FY08, the

sponge iron industry enjoyed 100% coal linkage.

DRI drove Indian crude steel production till 2008

Indian DRI production (m tons)

Share in w orld crude steel (%)

23% CAGR

Share in Indian crude steel (%)

Source: MOSL

With Coal India reducing

linkages to DRI producers,

their coal cost has increased

considerably

Cost of coal started rising for sponge iron producers in FY09, as Coal India reduced

linkages to the steel industry to meet demand from utilities. Coal linkages to steel producers

have been cut to 50% now. The actual fulfillment of commitment is even lower. Shortage

of coal choked production growth thereafter, as a large number of fragmented small

producers could not afford imports.

Coal linkages to steel industry declining

100

Coal linkage

Deliveries

2007

2008

2009

2010

Source: MOSL

March 2011

Metals | New Order

Some sponge iron producers turned to imports and Coal India's e-auctions for their coal

requirements. This led to significant increase in costs from FY09/2008. Since coal-based

power generation in India is expected to grow at 15% over FY10-14 v/s 5% over FY04-

FY10, coal allocation to the sponge iron industry is likely to reduce further.

Coal supply to DRI industry will reduce further due to pressure from power sector

Pow er generation (coal based)

800

625

450

275

100

15%

Coal production

1,100

825

550

275

Source: MOSL

DRI grade iron ore lumps

are also in short-supply

Even when the sponge iron industry benefited from lower cost of coal due to linkages

from Coal India, it had been paying high prices for iron ore due to a very specific size and

grade requirement. As there was rapid growth in iron ore production during FY02-FY08,

driven by burgeoning exports of fines to China, the domestic DRI industry's demand for

the specific grade of ore was met. However, clamp-down on illegal mining and ban on

export of iron ore from Karnataka has crippled iron ore production. Additionally, deepening

of iron ore mines has reduced the generation of DRI grade lumps. The shortage has

resulted in a sharp rise in iron ore prices.

The double impact of rising coal and iron ore cost has squeezed margins for the sponge

iron industry. This situation is unlikely to change in the coming years. As a result, sponge

iron production may decline. Stagnant sponge iron production over FY08-FY10 has already

brought down its contribution in India's crude steel production.

DRI margins are getting squeezed (Rs '000 per ton of production)

Coal cost

Iron ore cost

15.9

4.5

10.6

3.3

4.8

2.6

FY06

11.5

3.2

7.5

5.3

2.9

FY07

3.3

FY08

4.4

FY09

4.7

FY10

5.1

FY11E

Source:MOSL

Squeezed margins have

led to DRI production

stagnating

Spread

18.8

Sponge iron

17.0

14.5

4.4

2.1

5.1

9.9

9.8

5.4

March 2011

Metals | New Order

Constrained DRI

availability resulted in scrap

imports surging 50% to 5.2m

tons during FY08-FY10

Steel scrap imports have filled the gap in metallic production

Though the global supply of ferrous scrap has declined during the last 4-5 years, India's

scrap imports have increased continuously. Domestic sponge iron availability had kept

scrap imports low until FY08, but as growth in sponge iron production became constrained,

scrap imports surged 50% to 5.2m tons in the following two years. New pig iron supply

from primary producers can provide an alternate to steel scrap imports in coming years.

This will lead to primary producers gaining market share from secondary producers.

Steel scrap imports increased by 50% in two years

5.2

4.8

4.4

3.5

3.2

3.5

FY05

FY06

FY07

FY08

FY09

FY10

Source: MOSL

New pig iron supply will

provide an alternate to

steel scrap imports in

coming years

Pig iron is regaining importance…

Pig iron is likely to play a more important role in steel production growth in India due to

addition of a number of blast furnaces during FY11-FY13. Pig iron production grew at

CAGR of just 4% over FY02-FY08; sponge iron production grew much faster at a CAGR

of 23%. With shortage of sized iron ore and coal linkages impacting sponge iron production,

this scenario is changing.

The share of pig iron in India's steel production is rising once again

Indian hot metal production (m tons)

Share in w orld crude steel (%)

Share in Indian crude steel (%)

Source: MOSL

March 2011

Metals | New Order

Pig iron production is likely

to grow at a CAGR of 18%

over FY10-FY13, driving

coking coal imports

…driving coking coal imports

Pig iron production is likely to grow at a CAGR of 18% over FY10-FY13, driving the

demand for coking coal. Since domestic coking coal production is unlikely to ramp up

much, coking coal imports are likely to grow at a CAGR of 22% over FY10-FY13.

Incremental imports during FY10-FY13 will be ~20m tons v/s total imports of 24m tons in

FY10.

Coking coal imports to nearly double in three years

Coking coal

Coke

CAGR 22%

CAGR 14%

Source: MOSL

March 2011

Metals | New Order

Greater challenges in iron ore mining / exports

Increasing environmental concerns are leading to stricter regulatory enforcement, which

has adversely impacted iron ore mining in India. Older mines are getting deeper and new

mining licenses are not coming through due to regulatory and governance issues. The

crackdown on illegal mining has also adversely impacted legitimate miners. As a result,

growth in domestic iron ore production has been crippled during the last two years. Higher

royalties on iron ore mining have resulted in increased cost of mining and stricter

enforcement of transportation permits is leading to higher logistics cost. Exports have

been hit by periodic increases in export duties and hikes in rail freight for iron ore meant for

exports.

Indian iron ore industry is highly fragmented

The Indian iron ore industry is highly fragmented. A total of 577 mining leases are in force,

which together produce ~225m tons of iron ore, implying an average of 0.4m tons from

each lease.

Indian Iron ore production: 225 m tons (FY08)

Others

Chattisgarh

15%

Goa

14%

India has 577 operating mining leases (FY08)

Others

14%

Chattisgarh

Goa

33%

Jharkhand

10%

Karnataka

22%

Orissa

16%

Orissa

33%

Karnataka

27%

Source: IBM

Goa has a total of 187 mining leases, with the lowest average per mine production of

157,000 tons per annum. Karnataka and Jharkhand have an average per mine production

of 289,000tpa and 435,000tpa, respectively.

Orissa is the largest iron ore

producing state, with 1/3rd

of the country's production

Mining in Chhattisgarh is somewhat concentrated. NMDC and SAIL operate most of the

mines. Merchant mining is virtually absent in the state. Orissa is the largest iron ore

producing state, with 1/3rd of the country's production. It has 90 mining leases, with an

average mine production of 761,000tpa.

March 2011

Metals | New Order

Average iron ore production per mining lease ('000 tons per annum)

2,361

761

157

289

435

142

Source:MOSL

Lump generation in

Orissa mines is 55-60% v/s

40-45% in other iron ore

producing states

Lump generation is declining in the country…

Orissa has been the main source of sized lump ore (5-18mm) used in sponge iron production.

Lump generation in Orissa mines is 55-60% v/s 40-45% in other states like Jharkhand,

Chhattisgarh and Karnataka. Due to strong demand from the domestic sponge iron industry

for sized lumps and from China for iron ore fines, iron ore production in Orissa grew

unfettered and more than doubled over FY04-FY08. In other states, the growth in iron ore

production during the same period was less than 50%.

Orissa has been the main source for sponge iron grade lump ore

FY04

Goa

Lumps

Karnataka

Lumps

Orissa

Lumps

Jharkhand

Lumps

Chattisgarh

Lumps

Total

m tons

(%)

m tons

(%)

m tons

(%)

m tons

(%)

m tons

(%)

m tons

20.3

31.6

31.3

14.7

23.3

122.8

FY05

22.3

37.2

40.6

16.1

23.1

145.9

FY06

24.0

39.8

52.5

18.0

26.1

165.2

FY07

28.7

40.7

64.2

18.6

28.7

187.7

FY08

29.3

45.6

68.5

20.9

30.7

Share (%)

206.5

Source: IBM (FY06-FY08)

During our recent field

visits, however, we

discovered that the average

percentage of lump in iron

ore production is declining

During our visits to iron ore mines in the Barbil region over the last 9-12 months, we were

given to understand that the average percentage of lump in iron ore production is declining

though this is yet to be reflected in data. New mining licenses are not coming through due

to regulatory and governance issues and older mines are getting deeper. Increased focus

of government agencies on enforcing mining and transportation permits has crippled

production growth in the last two years.

March 2011

Metals | New Order

Mines in Barbil are getting deeper thereby generating more fines

Source: MOSL

Realizing the shortage of

lumps, Indian steel

companies are setting up

pellet plants

…resulting in greater investments in pelletization

Realizing the shortage of lumps, JSPL has already set up pellet plants to utilize blue dust

and iron ore fines. Tata Steel too is setting up a pellet plant due to deepening of mines and

higher generation of blue dust.

Many others like Arya, MSP, Godawari, Sarda Energy, etc have already set up plants due

to rising shortage of sponge iron grade iron ore.

Regulation, increasing logistics cost impacting exports

Iron ore exports rose sharply at a CAGR of 21% over FY00-FY05 due to strong Chinese

demand and unfettered production growth. Exports continued to grow over FY05-FY10,

albeit at a slower CAGR of 7%. Iron ore exports are likely to decline in FY11 and thereafter

due to ban on export of iron ore from Karnataka and crackdown on illegal mining across

the country, which is also adversely impacting legitimate miners. Exports have also been

hit by periodic increases in export duties and hikes in rail freight for iron ore meant for

exports.

Domestic consumption (m tons)

Iron ore exports from India

are likely to decline in FY11

and thereafter

Iron ore exports (m tons)

7% CAGR

100

21% CAGR

106

117

113 110 109

29%

120

127

Source:MOSL



Export duties

The Indian iron ore industry enjoyed low freight, low royalty and zero export duty until

2006. In the union budget 2007, the central government imposed export duty of Rs300/ton

in an unprecedented move, to which the iron ore lobby protested. The government yielded

March 2011

Metals | New Order

under pressure and reduced the duty to Rs50/ton on low grade ore largely benefiting

mines in Goa.

Again in June 2008, when commodity price inflation started hurting, the government forced

the domestic steel industry to cap prices and, in return, agreed to raise export duty on iron

ore to a uniform 15% so that the cost of iron ore to steel producers could be controlled.

This did not last long, as financial crisis crippled the world economy and iron ore exports in

the latter part of 2008, forcing the government to cut export duty to nil on fines and 5% on

lumps by the end of 2008.

As iron ore prices and exports picked up again in 2009, export duty was raised once again

to 5% on fines and 15% on lumps. The export duties have been raised further to a uniform

20% in the budget for 2011-12.

Export duty changes

Fines

<62% Fe

Mar-11

Jan-10

Dec-09

Dec-08

Nov-08

Oct-08

Jun-08

May-07

Mar-07

Until Feb-07

20%

Rs200/t

15%

Rs50/t

Rs300/t

-nil-

Fines

>62% Fe

20%

Rs200/t

15%

Rs300/t

-nil-

Lumps

(%)

Rs300/t

-nil-

Source: MOSL



Iron ore royalty - ad-valorem 10%

The royalty on iron ore mining was a pittance due to very low iron ore prices about a

decade ago and remain unchanged until August 2009.

Royalty on iron ore production before September 2009 was a pittance

Fe %

Lumps

Iron ore

>65%

62-65%

<62

Royalty (Rs/ton)

Fines

Source: MOSL

Increase in royalty on iron

ore mining, though justified,

has raised the cost of mining

On the recommendation of the Hooda Committee, the royalty has been changed to 10%

ad-valorem on ex-mine realization since September 2009. Though justified, this has resulted

in high payout, leading to higher cost of mining. The Ministry of Mines has started publishing

ex-mine prices for iron ore according to geography, which is used for calculating ad-

valorem royalty.

Average price of 62-65% grade iron ore lumps (Rs/ton)

Feb-10 Mar-10 Apr-10 May-10 Jun-10

Chhattisgarh

Goa

Jharkhand

Karnataka

Orissa

All India avg

1,949

1,755

1,182

1,210

2,160

1,760

2,239

1,126

1,215

2,244

1,861

3,086

2,683

1,879

1,276

3,117

2,643

3,040

3,666

1,793

1,662

3,175

2,620

3,063

1,529

1,778

3,063

2,880

Jul-10 Aug-10 Sep-10 Oct-10 Nov-10

3,433

1,761

2,062

2,340

2,228

3,120

1,913

1,643

2,369

2,049

3,242

1,794

2,269

2,947

2,657

3,302

3,033

3,416

1,848

1,616

2,445

2,425

3,339

3,317

3,026

3,072

Source: IBM

March 2011

Metals | New Order



Inadequate rail capacity,

frequent freight revisions

adversely impact iron

ore exports

Rail freight

In India, rail freights for goods subsidize passenger traffic freights, leading to higher

transportation cost as compared with the global standards. Besides, Indian Railways follows

a dual freight pricing policy for iron ore. The freight on cargo meant for exports is higher

than on cargo meant for domestic consumption. In the last four years, rail freights on iron

ore exports have been changed 14 times. In 2010 alone, the freights were changed five

times. The iron ore industry has to face further challenges in sourcing rakes. Significant

quantities of iron ore are transported through road, as low axle load and shortage of rakes

results in inadequate rail capacity.

Rail freight for iron ore exports increased 3x over last two years (Rs/ton)

2,600

Class 160

2,100

1,600

1,100

600

100

Class 200X

Class 180

Source: Indian Railway/MOSL

Rail freight for iron ore meant for exports has changed frequently

S.N.

Date

11-May-05

1-Apr-07

1-Aug-07

1-Oct-07

1-Dec-07

22-May-08

1-Dec-08

30-Jan-09

1-Jun-09

Freight

513

646

706

780

903

1,564

1,193

1,293

884

-24

-32

% Chg.

Class

160

200X

180

Busy season surcharge 6 % and port congestion

charge 21%: total 27% introduced

Terminal charges increased from Rs10 to Rs40

Busy season surcharge raised to 7 % and port

congestion charge raised to 35%

Port congestion charge raised to 60%: total 67%

New Freight class 200X introduced+ Congestion

charge abolished

Discounts (25% for distances 401-500kms; 40% for

501-700;50% for 701-1100) introduced

Discount reduced by Rs100/ton

Discounts withdrawn; Freight class cut to 180;

distance surcharge 90%(201-300kms),

75% (301-400), 45%(401-500); 25%(501-600);

10% (601-700) introduced

1-Jul-09

15-Mar-10

1-Apr-10

1-May-10

1-Jun-10

27-Dec-10

28-Jan-11

4-Mar-11

1,084

1,384

1,484

1,584

1,884

1,916

2,416

2,516

180

Distance based surcharge + Rs200

Distance based surcharge + Rs500

Distance based surcharge + Rs600

Distance

based

surcharge + Rs700

surcharge + Rs1,000

surcharge + Rs1,500

surchage + Rs1,600

Source: Indian Railway/MOSL

Remarks

March 2011

Metals | New Order

Though Orissa iron ore

fetches the highest prices in

the spot market, the residual

realization to mining

companies at the pithead is

very low

Logistics and taxes take away ~72% of iron ore export realization for Orissa

mines

Of the four mining regions in India, three are located 400-600km from the ports. Barbil

(Orissa and Jharkhand) is the farthest - about 500km from the port, leading to high logistics

cost. Though Orissa iron ore fetches the highest prices in the spot market, the residual

realization to mining companies at the pithead is very low. On an average, ~72% of the

iron ore price is eaten by logistics cost, royalty, export tax and income tax. At lower iron

ore prices, this percentage goes up to 90-95%, making exports unviable from mines like

Barbil in Orissa/Jharkhand and Bailadila in Chhattisgarh. When iron ore prices go below

US$80/ton, the government is forced to lower railway freight and export duties, as exports

from the Indian hinterland become unviable.

Proximity to ports enables Goa mines to remain profitable across cycles

On the other hand, despite inferior grade ore and lower realizations, iron ore mines in Goa

have remained profitable through business cycles, due to proximity to ports. Margins per

ton for mines in Goa have been higher than Orissa mines though realizations are higher for

Orissa mines on account of superior grade as evident from the 4-year trends for both

regions (see exhibits below).

Margins per ton for mines in

Goa have been higher than

Orissa mines

Orissa mines: Margins vulnerable to logistics pricing

Ex-mine Margin

Export duty

200

150

100

Royalty

Sea freight

Road

Moisture adjustment

Rail

Income tax

Port charges

Exports (RHS)

-1

-6

Goa mines: Evergreen profitability despite lower grade

Ex-mine Margin

Export duty

200

150

100

Income tax

Sea freight

Royalty

Moisture adjustment

Road

Grade adjust.

Port charges

Exports (RHS)

-1

-6

Source: MOSL

March 2011

Metals | New Order

NMDC is unwilling to renew

contracts with Japanese

mills, as margins on exports

have shrunk

Domestic market more profitable for mines in Barbil and Bailadila

NMDC exports 3m-4m tons of iron ore to Japanese mills through long-term arrangements.

The contract period is now getting exhausted. Since NMDC is earning lower margins on

exports due to export duty and exorbitantly high rail fares for exports, it is not willing to

renew the contracts. Frequent disruptions due to naxalite activities and strong domestic

demand are other reasons for mines in Barbil and Bailadila to avoid exports.

Draft MMDRA proposes a further 26% profit share from heavily taxed industry

The draft Mines and Minerals Development and Regulation Act (MMDRA) has been passed with consensus

by the Group of Ministers (GoM) headed by Finance Minister, Mr Pranab Mukherjee. The industry has

reacted negatively and the Cabinet has yet to take view though initial reactions have been negative. The

draft MMDRA proposes sharing of 26% profit from mining activities.

Other highlights of the draft MMDRA



New mine allotments will be based on a transparent competitive bidding system. The state government

will seek conditional environment, forest clearance and permissions from locals in advance. The

offers will be evaluated based on pre-decided numerical weights attached to key criteria like

technical knowhow, value addition, end use, long-term supply agreement with domestic industry,

existing mining companies whose resources are exhausting in the near future and financial bid.

There will be Mining Tribunals with judiciary power at the national and state levels for resolving

mining related disputes.

The central government will collect cess for national mineral funds for the purpose of R&D,

awareness, and development of the sector.

The state governments too will be allowed to collect cess (to a maximum of 10% of royalties) for

state mineral funds.

As in manufacturing, excise/export tax will be imposed on mine production.

Mining lease will be transferable subject to qualification of buyer and state government will charge

a fee.



May simplify allotment of new leases subject to state government's proactiveness



The new MMDRA has been drafted with focus on driving growth in mining activities and simplifying

procedures. Profit sharing, excise, royalty, central and state cess will bring down the returns from

mining projects. However, a more transparent and time-based mechanism, along with permission

from locals, environment and forest clearances, may expedite mine production.

Profit from mining activities will be calculated on run of the mine (RoM) ore and will be allowed as

expenditure in subsequent year. This will bring down the final impact on PAT to 18-21%, depending

upon applicable tax rate. The impact will be diluted further in case of companies involved in high level

of value addition. However, the specific details on calculating profit (after tax) are still not laid out.



Though a numerical weight-based multiple has been proposed for allotment of new mining leases,

the size of weight has been left to the state governments' discretion.

Though excise on mine production has been proposed, there is no clarity on whether this will be

"CENVATable".

Share of profit will be subjected to a minimum amount equal to royalty in case there are not enough

profits in a particular year. It is not clear if carry forward losses will be allowed.

Some companies have been spending significant amounts on CSR activities. It is not clear if this will

be allowed as a deduction against the proposed 26% profit share.



March 2011

Metals | New Order

Global iron ore prices to peak in 2011, with least supply

growth

Iron ore sales realizations (on fob basis) are touching new highs though spot prices (on

C&F basis) delivered to China are yet to cross the all-time high of US$205/ton for 63.5% Fe

achieved in 2008. The iron ore market, which headed into oversupply in 2HCY08 due to

scheduled commissioning of a number projects that were to bring ~300mtpa of new capacity

over 2008-2010, has become tight once again. This is because several projects got shelved

during the financial crisis and only 180mtpa of new supplies came to the market during the

period. We expect iron ore supply to remain tight in 2011 and prices could surpass the

previous high of 2008.

Though Chinese iron ore

imports registered a small

decline in 2010…

Chinese iron ore imports declined 1.4% in 2010 after 41% growth in 2009

China took the benefit of low global iron ore prices and its imports grew 41% in 2009,

driven by fiscal stimulus-led demand growth and shutdown of its local mines. The scenario

has started changing in the last 12-15 months. As iron ore prices crossed US$100/ton

towards the end of 2009, a number of high cost mines became operational in China.

Though Chinese iron ore imports continued to grow in the first 3-4 months of 2010, they

tapered off later in the year due to lower crude steel production and rising local iron ore

production. Chinese iron ore imports registered a small decline of 1.4% in 2010 to 619m

tons.

Spot price in China (US$/ton)

Fob change (RHS)

100

-5

-40

210

165

120

CIF

FOB

Contract price for Brazil ore

FOB

180

135

Freight

Source: Bloomberg/MOSL

Pig iron production

China

RoW

+8%

YoY

700

525

350

+24%

YoY

RoW

175

CAGR (1995-07) =1% in RoW

CAGR (1995-07) =14% in China

Source: MOSL

March 2011

Metals | New Order

…the global seaborne trade

grew 11-12%

Though Chinese iron ore imports declined in 2010, the global seaborne trade still grew by

11-12% to 1,003m tons, as pig iron production in the rest of the world recovered by 24%.

Expect tight global supply in 2011; prices to touch new highs

We expect iron ore supply to remain tight in 2011 because demand will grow across the

world. Steel production will still grow in China albeit at slower rate, and the rest of the

world (RoW) is yet to recover from the financial crisis. On the supply side, the Big-3

mining companies will bring an additional 20m tons and junior miners will bring an additional

42m tons (~28m tons from Australia and ~10m tons from Brazil) during 2011. Supplies

from India will shrink by 6-7m tons. Iron ore prices have already soared and are very

close to the previous highs of 2008. We believe that there is very high probability that

prices will go well beyond the highs of 2008.

Higher prices leading to re-opening of closed mines; encouraging new

capacities

Higher iron ore prices have led to re-opening of closed mines, which brought ~106m tons

(~88m tons from the Big-3 miners and ~9m tons from FMG) of additional supplies in 2010.

Also, a number of projects have been announced, which will bring ~730mtpa of new

capacity to the market over the next five years. This will require ~US$60b of investment.

Interestingly, most of these projects are already funded and majority of the projects have

the requisite statutory clearances.

Chinese steel mills have been aggressively buying equity in projects across the world.

China, which now has equity investments in overseas mines of 50-60mtpa capacity, will

have 300mtpa in 4-5 years at an investment of US$20b-25b. Many projects with low

grade ore have received funding e.g. Citic Pacific has committed US$2.6b in 28mtpa

magnetite iron ore project in Pilbara. This project had got delayed due to the financial

crisis, but is now slated to come on stream by the end of 2011. FMG has committed

US$8.8b to expand capacity from 50mtpa currently to 155mtpa by 2015. Similarly, many

projects in Brazil and Canada, which will produce sinter and pellet feed, have got funding

from Chinese, Japanese and Indian investors. Since these projects are funded by steel

producers, the risks to these projects are minimal.

We expect iron ore supply to

remain tight in 2011 because

demand will grow across

the world

Higher iron ore prices have

led to re-opening of closed

mines, which brought

~106m tons of additional

supplies in 2010

A number of projects have

been announced, which

will bring ~730mtpa of

new capacity over the

next five years

Global iron ore exports (m tons)

2004

Vale

Rio Tinto

BHP-Billiton

FMG

India Exports

South Africa

Others

Total

Change (yoy)

231

128

646

2005

255

148

114

717

2006

276

152

114

106

763

2007

310

179

122

823

2008

310

193

127

106

107

889

2009

247

218

128

115

111

897

2010

303

239

138

146

1,003

106

2011E

311

244

145

180

1,061

2012E

316

249

180

247

1,176

115

2013E

356

254

205

295

1,310

133

2014E

380

302

223

120

368

1,512

2015E

462

307

240

155

459

1,733

202

221

Source: MOSL

March 2011

Metals | New Order

We expect the iron ore

market to move into

oversupply in 2-3 years

Supply to ease, with new capacities of 730mtpa over five years

We expect the Iron ore market to move into oversupply in 2-3 years, as nearly 730mtpa of

new supply is expected to hit the seaborne market over five years. Overinvestment in bulk

shipping capacities by shipping companies, by Chinese steel mills, and by the largest iron

ore exporter, Vale, in super capsize vessels, which can carry 300k-400k tons of ore, will

keep freights low. Hence, far-off mines in Canada, Brazil, Chile and Peru will be viable,

even if iron ore prices soften. We have analyzed most of the project announcements over

the last few years to understand the expected supplies. Brazil will be the biggest contributor,

accounting for nearly 61% of the new supplies.

Big-4 companies will add 442m tons

The Big-3 players are expected to bring 329m tons of new supplies over five years. Vale

will contribute nearly half of that, while BHP-Billiton and Rio Tinto will bring 102m tons

and 68m tons, respectively. FMG will raise capacity to 155mtpa by the end of 2014,

bringing new supplies of 113m tons over five years - the most aggressive growth after

Vale. Bulk of the 442m tons of new supplies i.e. 61% of 730m tons will still remain

consolidated among four players. However, the combines share of the Big-4 will slip from

72% in 2010 to 67%.

Junior mining companies will add 313m tons

Junior mining companies will bring nearly 313m tons of supplies over five years. Brazil

will lead, with new supplies of 164m tons. As a country, Brazil's total supplies will increase

by 323m tons, i.e. 44% of new global supplies of 730m tons.

Brazil



CSN owns 100% of Casa de Pedra and 60% of Namisha. CSN is investing BRL11.6b

in mining projects. Projects include the expansion of Casa de Pedra to 50mtpa from

21mtpa and the expansion of Namisa (which is 40% controlled by a consortium of

six Japanese companies and one South Korean company) to 39mtpa from 6.8mtpa.



Expansion of Casa de Pedra to 40mtpa was concluded in June/July 2010.



CSN exported 32m tons of iron ore in 2010, less than 37m tons previously forecast

because of heavy rains that hit Rio de Janeiro in March-April, 2010. CSN expects to

gradually increase its stake in the seaborne iron ore market until becoming the

fourth-largest global supplier in 2015 with 84mtpa. Handling capability at the Itaguaí

port will be increased to 84mtpa of iron ore products from 30mtpa as part of the

mining budget. The port's capacity has reached 45mtpa in October 2010.



Mineração Usiminas (JV with Sumitomoto that paid US$1.26b for 30% stake) approved

a BRL550m (US$303m) investment to increase capacity to 12mtpa iron ore in the

second half of 2012, up from 7mtpa iron ore. By 2015, Mineração Usiminas plans to

reach 29mtpa capacity through estimated investments of BRL4.1b. By 2015, iron

ore capacity of 7mtpa will feed Usiminas' Cubatão steel works in São Paulo, while

around 22mtpa of iron ore will be sold to third parties. Of this, 12mtpa will be exported

through Sudeste Port. Porto Sudeste will be operational by the end of 2011 and will

have a total iron ore shipping capacity of 50mtpa. Usiminas will then need to export

up to 10mtpa of iron ore from 2015 onwards: either by building a port with a similar

capacity to Sepetiba, or by increasing iron ore shipments through Sudeste Port and

other facilities in South East Brazil.



MMX will increase installed capacity in Serra Azul to 33.7mtpa by 2015, up from

8.7mtpa currently at an investment of US$2.92b i.e. US$79/tpa. MMX is also investing

March 2011

Metals | New Order

New supplies from junior miners in Brazil

Sr.

No.

Casa de pedra

& Nimisha

Serra Azul

Minas Rio

Sul Americana

de Metais (SAM)

Mineração Usiminas

BMBV

Ferrous Resources

Greystone

CSN

MMX

Anglo

Honbridge

Usiminas

ENRC

Ferrous

Resources

ENRC

Hamatite

Pellet feed

Hamatite

Pellet feed

31.8% Fe

Sub

124

204

164

Source:Metal Bulletin/MOSL

32% Fe

Project

Operator

Type

Grade

2010

2011

2012

2013

2014

2015

Incr.

2016

2010-15 onwards



US$300m in Chile to set up infrastructure for exporting 10mtpa iron ore from its

under-development mines 80km away in Copiapo. It will be ready by June 2013.

Hong Kong-based Honbridge Holdings acquired 100% stake in Brazil's Sul Americana

de Metais (SAM), which will produce up to 25mtpa of pellet feed in the Minas Gerais

state at an estimated investment of US$3b. SAM's Salinas is under drilling stage

currently and reserves are estimated at 2.8b tons. Salinas is expected to come on

stream by March 2014. Pellet feed production is expected to be transported through

a slurry pipeline that Sul Americana de Metais plans to build in Brazil. The pipeline

will link the mine in Minas Gerais to a port on the coast of Bahia state.

Anglo American will start civil building work in March 2011 on a beneficiation plant, a

tailings dam and a mine that will comprise its 26.5mtpa Minas-Rio pellet feed iron

ore project in Brazil. The announcement follows receipt of the second part of the

mine installation license granted on 9 December 2010 by Supram, the Minas Gerais

state agency responsible for environmental licensing. It should take 27-30 months to

construct and commission the mine and plant, complete the project, and deliver the

first ore on ship. This means commercial production at Minas-Rio will start between

the third and fourth quarters of 2013.

Several key approvals remain outstanding and these are on the critical path of the

project, which will impact the time and cost to complete. Output will be transported

through a 525km slurry pipeline to the Açu Superport, which is being built by LLX

Logística on the northern coast of Rio de Janeiro state. The port will be operational

in the first half of 2012 and will have capacity to handle 60mtpa of iron ore, 10.3mtpa

of steel products, 12.6mtpa of coal, and 2mtpa of pig iron, among other products.

Ferrous Resources is moving ahead with a project to produce 50mtpa of iron ore

(pellet feed) in Brazil, although it now estimates full capacity will be reached by the

end of 2017, nearly two years after the previous forecast of early 2016. A 400km

slurry pipeline will be constructed to link the mine to a private port to be built in

Presidente Kennedy city, in Espírito Santo state.

ENRC controlled BMBV's (Bahia) iron ore project has a JORC-compliant resource

base of 1.8b tons at 32% Fe content. Greystone has a JORC-compliant iron ore

resource base of 147m tons at 31.8% Fe, and an additional potential resource of

187.5m tons. Production is expected to start with initial capacity of 11mtpa in 2013,

which will be ramped up to 19.5mtpa. This would consist of 13.5mtpa of blast furnace

pellet feed fines and 6mtpa of direct reduction pellet feed fines up to 67% and 68.5%

Fe content. ENRC paid US$1b for the Bahia project, while Greystone will cost further

US$150m.

March 2011

Metals | New Order

Australia



Citi Pacific has undertaken the Sino Iron Project in Pilbara region to produce 28mpta

at a capital cost of US$2.6b. The production of magnetite ore will begin in 2HCY11.

Sino Iron is the largest magnetite ore project in Australia and has the potential to

expand further to 70mtpa. The reserves are 2b tons with an option on another 4b

tons.



Both Western Desert and Sherwin Iron hope to start shipping ore in 2012. Prospective

iron ore miners Sherwin Iron and Western Desert Resources have established a JV

to develop a common-user export facility in the Gulf of Carpentaria, Australia.



Atlas Iron has entered infrastructure discussions with BHP Billiton barely three weeks

after the junior iron ore producer hit an annualized export rate of 6mtpa ahead of

schedule. Iron ore miner Atlas Iron is set to expand through the acquisition of fellow

Australian miner Giralia Resources for AU$828m. Atlas is currently exporting DSO

from its Pardoo and Wodgina projects at a combined rate of around 6mtpa. Giralia

has a DSO resource of 397.5mtpa at 56.1% Fe content iron ore, according to its

website.



Murchison and Japan's Mitsubishi own 50:50 in Crosslands Resources, which

operates the 2mtpa Jack Hills iron ore mine in Geraldton, and is progressing an

expansion to 25-35mtpa. First shipment is now scheduled for late 2014 or early

2015.



Moly Mines Limited has shipped the first 54,500 tons of iron ore from its Spinifex

Ridge iron ore project in Western Australia to China. The project's expected annual

production rate is 800k-1m tons of iron ore from deposits located in the same area

as its Spinifex Ridge molybdenum project, which has yet to begin production.



The Mt Jackson J1 deposit project is expected to help Cliffs' increase production at

Koolyanobbing from 8.5mtpa to 11mtpa, or by 29.4%.



Brockman Resources and Fortescue Metals Group are in negotiations regarding an

agreement for rail haulage, port access and marketing service for its Marillana iron

ore project in Western Australia. The Marillana project could produce 17mtpa (dry)

once fully operational, shipping its first ore in early 2014.



Junior miner IMX Resources loaded its first shipment of iron-copper ore in Port Adelaide

from the Cairn Hill mine in December 2010. At full production, Cairn Hill will be

shipping ore at a rate of around two vessels per month, equivalent to 1.7mtpa.



Western Australian iron ore juniors Gindalbie Metals and Sinosteel Midwest

Corporation will share infrastructure and services to cut costs at neighboring mines

in the Mid West region, the two companies said. Both projects are still being

developed. Sinosteel's 1.5mtpa Koolanooka-Blue Hills is expected to start operations

this month, while 12mtpa Karara, which Gindalbie is developing in a joint venture

with China's Anshan Steel, is due to come on stream in 2011.



Australian iron ore exploration company Batavia Mining Limited said that the Roper

River deposit, in northern Australia, will start production at 5mtpa of direct shipping

iron ore (DSO) by 2012. In the next 5-7 years, the company expects to boost production

to 25mtpa and to build infrastructure to export material from Maria Island, close to

the mine. An extensive historical database supports an exploration target of 400m-

500m tons grading above 40% Fe content, according to Batavia. The mine is 300km

away from Darwin port and 80km away from the railway which will carry the ore to the

port at Darwin.



Western Australia could build a deepwater iron ore port to handle 350mtpa of iron ore

exports from the Pilbara, the state government said. The Anketell port, 10km from

Cape Lambert, would complement the other two major iron ore ports of the area: Port

March 2011

Metals | New Order

New supplies from junior miners in Australia

Sr. Project

No.

Sino Iron

Marillana

Karara

Operator

Citic pacific

Brockman

Gindalbie

Metals

8.5

40% Fe

62.5% Fe

1.7

1.5

0.8

DSO

56.10%

60% Fe

Sub

Source:Metal Bulletin/MOSL

Type

Magnetite

8.5

Grade

2010

2011

2012

8.5

1.7

1.5

2013

1.7

1.5

2014

1.7

1.5

2015

1.7

1.5

1.7

1.5

Incr.

2016

2010-15 onwards

2.5

Koolyanobbing

Cliff

Pardoo and Wodgina Atlas iron

DSO

Roper River

Batavia Mining

Peculiar Knob

Jack Hill

Western Plains

Resources

Crossland resource

Wilcherry Hill

Iron clad

Cairn hill

IMX resources

Koolanooka-Blue Hills Sino Steel

Spinifex Ridge

Giralia

Mt. Jackson J1

Moly Mines

Atlas iron

Cliff

Hedland and Dampier ports. Three major iron ore projects are in the vicinity of Anketell

and are potential investors in the port: Api Management for its 30-40mtpa project in

West Pilbara; Fortescue Metals Group for its 30-50mtpa Solomon project; and China

Metallurgical Group Corp for its 15mtpa Cape Lambert project, the government said.

"The government will work with these companies, or an infrastructure provider to

develop the project, with plans to commence operation by 2015," Barnett said in a

statement.



Perth-based iron ore junior Iron Clad Mining has signed a sales and marketing

agreement with Singapore trader OM Materials (OMS) for its total production at

Wilcherry Hill until 2013. Under the agreement, OM Materials will buy 2mtpa of

crystalline magnetite ore from Iron Clad's South Australian project, which will start

production in the first quarter of 2011.



Australia's Western Plains Resources has agreed to sell 9m tons of iron ore fines to

mainly China from 2011, said Chairman Bob Duffin. The miner has signed a

memorandum of understanding to sell output from its Peculiar Knob project in South

Australia, which is set for commissioning in the second half of 2011 at an initial 2-

3mtpa. The material has a Fe grade higher than 62.5% and the impurities of

phosphorous and alumina are low. The haematite mine is situated near Coober Pedy,

770km northwest of Adelaide.

Canada



Consolidated Thompson operates the high grade (66% Fe) Bloom Lake Mine, which

recently ramped up to 8mtpa production and turned its first profit. Production will

double to 16mtpa by end of 2014 at a capex of US$500m. The output is already tied

up in offtake agreement with Wuhan (WISCO). Cliff has signed US$4.94b all cash

deal to acquire 100% of Consolidated Thompson. It controls 580m tons of proven

and probable reserves and has more than 1b tons of indicated resources.



Adriana (19.9% stake sale to Wuhan Steel) sold 60% stake in Lac Otelnuk and

December Lake iron ore projects for US$121m to Wuhan Steel. The Lac Otelnuk

project has an estimated 4.29b tons indicated and 1.97b tons of inferred iron ore at

29% Fe (19 January 2011).

March 2011

Metals | New Order



Baffinland's original plan was to develop an 18mtpa open-pit mine producing lump

and fines grading around 65% Fe iron ore starting production around 2015. ArcelorMittal

could spend upwards of US$4b over 4-5 years bringing Baffinland Iron Mines' Mary

River project on stream, according to industry estimates. The project, which lies

within the Arctic circle, will be relatively difficult to develop.



The bulk of capex will be on infrastructure, including rail and a port to ship iron ore.

The real challenge for the project has been to find a logistics solution to shipping

from a predominantly icebound-port, at a reasonable cost. This will involve a fleet of

vessels with ice breaking capabilities, Baffinland's development proposal outlines,

which will be another significant expense. (10 November 2010)



Arcelor-Mittal expects to increase its iron ore production by nearly 45% over the

next five years. The company is targeting iron ore output as high as 100m tons by

2015. The expansion will cost the company about US$4b over the next five years.

(19 November 2010).



Toronto-based Advanced Explorations Inc (AEI) has entered an agreement to partner

with Xinxing Ductile Iron Pipes Company Limited, a subsidiary of Xinxing Pipes Group

Company Limited, and its affiliate China Huaxin International Trade Company Limited

to develop the Roche Bay Plc iron ore project in Nunavut, northeastern Canada. The

project is located near a deepwater harbor on the Melville Peninsula and has an

inferred resource of 357m tons. It intended to build an iron ore nugget plant using the

ITmk3 process from Japan's Kobe Steel Limited to produce higher-grade pig iron

nuggets. This is the same technology being used by Steel Dynamics Inc (SDI), Fort

Wayne, at its Mesabi Nugget plant in Minnesota. A preliminary study suggests that

the project is worth US$2.76b and is expected to have a 50-year mine life.



Labrador Iron Mines Holdings is looking to sell production from its Schefferville Iron

Ore project to European and Chinese markets. The miner, which has a project with

20 direct shipping ore [DSO] deposits stretching over 120km in Labrador and Quebec,

Canada, is hoping to ship 2m tons of iron ore products from 2011, ramping up to

6mtpa eventually. Production consists of 20-25% lump ore and 75-80% sinter fines.

The company, which is 41% owned by UK-based Anglesey Mining, has resources of

150m tons of iron ore and will produce 66-67% hematite DSO products. Ore will be

transported to a nearby rail line and moved 565 km to the Sept-Iles port, where

vessels of up to 140,000dwt will be filled.

New supplies from junior miners in Canada

Sr. Project

No.

Mary River

Schefferville

DSO

Bloom lake Mine

Lac Otelnuk

Operator

Baffinland

(Arcelor-Mittal)

Labrador Iron Hamatite

Mines Holdings

New Millenium

Capital

Consolidated

Thompson

66% DSO

66% Fe

-8

Type

Grade

2010

2011

2012

2013

2014

2015

Incr.

2016

2010-15 onwards

Adriana

29% Fe

(19.9% WISCO)

Roche Bay, Nunavut Advance

A preliminary study suggests that the project is worth $2.76 billion, which is expected to

Exploration

have a 50-year mine life

Sub

Source:Metal Bulletin/MOSL

March 2011

Metals | New Order



New Millennium Capital Corp's 4mtpa direct shipping iron ore (DSO) project in Canada,

which straddles the provinces of Newfoundland and Labrador, and Quebec, is expected

to start production in 2012, with all output going to Tata Steel.

USA



Nearly 75% of iron ore consumed in the United States and parts of Canada originates

from the Mesabi range. Minnesota is situated to serve the Chicago and Lake Erie

markets. The state has been averaging 40m tons annually except in 2009, when

production fell to a mere 19m tons. In 2002, eight companies held ownership in

mines, with the two largest companies holding 50% of the assets. By 2009, three

owners - two steel producers and an iron ore supplier - held nearly 80% stake in the

mines. US Steel Corp, Pittsburgh, holds 22.8m tons of capacity in four mines and

could increase its output to 26.4m tons, with 95% of its domestic needs sourced

from Minnesota. ArcelorMittal USA, Chicago, has 17.2m tons of capacity in three

mines, which supply nearly half of its domestic needs. Cliffs Natural Resources Inc,

Cleveland, has 30.7m tons of capacity, or about 42% of its supply. Pellet demand at

seven other blast furnaces in the United States and one in Canada total another

17.2m tons of iron units each year.



In addition to a half-dozen projects recently completing environmental reviews and

receiving necessary permits, another half-dozen projects are in the review process,

including the expansion of permitted output at Essar Steel Minnesota LLC, US Steel's

Keetac expansion and Steel Dynamics Inc's second phase of Mesabi Nugget LLC.

Another six projects are expected to apply for permits in the near future, including a

potential expansion of US Steel's east pit and ArcelorMittal's central pit.

Afrcia



The first phase of ArcelorMittal's project in Liberia is under construction, with direct

shipping ore production expected in the second half of 2011. The steelmaker is

hoping to produce around 1mtpa of iron ore once the project starts up. This will ramp

up to 15mtpa when in full production, according to its second quarter 2010 results.



Bellzone Mining has sealed a US$2.7b deal with China International Fund Limited

(CIF) to fund infrastructure to service the proposed Kalia iron ore project in Guinea

depending upon market conditions. The Kalia project has a maiden 2.4b tons inferred

JORC magnetite deposit. Once fully developed, Kalia will produce 50mtpa iron ore.

The studies will be complete by June 2011, after which building work will begin.



Bellzone and CIF are also partnering to develop Forecariah Iron Permits, which has

the potential to provide early production and cash flow.



Rio Tinto reported 2.25b tons of iron ore resources at the Simandou project in 2008,

and it plans to develop its first phase production of 70mtpa, potentially rising to

170mtpa. Chalco will invest US$1.35b to join Rio Tinto in developing the giant Simandou

iron ore resource in Guinea, extending China's push for access to overseas raw

materials. Chalco will take 47% share of a JV which controls 95% of the Simandou

project. Rio Tinto will retain a 53% stake in the JV. Political situation is ominous to

the project.



Shandong Iron & Steel Group has agreed to buy 25% stake in the Tonkolili project in

Sierra Leone to secure 10mtpa of iron ore supplies from the end of 2011. China's fifth-

biggest steelmaker will pay African Minerals US$1.5b for the stake, in exchange for

an offtake agreement based on discounted iron ore prices, African Minerals said in a

statement.

March 2011

Metals | New Order

Other countries



Peru:

Shougang Hierro Perú expects to complete its 10mtpa iron ore expansion in

2012 at a capex of US$1b. According to Peru's mining ministry, iron ore output

between January and October 2010 reached 5m ton, up 40% from the 3.56m tons

recorded in the corresponding period of 2009.



Chile:

CAP, which is able to produce 11mtpa currently, was recently granted approval

for a new Greenfield iron ore project and to expand one of its existing facilities.

Developing the Serro Negro Norte Greenfield mine and expanding CAP's Los

Colorados facility will come at a cost of US$916.5m and will boost the company's

output to 18mtpa in the first quarter of 2013.



Scandinavian Resources' subsidiary Kiruna Iron has acquired the Rakkuri project

in northern Sweden from Anglo American Exploration and Rio Tinto. The project is

located less than 3km from LKAB's Kirunavaara iron mine. The company hopes to

establish a 500m tons iron ore resource within the medium term. Rakkuri is within

30km from Kiruna and an open access railway that leads to the port of Narvik,

Norway.



China will boost its equity iron ore imports to 300mtpa, up from 50-60mtpa," said

Jiao at the 12th China Mining Congress in the port city of Tianjin.



Northland Resources has agreed to supply Tata Steel with 6m tons of iron ore

concentrate from its Kaunisvaara project in northern Sweden. Production at

Kaunisvaara is scheduled to begin in 2012. When Kaunisvaara reaches full capacity

during 2014, Northland is planning to produce 5mtpa of iron ore concentrate.



Russia's Metalloinvest may increase iron ore extraction at its Mikhailovsky and

Lebedinsky deposits by 30-40% over the next five years on rising demand.

Metalloinvest holds the largest iron ore reserves in the world at 14.8b tons, based

on the JORC international classification standards.



Russia's Magnitogorsk Iron & Steel has contracted Hatch Engineering & Consulting,

which is the Russian division of Canadian company Hatch, to conduct pre-project

development of the Prioskolskoye iron ore field, which has estimated reserves of

over 2b tons. MMK won an auction to develop the Prioskolskoye iron ore deposit in

the Belgorod region, in South West Russia. Planned capacity up to 25mtpa from

the mine will cover MMK's iron ore requirements for 60 years or more, MMK said.



IRC Limited, a subsidiary of London-based Petropavlovsk, will produce more than

3mtpa of iron ore at fully funded US$340m Kimkanskoye and Sutarskoye (K&S)

project near Russia's border with China from 2013. K&S could produce up to 4mtpa

of 65% Fe concentrate by 2016.

March 2011

Metals | New Order

Australia remains the main source for new coking coal

supplies

Over the last decade, coking coal supplies from US, Canada and Russia have either remained

stagnant or have declined due to high cost of production, aging and safety concerns. Volatility

in coking coal prices has deterred investments in these countries. Russian mines, in

particular, are suffering due to old technology and underinvestment, leading to frequent

mine fires and accidents. The aging US mines are showing a declining production trend.

Recently, Mechel from Russia, Metinvest from Ukraine and JSW Steel from India have acquired

assets in the US, which are essentially a group of very small mines. Opening of new mines

will help sustain current production levels. China, which used to export 25m-30m tons

equivalent coking coal, has turned a net importer, swinging supplies by nearly 40m tons in

2009. Mozambique and Mongolia are future sources of supplies, but large-scale investment

in infrastructure, logistics and political stability remains the key. Australia, which is vulnerable

to floods and cyclones during monsoons, remains the main source of new coking coal

supplies.

Coking coal supply (seaborne trade)

(m ton)

Australia

United States

Canada

Russia

China

Poland

Mozambique

Total Seaborne

Supply Growth (%)

2001

106

186

2008

135

222

2009

125

211

-11

2010

154

231

2011E

157

239

2012E

183

272

2013E

202

2014E

222

295

316

Source: MOSL

Australia will bring 20m

tons of additional coking

coal supplies each year

over 2-3 years

Australia - only reliable source of new projects

In 2011, nearly 15m tons of new coking coal is expected in Australia. Vale commissioned

Carborough Downs Longwall near Moranbah in Queensland, with new capacity of 4.2mtpa

towards the end of 2010. Among the new capacities expected in 2011 are: 4.2mtpa from

BMA's Daunia Project at Moranbah in Queensland, 2.5mtpa from Rio Tinto's Hail Creek

expansion at Mackay, 1mtpa from Xstrata's Oaky Creek expansion, and 2mtpa from

expansion of Wesfarmer's Curragh mine to 8.5mtpa. Existing mines (including Gujarat

NRE in NSW) are also likely to produce more.

Heavy rains leading to unprecedented floods in December 2010 have adversely impacted

mines, rail and infrastructure in Queensland, which accounts for nearly 70% of Australian

coking coal exports. Coal shipments are expected to return to normal only towards the

end of March 2011 provided there is no further damage during the monsoon months of

February and March.

Recovery of coking coal prices and replacing of proposed Resource Super Profit Tax

(RSPT) with Mineral Resource Rent Tax (MRRT) in 2010 has spurred investments in the

sector. Consequently, new capacities of nearly 13.2mtpa, 17.3mtpa and 20.6mtpa are

expected in 2012, 2013 and 2014, respectively. These will mainly be in Queensland. Nearly

20m tons of new supplies are expected each year over 2-3 years from Australia.

March 2011

Metals | New Order

Coking coal projects in Australia

Projects

Curragh Mine

Intergrated Isaac Plains Project

Daunia

Hail Creek expansion

Oaky Creek (phase 1)

Coltan

Kestrel

Middlemount (stage 1)

Byerwen Coal Project

Caval Ridge

(Peak Downs expansion)

Lake Vermont

Middlemount (stage 2)

Oaky Creek (phase 2)

Washpool coal project

Currah Mine expansion

Denham

Eagle Downs

(Peak Downs East underground)

Jellinbah East

Moranbah South project

Olive Downs North

Grosvenor underground

Belvedere underground

Winchester South

Ellensfield coal mine project

Goonyella Riverside Expansion

Operator

Wesfarmers

Aquila Resources/ Vale

BMA

Rio Tinto

Xstrata

Northern Energy

Rio Tinto

Macarthur Coal/ Nobel

QCoal / JFE Steel

BMA

Jellinbah Resources

Macarthur Coal/ Nobel Group

Xstrata

Aquilla Resources

Wesfarmers

Peabody Energy

Aquila Resources/Bowen

Central Coal Management

Jellinbah Resources

Anglo Coal Australia/Exxaro

Macarthur Coal

Anglo Coal Australia

Aquila Resources/ Vale

Rio Tinto

Nebo Central Coal/Vale

BMA

Location

200 km W of Rockhampton

180 km SW of Mackay

25 km SE of Moranbah

120 km SW of Mackay

90 km NE of Emerald

Maryborough

51 km NE of Emerald

6 km SW of Middlemount

100 km S of Collinsville

20 km SW of Moranbah

60 Km SE of Moranbah

6 km SW of Middlemount

90 km NE of Emerald

260 km W of Rockhamption

200 km W of Rockhampton

160 km W of Mackay

20 km SE of Moranbah

90 km E of Emerald

4 km S of Moranbah

30 km S of Coppabella

8 km N of Moranbah

160 km W of Gladstone

40 km S of Moranbah

175 km W of Mackay

30 km N of Moranbah

Startup

2011

2012

2013

2014

2015

2016

New Capacity

increase to 8.5 Mt

1.6Mt coking and thermal

4 Mt coking

2.5 Mt hard coking

1 Mt coking

0.5 Mt coking

1.7 Mt coking

1.8 Mt coking (ROM)

10 Mt coking

5.5 Mt coking

4 Mt coking

3.2 Mt coking (ROM)

3 Mt coking

1.6 Mt coking

2 Mt coking

5-6 Mt coking

4.6 Mt coking

1-2 Mt coking

6.5 Mt coking

1 Mt coking

7 Mt hard coking

7Mt hard coking

4 Mt of coking and thermal

4.5 Mt thermal and coking

up to 9 Mt hard coking

Source:Metal Bulletin/MOSL

Infrastructure investments

will start easing bottlenecks

in rail and port facilities

from 2012

Rail and port infrastructure has been one of the bottlenecks in coking coal exports from

Australia. However, infrastructure investments will start easing bottlenecks from 2012.

Queensland (QLD) and New South Wales (NSW) are the two key mining states on the

eastern coast of Australia, with ship loading capacity of 220mtpa and 224mtpa, respectively.

In the next 2-3 years, new port handling capacities of 135mtpa and 48mtpa are planned in

QLD and NSW, respectively.



Queensland - new port handling capacity of 135mtpa in 2-3 years

Abbot Point Coal Terminal (APCT), Dalrymple Bay Coal Terminal (DBCT), Hay Point

Services Coal Terminal (HPSCT), RG Tanna Coal Terminal (RGCT) at Gladstone and

Brisbane Coal Terminal (BCT) handle almost all of the coking coal exported from QLD.

In the last 2-3 years, the only port expansion in QLD has been the expansion in DBCT's

port handling capacity from 72mtpa to 85mtpa. Port handling and rail shipment constraints

have restricted the growth of coking coal exports from Australia. However, a number of

projects are now in progress, which will add nearly 201m tons of new port handing capacity

at a capex of ~US$9b over 10 years. A further US$3b is being invested to strengthen rail

capacity.

In the near term, only 25mtpa of new capacity is expected, with the expansion of APCT

from 25mtpa to 50mtpa under project X50 towards mid-2011. APCT's X50 expansion can

effectively be utilized when the 70km rail link from Goonyella is established in early 2012.

The rail link will have carrying capacity of 50mtpa, which is being built at a capex of

March 2011

Metals | New Order

US$1.1b. Further US$800m is being invested in doubling of the lines from Rocklands to

Kabra in 2011, from Dingo to Walton in 2012, and to build the Maura link to Aldoga in

2013.

APCT will be further expanded to 80mtpa by 2013, bringing another 30mtpa of port handling

capacity. In December 2009, the QLD government approved the building of a new coal

handling terminal, Wiggins Island Coal Terminal (WICT) at Gladstone at a capex of US$3.8b.

WICT, at stage-1, will deliver port handling capacity of 25mtpa by the end of 2013, which

will be ultimately raised to 70mtpa by 2020. Thus, about 55mtpa of new capacity will be

delivered in 2013.

Xstrata is building the Balaclava Island Coal Terminal (BICT), 50km north of Gladstone,

at a capex of AU$1b. BICT will have a capacity of 35mtpa and is expected to start

operations towards the end of 2014. BMA is expanding Hey Point Port's capacity from

44mtpa to 55mtpa, translating into new port handling capacity of 11mtpa in 2014. Thus,

55mtpa of new capacity will be delivered in 2014.

WICT, at stage 2, will be expanded to 50mtpa by 2016 and to 70mtpa by 2020. In December

2010, Surat Basin Rail (Southern Missing Link) received environmental approval. The

project to connect Wandoan to Theodore by 210km rail link at a capex of US$1b will take

2.5 years. Work is expected to start in 2011, implying completion by the end of 2013.



New South Wales - new port handling capacity of 48mtpa in 2-3 years

NSW has two important ports of Newcastle and Port Kembla. These ports are not as

congested. Kooragang, Carrington and NCIG with port capacity of 88mtpa, 25mtpa and

30mtpa, respectively are the three key coal handling terminals in Newcastle. Kooragang

and Carrington are promoted by Port Waratah Coal Services (PWCS). NCIG terminal

started operations on 3 May 2010, with initial capacity of 30mtpa. Newcastle ports' shipping

capacity will expand to 163mtpa by the end of 2011 on completion of 20mtpa expansion to

108mtpa at Kooragang terminal at a capex of AU$670m.

NCIG terminal will expand to 53mtpa, thereby bringing new capacity of 23mtpa in 2013.

Thus, the shipping capacity at New South Wales ports will expand from 156mtpa currently

to 204mtpa.

In December 2010, the Australian government recognized the need for a fourth terminal,

Major Project Facilitation (MPF) promoted by PWCS, with initial capacity of 45mtpa.

Port Kembla too will expand capacity by 5mtpa to 18mtpa in 2012.

Mozambique - a potential supplier

The Tete region in Mozambique has the potential to develop into an alternate source of

coking coal supply in seaborne trade provided significant investment is made in infrastructure

building.

Vale and Riversdale are

developing coking coal

projects in Mozambique…

March 2011

Vale and Riversdale are developing coking coal projects in Mozambique and are targeting

to start production in 2011. Vale's Moatize stage-1 US$1.6b project and Riversdale's Benga

stage-1 US$270m project will have hard coking coal production capacity of 8.5mtpa and

Metals | New Order

1.7mtpa, respectively. These projects should ramp up fully in 1-2 years. Both Vale and

Riversdale are considering expansion of coking coal mine capacity to 17mtpa and 33mtpa,

respectively in stage-2.

…but transport remains the

bottleneck for fast ramp-up

of coal exports

Transport remains the bottleneck for fast ramp-up of coal exports. There is just one single-

line 1,700km rail connection, the Linha do Sena Railway to the Beira port, which can

transport a maximum of 10m tons of coal per year. The war-torn line (Sena Railway) has

been revamped recently with the help of IRCON. Though the production of coal is expected

to start in 2011, exports of the full 10.3m tons of hard coking coal is expected only in 2013.

Further expansion of capacity remains contingent upon infrastructure investment.

In September 2010, Vale acquired 51% stake in a distribution company in Mozambique,

Sociedade de Desenvolvimento do Corredor do Norte S.A. (SDCN) to get control over

logistics. SDCN is a major shareholder in Mozambique's rail transport companies, Corredor

de Desenvolvimento do Norte (CDN) and Central East African Railway (CEAR). Vale

has, thus, become an indirect owner of these two railway companies. Vale plans to invest

US$298m in logistics to connect Tete to Nacala port as an alternate transport route. This

will allow Vale to double coking coal exports.

Riversdale is carrying out feasibility studies to evaluate transportation through the Zambezi

River. This will involve dredging and building of a new port.

Mongolia - new supplies currently only for China

Mongolia, land locked between Russia and China, is developing a number of coal projects.

Energy Resource and South Gobi have started coking coal production at Ovoot Tolgoi

district in South Gobi, which is largely exported to China. The Mongolian government is

undertaking another large scale coal mine project, Tavan Tolgoi, and is developing an

alternate 1,100km rail link to Russia to export through East Russian ports to other countries.

Coal exports from Mongolia have started rising, which has reduced China's dependence

on the seaborne trade to some extent. In 3-4 years, Mongolia may also emerge as an

important contributor to the seaborne trade.

Energy Resource started coking coal production, with initial production of 1.8m tons in

April 2009 at Ukhaa Khudag (UHG) coal mine in Mongol. UHG is an open cast coal mine

at Ovoot Tolgoi district in South Gobi. Raw coal production in 2009 was 1.8m tons, which

is expected to expand to 15mtpa by the end of 2013. Coal produced at the mine is exported

to China without washing.

South Gobi Energy operates the Ovoot Tolgoi coal mine in the South Gobi region of Mongol

near the border with China. This is an open cut mine located in the South West part of

South Gobi Province, where full stride coal production was launched in July 2008. The

mine produces high quality thermal coal and metallurgical coal, with the total production

volume of 1.5mtpa. At Ovoot Tolgoi mine, the coal production was raised by expansion

works to 4mtpa in 2010. Further expansion to 6.5mtpa in 2011 and 8mtpa in 2012 planned.

More than half the coal produced at Ovoot Tolgoi is exported to Inner Mongolia Autonomous

Region and Gansu Province of China. In addition, South Gobi Energy plans to develop the

Vale has acquired majority

stake in SDCN, a

distribution company in

Mozambique

Mongolia is developing a

number of coal projects

March 2011

Metals | New Order

underdeveloped Soumber concession located 20km east of the Ovoot Tolgoi mine for

exports to China. Rio Tinto owns 34.9% in Canadian mining company Ivanhoe, which in

turn owns 57.3% in South Gobi. Thus, Rio Tinto now has 20% stake in the Ovoot Tolgoi

project.

Peabody and Winsway Coking Coal Holdings of China are actively developing concessions

in the South Gobi Coal Region through equal joint venture to export metallurgical coal and

thermal coal to the Asian region including China as the central market.

In November 2009, Mongolia Energy Corp of Hong Kong promoted Khushuut Metallurgical

Coal Project in Mongol to develop metallurgical coal concession in the Khovd Province of

West Mongol. The metallurgical coal production at Khushuut concession will be 3mtpa,

which will be raised to 8mtpa in the future.

The construction of a

1,100km railway line to the

Russian border will

facilitate exports

On 25 June 2010, the Mongolian Parliament gave a green signal to the construction of a

railway line of 1,100km from Tavan Tolgoi deposits to the Russian border. The railway will

export metallurgical coal produced at Tavan Tolgoi through Russia directly to Japan, South

Korea and so on without passing through China. In early July 2010, the Mongolian Parliament

approved the release of 50% interest in large-scale metallurgical coal project in South

Gobi, Tavan Tolgoi Project.

Canada - expect 2m-3m tons of new supplies

Canada currently produces 25m-26m tons of coking coal, which is mostly found in Bristish

Columbia and Aberta and is evacuated from western coast ports at Vancouver. Teck

Resources accounts for 85-90% of the entire production in Canada through its operations

in six mines in British Columbia. Teck's current rate of production is ~22mtpa, with a

potential to ramp up to 25mtpa provided there are no disruptions from strikes, weather,

breakdowns, etc. Western Coal Corp (WCC) and Grand Cache are the only other significant

coking coal producers in Canada, accounting for 2-3mtpa and 1.5-2mtpa, respectively. At

this stage, there is no visibility over opening of new mines though a couple of mine expansion

projects are under consideration.

The cost of Canadian mined coking coal loaded on ship is US$90-95/ton. Coking coal

prices have been highly volatile in the last five years, moving from US$50-60/ton in 2005

to US$300/ton in 2008, then falling back to US$129/ton in 2009, and rising again to US$225

in 2010. This has deterred large-scale investment in the mining sector in Canada. Teck is

now carrying out feasibility studies to re-open the Quintette mine. If restarted, it can begin

supplying 3mtpa in 2013. Four of Teck's mines have long lives of more that 25 years at

current rate of production. However, two mines, Coal Mountain and Line Creek will

deplete in 9-10 years.

WCC has plans to bring new supplies of 2m-3m tons over the next couple of years.

Grande Cache too has plans to raise coal production from 2mtpa currently to 3mtpa.

Canada currently produces

25m-26m tons of coking coal

Volatile coking coal prices

have deterred large-scale

mining investments

in Canada

March 2011

Metals | New Order

Steel producers remain vulnerable to global raw material

shortage

Having witnessed very strong growth of 8% during 2001-2007 and the extremely volatile

period of 2008-2010, we expect global steel consumption to grow at a moderate 4.1% over

the next four years. This will drive demand for raw materials like iron ore and coking coal.

Supplies of both iron ore and coking coal are, however, likely to remain tight in 2011 and

2012. We expect average iron ore prices to increase by US$29/dmt and coking coal prices to

increase sharply by US$86/dmt to an average of US$300/ton in FY12. Steel producers will

have to increase steel prices by US$144/ton in FY12 to pass on the higher cost of raw

materials.

Global steel consumption

is likely to increase

by 5.3% in 2011

Expect global steel consumption to grow at 4.1% over the next four years...

In 2010, global steel consumption surpassed the previous all-time high of 2007. Having

witnessed very strong growth of 8% during 2001-2007 and the extremely volatile period

of 2008-2010, we expect global steel consumption to grow at a moderate 4.1% over the

next four years. According to World Steel Association (WSA) Short Range Outlook, October

2010, steel consumption is likely to increase by 5.3% in 2011, which factors 3.5% growth

in China and 13.6% growth in India. Steel consumption is expected to grow at 5.7% in

Europe and ~9% in the Americas as these regions are yet to recover fully from the

financial crisis of 2008. We expect growth to moderate post 2011, as China will continue

to slow down and the West will move from recovery phase to normal growth.

Global finished steel demand

Demand

1,500

Grow th

Average Grow th

1,300

1,100

900

-3

700

2002 2003 2004 2005 2006 2007

2008 2009 2010

2011 2012 2013 2014

-9

Source: WSA and MOSL

…driving demand for iron ore and coking coal

Finished steel consumption is likely to grow by 68m tons in 2011, by 55m tons in 2012, 50m

tons in 2013 and 48m tons in 2014. Assuming that 30% of the incremental steel is produced

from incremental supply of steel scrap and ramp up of production of raw material from

inland captive mines with steel producers, production through the BoF route will have to

be ~47m tons in 2011, ~38m tons in 2012, ~35m tons in 2013, and 33m tons in 2014. This

will drive demand for seaborne trade by 95m tons in 2011, 77m tons in 2012, 70m tons in

2013, and 67m tons in 2014 for iron ore and by 47m tons in 2011, 38m tons in 2012, 35m

tons in 2013, and 33m tons in 2014 for coking coal.

March 2011

Metals | New Order

Iron ore: incremental demand and incremental supply

Demand

Supply

202

Coking coal: incremental demand and incremental supply

Demand

Supply

133

115

2012

2013

2014

2011

2012

2013

2014

Source: MOSL

2011

Supplies of both iron ore

and coking coal will

remain extremely tight

in 2011 and 2012

Supplies of both iron ore and coking coal to remain tight in 2011 and 2012

Supplies of both iron ore and coking coal will remain extremely tight in 2011 and 2012. In

2011, the supply situation might be worse than in 2008. Prices of both iron ore and coking

coal are likely to cross the previous all-time highs of 2008. Since sea freights have crashed

to 10-year lows, fob realizations for both iron ore and coking coal are likely to make new

highs in 2011.

Iron ore will remain in tight supply for at least two years. While supply is likely to ease in

2013 or 2014, iron ore prices are not likely to fall below US$120/dmt cfr China. This is

because the cost for Chinese iron ore mines is US$90-120/ton, as the average grade has

fallen to as low as 15% Fe. Since the Chinese Remninbi is under constant pressure to

appreciate and the iron ore market is highly consolidated, the floor for iron ore prices will

practically be higher.

Iron ore contracts

FOB

200

150

100

Freight

Fob change (RHS)

105

-35

While iron ore supply will

ease in 2013, prices are

unlikely to fall below

US$120/dmt

Source: MOSL

Coking coal will remain in

structural shortage for the

next 3-4 years

Coking coal will remain in structural shortage for the next 3-4 years. Though the annual

incremental seaborne supply growth over the next 4-5 years is likely to be 20m tons i.e. 4x

the 5m tons average growth in the last decade, it will still be not sufficient because pig iron

production growth will accelerate outside China unlike the last decade of stagnation. India

alone will demand 7m-8m tons of incremental seaborne supply every year. China has the

potential to gobble such volumes in a couple of months, as its local coking coal mines have

March 2011

Metals | New Order

been overexploited. The 40m tons of seaborne coking coal and equivalent coke trade

swing in 2009 by China alone is a testimony to the Chinese appetite. We expect coking

coal prices to increase 44% QoQ to US$325/ton fob in 1QFY12 due to floods in Australian

mines in December 2010 / January 2011.

Coking coal contracts

FOB

350

250

150

-50

Freight

Change

300

200

100

-100

Source: MOSL

To maintain margins, steel

producers will have to

increase steel prices by

US$144/ton in FY12

Steel producers to increase prices by US$144/ton in FY12 to pass on higher

raw material prices

We expect average iron ore prices to increase by US$29/dmt in FY12 and decrease by

US$12/dmt in FY13. Coking coal prices will increase sharply by US$86/dmt to an average

of US$300/ton in FY12 and decline by a modest US$12/ton in FY13. Steel producers will

have to increase steel prices by US$144/ton in FY12 to pass on the cost increase on

account of higher raw material prices.

EBITDA per ton of global steel producers

Arcelor-Mittal

MMK

JSW Steel

700

Corus

NLMK

SAIL

AM-Europe

Tata Steel India

450

200

-50

-300

Source: MOSL

March 2011

Metals | New Order

Ferrous Factories

Sahibabad BHUS 0.5mtpa CR mill

Champa PKI 0.7mtpa steel

Raigarh JSP 3mtpa ISP->6mt*, JPL 1000MW IPP->3400MW* + MISP 0.3mt

Patratu JSP 6mtpa ISP#

Bokaro SAIL 3.8mtpa ISP->4.18mtpa*

Durgapur SAIL 1.6mtpa ISP->2.1mtpa* + JBIL 0.9mtpa

steel / Burnpur SAIL 0.55mtpa ->2.4mtpa*

Purulia JBIL 5mtpa ISP#

Jamshedpur TATA 6.8mtpa ISP->9.7mtpa*

Hazira 4.6mtpa Essar steel

Rourkela SAIL 1.7mtpa ISP->4mtpa* + ADML 0.45mtpa steel

Angul BHUS 2mtpa steel->5mtpa ISP* + JSP 6mtpa ISP#

Tarapur JSTL 0.9mtpa CR mill

Dolvi ISPT 3mtpa steel

Raipur GODPI 0.4mtpa + MISP 0.3mtpa + SEML 0.24mtpa steel

Bhilai SAIL 3.15mtpa ISP->6.56mtpa*

Khopoli BHUS 0.5mtpa CR mill

Vizag 3.6mtpa RINL steel->6.3mtpa+ 125ktpa SEML Ferro alloy

Vijaynagar JSTL 10mtpa steel

Salem JSTL 1mtpa + SAIL 0.34mtpa steel

Integrated Steel Plant

Partly integrated Steel Plant

Ongoing capacity expansion

Greenfield projects

March 2011

Metals | New Order

Ferrous Mines

Hasdeo-Arand coal fields JV

Rajgamar 50mt MISP

Rohne 17mt JBIL

Kiriburu SAIL

N Karanpura 447mt JV

Ghatkuri 97mt ADML

W Bokaro 250mt TATA

Sitarampur JSTL

Urtan 96mt JSP/MISP/BHUS/PKI

Kawardha 75mt PKI

Mand Raigarh (Gare) coalfields

Rajnandgaon SEML

Jharia 394mt SAIL

Raniganj 753mt JV

Andal 230mt JBIL

Noamundi TATA

Gua SAIL

Keonjhar BHUS/ADML

Patrapara 325mt BHUS

Dumri 38mt JBIL

Talcher coalfields JV

Bolani SAIL

Joda TATA

Meghahatubure SAIL

IB Valley JV

Bailadila NMDC/SAIL

Bellary Hospet iron ore region

Shonshi & other mines Goa

Iron Ore Mine

Coal Mine

March 2011

Metals | New Order

Ferrous Large-caps

Companies

Ferrous (Large-caps)

Tata Steel

JSW Steel

Sesa Goa

SAIL

March 2011

Update

SECTOR: METALS

Tata Steel

BSE SENSEX

S&P CNX

18,328

Bloomberg

Equity Shares (m)

52-Week Range (Rs)

1,6,12 Rel. Perf. (%)

M.Cap. (Rs b)

M.Cap. (US$ b)

5,494

TATA IN

971.4

737/449

-7/5/-10

579.9

12.8

Rs597

Buy

Volume and margin expansion



Y/E March

2011E 2012E 2013E

1,350

178

1,416

208

102.0

23.1

366.1

5.9

1.6

0.6

4.1

27.9

15.2

21.1

Sales (Rs b) 1,200

EBITDA (Rs b) 170

NP (Rs b)

EPS (Rs)

72.5

82.8

EPS Gr. (%) -879.0

14.3

BV/Sh. (Rs) 202.8 277.0

P/E (x)

P/BV (x)

EV/Sales (x)

8.2

2.9

0.9

7.2

2.2

0.7

5.4

29.9

13.7

21.7



EV/EBITDA (x) 6.0

RoE (%)

35.7

RoCE (%)

13.7

RoIC (%)

18.0



Shareholding pattern % (Dec-10)

Others,

23.9

Promoter

32.5



Foreign,

17.4

Domestic

Inst, 26.2

Stock performance (1 year)

Tata Steel

Sensex - Rebased

800

700

600

500

400

Mar-10

Jul-10

Nov-10 Mar-11



Margins for Tata Steel's India steel business are likely to expand in FY12, driven

by higher steel prices. Its India business has 100% iron ore integration and 50%

coking coal integration. Steel prices have already responded to the anticipated

increase in raw material prices.

Volumes for the India business will increase 5% in FY12, followed by bigger increase

of 24% to 8.5m tons in FY13 due to expansion of capacity by 3mtpa to 10mtpa by

December 2011. Margins for new volumes will be lower because captive production

of coking coal will not grow in line with steel production, necessitating dependence

on higher cost external sources. However, margins will be higher than non-integrated

players, as its captive iron ore production will keep pace.

Fixed cost too will decline, as manpower is expected to decline 12% to 30,000 by

the end of FY12, while volumes will increase 24% in FY13.

Captive iron ore and coal mines ensure uninterrupted supply of raw material to

India business, while competition remains vulnerable to raw material supply

disruption.

Overseas investment in raw material assets, Riversdale and New Millennium Capital

will start generating cash flows in FY12, with the start of coking coal and iron ore

production, respectively. These investments are worth US$2b-2.5b at current market

prices.

Coking coal production is expected to start from Riversdale in Mozambique in

2HFY12, with stage-1 capacity of 1.7mtpa. Share of Tata Steel in Riversdale coking

coal production is likely to be 0.9m tons in FY12, with potential to generate EBITDA

of US$150m-200m.

New Millennium too is expected to start iron ore production from DSO project in

1HFY13, which will ultimately ramp up to 4m-5m tons. Tata Steel's share will be

~85%, which has the potential to generate EBITDA of US$300m-350m at current

iron ore prices.

Tata Steel Europe (TSE), the erstwhile Corus, too may have self-sustaining cash

flows, with proceeds from the sale of Teesside invested in improving operating

efficiencies, resulting in margin expansion. Currently, TSE margins are significantly

lower than many other players in the region. Management is now guiding that

normalized EBITDA per ton will expand from USS$50 to US$80 in two years. TSE

will generate EBITDA of US$750m (15m tons x US$50/ton) in FY12 and US$1.05b

(15m tons x US$70/ton) in FY13.

Tata Steel still has an investment of US$800m in group company, Tata Motors,

which can bring further cash to the company if the promoter continues to buy as

it did in the last two years.

We believe that growth in high margin businesses both in India and overseas

mineral investments will drive earnings growth. Cash flows from India business

will continue to rise. Focus on cutting costs and improving productivity will aid

long-term earnings sustainability. The stock trades at an attractive EV of 5.4x

FY12E and 4.1x FY13E EBITDA. We reiterate

Buy.

March 2011

Tata Steel

Volume growth in high margin business…

EBITDA per ton (US$)

Sales (m tons)

909

721

384

4.8

5.2

FY 08

FY 09

FY 10

FY 11E

FY 12E

FY 13E

295

6.2

4.8

FY 07

391

397

885

784

6.8

6.4

296

328

365

Realization (US$/t)

970

8.4

970

… will drive RoIC (%)

917

FY 06

FY 07

FY 08

FY 09

FY 10

FY 11E FY 12E FY 13E

TSE still dominates revenues (Rs b)…

Indain Business

TSE and others

… but India business dominates EBITDA (Rs m)

Indain Business

TSE and others

-9

121

124

137

FY08

FY09

FY10

FY11E

FY12E

FY13E

FY 08

FY 09

FY 10

FY 11E

FY 12E

FY 13E

Iron ore production to grow YoY (m tons)

India

Canada

3.0

Coking coal production will grow in FY13 (m tons)

India

Mozambique

1.7

8.0 8.4

6.1 6.5 7.0 7.3

12.0

9.8 10.8 9.8 10.0 10.4

16.8

13.5

12.9

5.1 5.2 5.3

5.6 5.9 5.8

6.4 6.5

7.0 7.2 7.3 7.2 7.2 7.2 7.2

Specific cost to reduce despite wage inflation…

Annual cost(US$/man)

24,000

18,000

12,000

6,000

Specific cost (US$/ton)

100

… through productivity improvement

Productivity(tons/man year)

300

225

150

Head count

Source: Company/MOSL

March 2011

Tata Steel

Financials and Valuation

Income Statement (Consolidated)

Y/E March

Net Sales (Rs b)

Change (%)

EBITDA

% of Net Sales

2009

1,473.3

12.0

181,277

12.3

2010

1,023.9

2011E

1,200.5

(Rs Million)

2012E

1,350.2

2013E

1,415.7

Ratios (Consolidated)

Y/E March

Basic (Rs)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

RoE

RoCE

RoIC

2009

101.9

124.7

132.9

16.0

16.5

2010

(9.3)

26.7

95.7

8.0

(106.4)

2011E

72.5

124.7

202.8

9.0

14.5

2012E

82.8

129.4

277.0

10.0

14.1

2013E

102.0

153.7

366.1

11.0

12.6

-30.5

17.2

12.5

4.8

80,427 170,465 177,624 208,205

7.9

14.2

13.2

14.7

44,917 43,887 45,845 50,767

35,509 126,577 131,779 157,438

30,221 27,735 30,579 32,667

6,859

2,228

4,339

4,465

12,147 101,071 105,539 129,235

-11,837

7,309

310 108,380 105,539 129,235

21,518 32,661 25,705 30,704

6,941

30.1

24.4

23.8

-21,208

152

1,269

-20,092

-8,255

-109.1

75,719

-375

742

76,836

69,526

-n/a-

79,834

667

80,465

15.7

98,532

165

694

99,061

23.1

Depn. & Amortization 42,654

EBIT

138,623

Net Interest

32,902

Other income

PBT before EO

EO income

PBT after EO

Tax

Rate (%)

Reported PAT

Minority interests

Share of asso. PAT

Attributable PAT

Adjusted PAT

Change (%)

2,657

108,378

-40,945

67,432

18,940

28.1

48,492

-409

607

49,509

90,454

16.9

5.9

4.8

4.5

0.7

5.7

2.7

(64.2)

22.3

6.2

1.0

12.1

1.3

8.2

4.8

2.9

0.9

6.0

1.5

7.2

4.6

2.2

0.7

5.4

1.7

5.9

3.9

1.6

0.6

4.1

1.8

76.7

15.3

18.5

(9.7)

4.5

-na-

35.7

13.7

18.0

29.9

13.7

21.7

27.9

15.2

21.1

Working Capital Ratios

Fixed Asset Turnover (x)1.5

1.0

1.3

41.4

83.4

1.2

1.3

43.7

71.7

1.3

1.4

39.9

71.6

1.2

1.4

41.5

75.5

Balance sheet (Consolidated)

Y/E March

Share Capital

Reserves

Net Worth

Minority Interest

Total Loans

2009

2010

2011E

(Rs Million)

2012E

2013E

7,301

8,867

9,587

9,707

264,245 221,516 330,423 404,749 491,308

271,546 230,383 340,011 414,457 501,015

8,949

8,841

8,466

8,501

8,666

599,005 531,004 559,835 524,008 515,276

Asset Turnover (x)

Debtor (Days)

Inventory (Days)

1.6

32.3

A/c Payables (Days)

57.2

Wkg Capital T/O (Days) 43

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Debt/Equity

Def. Tax Liability

27,518 16,541 14,742 12,943

11,144

Capital Employed 907,018 786,768 923,053 959,9091,036,101

Gross Block

995,007 976,2901,001,2901,031,2901,205,010

Less: Accu. Deprn. 630,832 608,126 652,013 697,859 748,626

Net Fixed Assets 364,175 368,164 349,276 333,431 456,384

Capital WIP

Investments

88,880

30,203

89,795 140,746 174,919

34,890 34,890 34,890

43,346

34,890

1.9

4.2

4.3

1.5

1.2

5.2

1.9

4.6

2.3

1.8

4.3

1.4

2.0

4.8

0.8

Cash Flow Statement (Consolidated)

Y/E March

EBITDA

2009

181,277

2010

2,404

46,465

-24,586

2011E

(Rs Million)

2012E

2013E

80,427 170,465 177,624 208,205

-62,644

-32,661

15,544

-25,705

-7,503

-30,704

Goodwill on Cons. 153,649 145,418 145,418 145,418 145,418

Curr. Assets

Inventory

Account Rec.

Cash & Bank Bal.

Others

572,620 457,965 545,510 594,892 710,533

216,687 186,866 224,073 233,659 255,475

130,316 116,240 143,736 147,558 160,989

95,391 87,166 110,006 145,981 242,824

130,225 67,694 67,694 67,694 51,245

Non cash exp. (inc.) 6,647

(Inc)/Dec in Wkg. Cap. 2,848

Tax Paid

-33,813

CF fr. Op. Activity 156,959 104,710

(Inc)/Dec in FA

-83,611

(Pur)/Sale of Invest. -4,743

Int. & Divident Income 4,754

Other inv. activities

CF fr. Inv. Activity -85,428

Equity raised/(repaid)

145

Debt raised/(repaid) 20,047

Dividend (incl. tax) -12,266

Interest Paid

-35,473

CF fr. Fin. Activity -27,548

(Inc)/Dec in Cash

Add: Opening Bal.

Closing Balance

43,983

51,408

95,391

-69,498

8,398

3,054

-61,584

24,465

-29,944

-13,209

-32,662

-51,350

75,159 167,463 169,999

-75,951

2,228

-15,051

-88,774

45,462

28,831

-10,103

-27,735

36,455

-64,173

4,339

771

-59,063

5,346

-35,827

-11,365

-30,579

-72,426

-42,147

4,465

18,428

-19,254

Curr. Liab.&Prov. 302,510 309,464 292,787 323,642 354,470

Account Payables 230,933 233,886 235,945 264,896 292,641

Provisions & Others 71,577 75,578 56,842 58,745 61,830

Net Curr. Assets 270,110 148,501 252,723 271,250 356,063

Appl. of Funds

907,018 786,768 923,053 959,9091,036,101

E: MOSL Estimates

-8,732

-12,502

-32,667

-53,901

-8,224 22,841 35,975 96,843

95,390 87,166 110,006 145,981

87,166 110,006 145,981 242,824

March 2011

Update

SECTOR: METALS

JSW Steel

BSE SENSEX

S&P CNX

18,328

Bloomberg

Equity Shares (m)

52-Week Range

1,6,12 Rel. Perf. (%)

M.Cap. (Rs b)

M.Cap. (US$ b)

5,494

JSTL IN

254.3

1,400/752

11/-21/-27

238.7

5.3

Rs939

Buy

Highest volume growth



Y/E March

2011E 2012E 2013E

405.9

77.6

33.8

132.9

17.9

986.4

7.1

1.0

0.8

4.4

13.5

16.0

14.5



Sales (Rs b) 240.8 381.1

EBITDA (Rs b) 45.3

69.9

NP (Rs b)

EPS (Rs)

EPS Gr. (%)

BV/Sh. (Rs)

P/E (x)

P/BV (x)

EV/Sales (x)

EV/EBITDA (x)

RoE (%)

RoCE (%)

RoIC

14.8

28.7

58.0 112.7

-2.4

94.3

732.1 863.2

16.2

1.3

1.6

8.3

7.9

9.0

8.9

8.3

1.1

1.0

5.4

13.1

14.4

12.9



Shareholding pattern % (Dec-10)

Others,

9.8

Promoter

38.3



JSW Steel boasts of the highest volume growth in the country, with 42% growth in

FY12 and a further 12% growth in FY13. It has demonstrated superior project

execution skills, growing its capacity 6x to 10mtpa during the decade (ending

March 2011) through brownfield expansions at Vijaynagar. With the acquisition of

Ispat Industries and Salem Steel, it now controls 14mtpa of capacity, i.e. none

less the SAIL. The growth momentum is likely to continue over the next 3-5

years, with a strong pipeline of projects in Karnataka and West Bengal.

In West Bengal, JSW Steel is undertaking a 4.5mtpa greenfield steel project at a

capex of Rs160b to be executed over four years. Coking coal blocks of Kulti,

Sitarampur and Rohne have already been allotted. Iron ore will be sourced through

slurry pipelines from Orissa/Jharkhand.

We expect the recently acquired Ispat Industries to cut costs. Refinancing debt

will enable it to save interest costs. Long-term supply agreements for power,

pellets and coke will help to reduce variable costs. Marketing synergies will help

to save on transportation costs. Ispat is an efficient producer, but suffers from

underinvestment, which can be overcome with planned capex of Rs39b over three

years.

Temporary oversupply in India may force JSW Steel to take some hit on its historical

average EBITDA per ton. However, PBT per ton is still likely to trend upwards

because of low specific project costs. JSW Steel's spend on new capacity is

US$700/ton, against ~US$1,200/ton for Tata Steel and ~US$1,600/ton for SAIL.

PBT margin expansion and strong volume growth will drive bottomline growth.

Consolidated net debt will decline, driven by rising cash flows and equity infusion,

despite capex and acquisition of equity in Ispat Industries. Debt-to-equity will

decline, freeing up capital for its West Bengal project. Rs59b of equity has been

infused i.e. Rs54b by JFE and Rs5.3b as advances from promoters towards issue

of warrants in FY11. Further Rs30b of equity is pending conversion - Rs15.9b

towards warrants, Rs11b towards FCCB and Rs3b by JFE. Even if pending

Foreign,

47.3

Domestic

Inst, 4.6

Despite capex and Ispat acquisition, consolidated debt will decline

-9

117

-28

-22

Stock performance (1 year)

JSW Steel

Sensex - Rebased

1,600

1,375

1,150

925

700

Mar-10 Jul-10 Nov-10 Mar-11

Debt

3/10

-97

223 m shares 254

121 EPS (Rs) 113

0.9 D/E (x)

0.6

Capex

Ispat

Div & Int WC EBITDA

paid changes

Equity

FY11

Debt

3/12

Equity

FY12

Debt

3/12

Source: Company/MOSL

March 2011

JSW Steel



conversion lapses, the D/E ratio will still remain comfortable at 0.9x. Ispat Industries'

balance sheet will not be consolidated unless JSW Steel is able to raise its stake

from 41% currently to more than 50%. We expect Ispat to break even at PBT level.

Overseas investment in Chilean iron ore mines and US coal mines too are expected

to generate cash flows in FY12. We expect production of 0.5mtpa each of iron ore

and coking coal in FY12, which is likely to double in FY13. We still do not expect the

US pipe and plate mill to turn around in the near term. We expect all subsidiaries

together to contribute Rs7.8b to consolidated EBITDA and Rs3.4b to consolidated

PAT in FY12.

We expect EPS CAGR of 51% over FY11-13. RoE is likely to improve from 7.9% in

FY11 to 13.1% in FY12. The stock trades at attractive valuations of 8.3x FY12E EPS

and 1.1x FY12E BV. On EV/EBITDA, the stock trades at 5.4x FY12E and 4.4x

FY13E. We maintain

Buy

with a target price of Rs1,655 (EV/EBITDA of 6.5x FY13E).

March 2011

JSW Steel

Fastest growing steel company (m tons)

JSW Steel

+42%

Tata India

SAIL

JSPL

Lowest conversion costs (USD/ton)

Staff costs

Pow er & fuel

Others

105

133

131

SAIL

TATA

JSW

122

Ispat

PBT/ton to inch up despite lower EBITDA/ton

PBT

300

250

200

Depreciation

Interest

Lowest project cost (USD/ton)

JSW Steel

SAIL

Tata Steel

1,628

1,169

753

150

100

814

641

700

Gross block

Capex

Rs117b of EBITDA over FY11-FY12 (USD/ton)

1,000

750

EBITDA per ton

Realization

Deleveraging will continue despite capex

Net Debt (Rs b)

Equity (Rs b)

2.6

2.1

1.6

1.1

0.8

1.0

0.6

0.4

D/E (x)

500

250

175

283

180

225 237

181 159

158 153

151

Ispat: High interest and depreciation costs (USD/ton)…

Interest

132

104

FY06

FY07

FY08

FY09

FY10

107

114

Depreciation

EBITDA

…significant opportunity for debt refinancing (USD/ton)

Interest

Depreciation

SAIL

TATA

JSW

Ispat

Source: Company/MOSL

March 2011

JSW Steel

Financials and Valuation

Income Statement (Consolidated)

Y/E March

Net Sales

Change (%)

Total Expenses

EBITDA

2009

2010

2011E

(Rs Million)

2012E

2013E

Ratios

Y/E March

Basic (Rs)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

EV/ton

Return Ratios (%)

RoE

RoCE

RoIC

13.5

7.7

10.0

12.4

10.1

7.9

9.0

8.9

13.1

14.4

12.9

13.5

16.0

14.5

54.4

65.8

401.8

1.0

23.0

59.4

152.5

480.0

9.0

14.9

58.0

141.4

732.1

9.0

16.2

112.7

182.9

863.2

9.0

10.5

132.9

203.7

986.4

9.0

8.9

2009

2010

2011E

2012E

2013E

159,348 189,572 240,821 381,100 405,885

29.1

19.0

27.0

58.3

6.5

129,530 148,865 195,556 311,200 328,276

29,818 40,707 45,265 69,900 77,610

21.5

12,987

27,720

11,080

1,012

17,652

4,348

22,000

6,467

29.4

15,533

289

11,117

9.3

18.8

14,934

30,331

9,650

1,813

22,494

1,570

24,064

7,451

31.0

16,613

291

14,751

32.7

18.3

17,774

52,126

12,498

407

40,034

11,308

28.2

28,726

279

28,656

94.3

19.1

18,222

59,388

13,785

415

46,018

12,438

27.0

33,579

279

33,798

17.9

% of Net Sales

18.7

Depn. & Amortization 9,878

EBIT

19,941

Net Interest

Other income

PBT before EO

EO income

PBT after EO

Tax

Rate (%)

Reported PAT

Preference Dividend

Adjusted PAT

Change (%)

11,556

2,717

11,101

-7,948

3,153

726

23.0

2,427

290

10,174

-31.8

17.3

14.3

2.3

12.4

0.1

54,505

15.8

6.2

2.0

1.9

9.0

1.0

1,349

16.2

6.6

1.3

1.6

8.3

1.0

1,360

8.3

5.1

1.1

1.0

5.4

1.0

926

7.1

4.6

1.0

0.8

4.4

1.0

784

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Minority Interest

Total Loans

2009

1,871

73,280

75,150

2010

2011E

(Rs Million)

2012E

2013E

1,871

2,231

2,543

87,911 161,111 216,941 248,250

89,781 163,343 219,484 250,792

1,135

83,468

Working Capital Ratios

Fixed Asset T/O (x)

0.7

Asset Turnover (x)

0.6

Debtor (Days)

Inventory (Days)

Creditors(Days)

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Debt/Equity

0.6

1.7

2.6

187

0.7

150

0.7

122

0.9

1.1

102

0.9

1.1

103

2,732

2,187

2,066

1,750

168,392 164,521 149,521 113,468

Def. Tax Liability

12,768 16,848 21,272 28,198 35,934

Capital Employed 259,042 273,336 336,202 362,900 371,329

Gross Block

231,720 276,912 328,053 401,391 429,616

Less: Accu. Deprn. 40,798 53,393 68,327 86,101 104,323

Net Fixed Assets 190,923 223,520 259,726 315,290 325,293

Capital WIP

Investments

95,852

3,966

69,562

6,282

54,700

28,667

6,964

3,030

16,038

80,727

78,078

2,649

87,562

6,282

68,438

38,222

12,560

7,138

10,517

42,562

27,852

91,088

49,139

19,514

2,553

19,881

42,562

27,852

97,081

51,986

20,996

2,711

21,388

0.7

2.5

2.1

0.8

3.1

1.0

0.8

4.2

0.6

0.8

4.3

0.4

Cashflow statement (Consolidated)

Y/E March

EBITDA

2009

29,818

2010

40,707

2,209

-4,710

-4,594

33,613

-27,418

-2,033

128

-29,323

-99

6,392

-570

-11,485

-5,762

-1,471

5,093

-591

3,030

2011E

45,265

454

-4,551

-1,841

39,379

-69,141

1,813

-67,328

59,397

-15,000

-2,690

-9,650

32,057

4,108

3,030

7,138

(Rs Million)

2012E

69,900

107

850

-4,383

66,474

-28,338

-21,570

407

-49,501

29,996

-36,053

-3,004

-12,498

-21,559

-4,585

7,138

2,553

2013E

77,610

117

1,731

-4,702

74,757

-28,225

415

-27,810

-30,000

-3,004

-13,785

-46,789

158

2,553

2,711

Non cash exp. (inc.) -6,857

(Inc)/Dec in Wkg.Cap.26,781

Tax Paid

-2,624

47,118

XO (employee sep)

CF fr. Op. Activity

Curr. Assets

50,929

Inventory

29,246

Account Receivables 3,991

Cash and Bank Bal.

5,093

Others

12,600

Curr. Liab. & Prov. 82,628

Account Payables 81,799

Provisions & Others

829

(Inc)/Dec in FA

-59,435

(Pur)/Sale of Invest.

874

Int. & Divident Income

152

CF fr. Inv. Activity -58,409

Equity raised/(repaid)

Debt raised/(repaid) 25,484

Dividend (incl. tax)

-3,404

Interest paid

-10,911

CF fr. Fin. Activity 11,169

(Inc)/Dec in Cash

-122

Add: Opening Balance 4,715

Adjustment

500

Closing Balance

5,093

85,807 113,891 121,459

80,424 106,872 114,121

5,382

7,019

7,338

Net Curr.Assets -31,699 -26,027 -17,368 -22,804 -24,377

Appl. of Funds

259,042 273,336 336,202 362,900 371,329

E: MOSL Estimates

March 2011

Update

SECTOR: METALS

Sesa Goa

BSE SENSEX

S&P CNX

18,328

Bloomberg

Equity Shares (m)

52-Week Range (Rs)

1,6,12 Rel. Perf. (%)

M.Cap. (Rs b)

M.Cap. (US$ b)

5,494

SESA IN

889.7

494/221

-17/-11/-44

244.7

5.4

Rs275

Buy

Negatives factored in



Y/E March

2011E 2012E 2013E

78.6

40.8

32.3

36.3

-27.6

180

7.6

1.5

3.0

20.2

24.8

73.3

83.4

43.3

35.3

39.7

9.4

215

6.9

1.3

1.1

2.1

18.5

22.0

75.0

Sales (Rs m)

82.8

EBITDA (Rs m) 49.7

NP (Rs m)

EPS (Rs)

EPS Gr. (%)

BV/Share (Rs)

P/E (x)

P/BV (x)

EV/Sales (x)

44.6

50.1

58.5

147

5.5

1.9

1.8



EV/EBITDA (x) 3.0

RoE (%)

34.0

RoCE (%)

36.8

RoIC (%)

114.4



Shareholding pattern % (Dec-10)

Others,

15.2

Promoter

55.7

Foreign,

24.6

Domestic

Inst, 4.5



Stock performance (1 year)

Sesa Goa

Sensex - Rebased

600

500

400

300

200

Mar-10

Jul-10

Nov-10 Mar-11



Sesa Goa has the most sustainable iron ore mining business in India. Its Goa

mines account for 80% of its 20-21m tons annual iron ore production and its

Karnataka mines, which contribute the remaining 20% production are located

~300km from ports.

Goa has the advantage of proximity to ports. Iron ore is transported 10-20km by

trucks from mines to nearby rivers and loaded onto barges, which in turn move

similar distances though the rivers into deep sea. With the help of transships, the

iron ore is loaded from barges into outgoing large capesize vessels for export.

Total logistics costs range from US$7-8/ton after factoring recent hikes in road

transport cost due to recently imposed weight and time restrictions.

Iron ore from Goa mines is of lower grade, with 52-62% Fe content. Though

realizations are lower, margins are similar to high grade ore due to low cost of

mining and logistics. Due to its inferior grade and fragility, Indian steel producers

find it undesirable. Hence, there is little risk of export ban. Iron ore exports from

Goa have sustained through multiple economic and steel cycles due to low costs.

Sesa Goa has permission to mine ~16mtpa in Goa, which it plans to ramp up to

30mtpa. Though it has already developed the infrastructure, the statutory

permissions are still awaited.

The Karnataka mines yield superior grade ore and costs are also low. Indian

Railways charges higher freights for carrying iron ore meant for exports. Despite

higher logistics costs, margins from the Karnataka business remain healthy.

Exports have temporarily been banned due to problems related to illegal mining

by few miners in the region and lack of effective administration. The Supreme

Court is, in principal, in favor of exports and has asked the state government to

put in place effective administration so that interests of genuine mining companies

are not hurt. A final word on this issue is expected in the first week of April 2011.

Sesa has permission to mine ~6mtpa against the current production rate of 3mtpa.

Production can be ramped up to 10mtpa once statutory permissions are in place.

Cost of mining has been continuously reduced since Sesa was acquired by Vedanta.

Under the new leadership, management processes have been streamlined to

enhance productivity.

Cash surpluses have mounted every year due to strong cash flows. Though RoIC

remains attractive at over 90%, RoE has continuously declined due to low return

on liquid investment. Sesa has been continuously on the lookout for inorganic

growth, but has kept away due to rising valuations. Dempo was an attractive and

thoughtful acquisition.

Vedanta's move to acquire Cairn using cash surpluses of Sesa for 20% stake has

de-rated the stock despite EPS accretion.

The stock has been de-rated due to uncertainties relating to the Cairn deal,

Karnataka export ban, and downgrading of volume guidance due to delay in getting

statutory permissions. Despite all-time high iron ore prices, the stock performance

has been subdued. We believe most of the negatives are already factored. The

March 2011

stock is now trading at attractive valuations of 7.6x FY12E EPS, and an EV of 3x

FY12E EBITDA and US$8.3/ton. Our discounted cash flow valuation is Rs249-458/

share, assuming iron ore prices range from US$100/dmt to US$160/dmt on fob basis

over the next 10-12 years. Though iron prices may soften from current levels, they will

still remain very attractive and well above US$100/dmt. Risk to reward ratio has turned

favorable. Maintain

Buy.

DCF valuation (Rs m)

WACC (%)

Terminal Growth (%)

NPV of cashflows post FY12 (a)

Cash surplus (b)

Terminal Value (c )

Equity value (a+b+c)

Number of shares (m)

DCF value per share

180,858

95,915

10,152

286,925

900

319

Iron ore

63% Fe

(US$/dmt fob)

100

120

140

160

DCF

Rs/sh.

145

180

215

249

319

388

458

Source: MOSL

March 2011

Sesa Goa

Volume growth muted pending permissions (m tons)

Total

Goa

Karnataka

Orissa

Mining cost cut since acquisition (USD/ton)

Mining

Logistic costs

Royalty & duties

FY03

FY04

FY05

FY08

FY09

FY10

FY06

FY07

Sesa has the most competitive fob costs (USD/ton)

We factor conservative realization (USD/ton)

Realization

200

150

Benchmark contracts

100

Rio Tinto

BHP-

Billiton

Kumba

Sesa

Vale

Goa

Karnataka

EBITDA/ton will still drag (USD/ton)

Mounting cash chest is dragging RoE

Cash surpluses (Rs b)

200

150

100

RoE (%)

RoIC (%)

FY06

FY07

FY08

FY09

FY10

FY11E FY12E FY13E

Source: Company/MOSL

March 2011

Sesa Goa

Financials and Valuation

Income Statement (Consolidated)

Y/E March

Net Sales

Change (%)

Total Expenses

EBITDA

2009

49,591

29.7

24,170

25,421

2010

58,583

18.1

27,097

31,486

53.7

745

30,741

555

4,260

34,446

8,056

23.4

26,390

26,291

32.2

2011E

82,826

41.4

33,155

49,671

60.0

789

48,882

544

5,143

53,481

-523

52,959

8,755

16.5

44,204

117

44,609

69.7

(Rs Million)

2012E

78,553

-5.2

37,725

40,828

52.0

824

40,004

8,584

48,575

16,225

33.4

32,350

32,276

-27.6

2013E

83,382

6.1

40,047

43,335

52.0

831

42,504

10,670

53,162

17,768

33.4

35,394

35,323

9.4

Ratios

Y/E March

Basic (Rs)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

EV/ton (US$)

Return Ratios (%)

EBITDA Margins (%)

51.3

53.7

44.9

33.2

30.8

79.5

60.0

53.9

34.0

36.8

114.4

52.0

41.1

20.2

24.8

73.3

52.0

42.4

18.5

22.0

75.0

Net Profit Margins (%) 40.1

RoE

42.2

RoCE

51.7

RoIC

112.8

25.3

26.0

59.9

2.3

10.4

31.6

32.7

95.3

3.2

12.0

50.1

50.6

147.4

3.5

8.2

36.3

37.3

179.5

3.5

11.3

39.7

40.7

215.1

3.5

10.3

2009

2010

2011E

2012E

2013E

% of Net Sales

51.3

Depn. & Amortization

517

EBIT

24,904

Net Interest

Other income

PBT before EO

EO Income

PBT after EO

Tax

Rate (%)

Reported PAT

Minority interests

Adjusted PAT

Change (%)

2,240

27,102

7,153

26.4

19,949

19,880

\29.0

10.9

10.6

4.6

3.7

7.3

0.8

8.7

8.4

2.9

3.0

5.7

1.2

5.5

5.4

1.9

1.8

3.0

1.3

7.6

7.4

1.5

3.0

1.3

6.9

6.8

1.3

1.1

2.1

1.3

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Minority Interest

Total Loans

Deferred Tax Liability

2009

787

46,370

47,157

334

664

2010

831

2011E

890

(Rs Million)

2012E

890

2013E

890

78,346 130,220 158,853 190,533

79,177 131,110 159,743 191,423

433

512

586

656

19,606

750

444

750

444

750

444

750

Working Capital Ratios

Fixed Asset T/O (x)

5.6

Asset Turnover (x)

Debtor (Days)

Inventory (Days)

1.0

21.9

5.3

2.1

0.6

21.1

8.6

13.4

77.3

2.8

0.6

23.2

6.4

15.6

41.7

2.5

0.5

23.0

6.2

16.0

42.3

2.5

0.4

23.1

6.2

15.6

40.8

Capital Employed 48,175

Gross Block

8,863

99,966 132,815 161,522 193,273

27,510

5,741

21,770

787

29,310

6,558

22,752

787

31,160

7,412

23,748

787

33,010

8,305

24,706

787

Wkg Capital T/O (Days) 21.8

Creditors

43.0

Leverage Ratio (x)

Current Ratio

Less: Accum. Deprn. 3,422

Net Fixed Assets

5,441

Capital WIP

Investments

Curr. Assets

489

48,084

8.2

7.2

12.5

16.1

19.0

Cashflow statement

Y/E March

Pre-tax Profit

2009

27,102

2010

34,446

745

2,973

-8,012

1,504

31,657

-18,945

394

19,587

-3,160

25,426

38,138

31,429

69,566

2011E

52,959

789

-5,075

-8,755

-7,682

32,236

-1,800

8,999

-19,162

-3,643

(Rs million)

2012E

48,575

824

343

-16,225

33,547

-1,850

19,162

-3,643

2013E

53,162

831

-435

-17,768

35,851

-1,850

89,808 118,744 146,085 177,089

5,278

4,864

5,194

5,255

4,957

5,273

96,359 124,412 154,770

11,851

9,468

11,851

9,099

11,851

9,310

Inventory

2,642

5,009

Account Receivables 2,982

3,381

Cash and Bank Balance31,429 69,566

Others

Curr. Liab. & Prov.

11,032

5,840

11,851

12,400

Depreciation

517

(Inc)/Dec in Wkg.Cap. -6,146

Tax paid

-7,100

Other Oper. Activities -585

CF fr. Op. Activity 13,788

(Inc)/Dec in FA

-1,442

-1,420

Account Payables

3,120

Provisions & Others 2,720

Net Curr. Assets 42,244

Appl. of Funds

E: MOSL Estimates

48,175

7,451

4,519

4,150

4,361

4,949

77,408 109,275 136,986 167,779

99,966 132,815 161,522 193,273

(Pur)/Sale of Inv.

CF fr. Inv. Activity

Share Capital raised/(repaid)

Debt raised/(repaid)

Dividend (incl. tax)

-2,072

CF fr. Fin. Activity -1,660

(Inc)/Dec in Cash

Add: Opening Bal.

Closing Balance

10,709

20,720

31,429

26,792 28,054 30,358

69,566 96,359 124,412

96,359 124,412 154,770

March 2011

Update

SECTOR: METALS

SAIL

BSE SENSEX

S&P CNX

18,328

Bloomberg

Equity Shares (m)

52-Week Range

1,6,12 Rel. Perf. (%)

M.Cap. (Rs b)

M.Cap. (US$ b)

5,494

SAIL IN

4,130.4

259/150

-3/-19/-40

648.5

14.4

Rs157

Sell

Losing competitive advantage



Y/E March

2011E 2012E 2013E

498.8

78.3

41.9

10.1

-3.9

105.9

15.5

1.5

10.3

1.6

9.6

9.7

Sales (Rs b) 450.9 474.0

EBITDA (Rs b) 85.7

76.1

NP (Rs b)

53.7

43.6

EPS (Rs)

EPS Gr. (%)

BV/Sh. (Rs)

13.0

-21.3

91.4

10.5

-18.8

98.9

14.9

1.6

9.6

1.5

10.7

11.5



P/E (x)

12.1

P/BV (x)

1.7

EV/EBITDA (x) 7.5

EV/Sales (x)

RoE (%)

RoCE (%)

1.4

14.2

14.8



Shareholding pattern % (Dec-10)

Others,

Foreign,

2.3

4.4

Domestic

Inst, 7.5



Promoter

85.8

SAIL has benefited from iron ore integration over the last decade. The prices of

iron ore increased 10x, pushing up cost of steel production for most steel producers

across the world. In the resultant scenario of high global steel prices, many of

SAIL's operating inefficiencies like sharp increase of 70-75% in labor cost to

US$126/ton and other fixed operating costs to US$170/ton were overlooked. This

situation is changing. Global steel consumption is tapering down and new iron ore

supplies are likely to come on stream over the next couple of years, leading to

softening of iron ore prices. In the mean time, ~30% increase in domestic steel

production over 12-15 months, largely from primary producers will create temporary

oversupply, leading to compression in margins.

Managing costs will be a challenge, which will get increasingly exposed as spreads

between coking coal and steel prices start narrowing. Capacity expansion to

20mtpa will ensure that specific labor cost does not increase, assuming total

headcount remains constant. However, per ton labor cost (6x new private Indian

players) is non-competitive. Though headcount has halved and steel production

has doubled, the basic working on ground has not changed in over 15 years. SAIL

needs to urgently invest in adopting best management practices and restructuring.

Plant and machinery is old, requiring frequent repairs and maintenance.

Sustenance capex has been just US$11/ton/year during FY01-FY09. Under the

company's Rs700b growth plan, Rs158b (US$269/ton over five years) is being

spent on sustenance.

Capex of Rs700b is being funded by internal cash flows, FPO and debt. Though

debt/equity ratio will still remain comfortable, the change from net interest earnings

to net interest expense will drag the bottomline.

RoIC too will decline sharply due to low returns on new investment. Rs540b are

being invested to create 7mtpa of new saleable steel capacity, translating into

capital investment of US$1,628/ton v/s US$245/ton currently. RoIC will drop every

year because new investment will yield just 5.3% v/s the current RoIC of >35%.

We have cut our EPS estimate by 24% to Rs10.5 for FY12. The stock is expensive

at 14.9x FY12E EPS and an EV of 9.6x FY12E EBITDA. SAIL will have CWIP of

Rs254b by FY11 end. Adjusting for CWIP, the stock is trading at an EV of 5.3x

FY12E EBITDA, which is comparable to peers. We believe as CWIP moves into

gross block, the declining RoIC because of low returns on new gross bock will

drag stock performance. We downgrade the stock to

Sell.

Stock performance (1 year)

Capex status as on 30 September 2010

SAIL

320

270

220

170

120

Mar-10

Sensex - Rebased

Actual expenses

Orders placed

Orders pending

Jul-10

Nov-10 Mar-11

Bhilai

DSP

RSP

BSL

ISP

SSPs

Others

March 2011

SAIL

Volumes will grow but margins will be subdued

EBITDA per ton (USD)

300

225

150

Sales tonnage (m tons)

16.0

12.0

8.0

4.0

0.0

D/E will remain comfortable (Rs b)

Debt

500

375

250

125

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

Cash

Net Worth

Coking coal & labor costs are a drag on margins (US$/ton)

Staff

900

675

450

225

Fixed

Realization

Net interest cost will rise (US$/ton)

Depreciation

Net interest costs

-20

-40

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

RoIC will drop every year…

RoIC (%)

261

181

137

180

EBITDA (US$/ton)

…because RoIC on new capex has plunged

Production

EBIT (RHS)

173

150

132

128

136

Invested Capital (RHS)

RoIC (%)

2,000

1,500

1,000

500

FY11

Grow th

FY06 FY07 FY08 FY09 FY10 FY11 FY12

FY13 FY14

Rs70b is being invested in product mix improvement and value addition

FY11E

Semis

11%

Round/

Bars

17%

Pipes

FY15E

Plates

21%

Round/

Bars

24%

Pipes

Plates

16%

Coated

Products

coils/sheets

Structurals

Coated

Products

Railw ays

Material

Coils/sheets

27%

coils/sheets

10%

Structurals

15%

Coils/sheets

27%

Railw ays

Material

Source: Company/MOSL

March 2011

SAIL

Financials and Valuation

Income Statement (Consolidated)

Y/E March

Net Sales

Change (%)

Total Expenditure

EBITDA

Change (%)

% of Sales

Depreciation

EBIT

Interest

Other income

PBT before EO

Extra ordinary Item

PBT

Current Tax

Defrred Tax

Total Tax

2009

9.2

350,781

86,764

-31.1

19.8

13,316

73,448

2,576

24,330

2010

2011E

(Rs Million)

2012E

2013E

Ratio

Y/E March

Basic (Rs)

EPS

Cash EPS

Book Value per Share

Dividend Per Share

Valuation (x)

P/E

Cash PE

EV/EBITDA

EV/Sales

EV( USD/Ton)

Price to Book Value

10.4

8.5

6.3

1.3

1,079

2.3

9.5

7.8

6.3

1.5

1,092

1.9

12.1

9.4

7.5

1.4

1,152

1.7

14.9

10.9

9.6

1.5

1,273

1.6

15.5

11.0

10.3

1.6

1,420

1.5

15.1

18.4

68.5

2.5

16.5

20.0

81.7

2.6

13.0

16.7

91.4

3.0

10.5

14.4

98.9

3.0

10.1

14.3

105.9

3.0

2009

2010

2011E

2012E

2013E

437,545 405,726 450,940 473,989 498,763

-7.3

11.1

5.1

5.2

311,118 365,225 397,842 420,473

94,608 85,715 76,147 78,290

9.0

23.3

14,296

80,312

4,740

26,909

-9.4

19.0

15,263

70,452

4,051

13,327

79,728

79,773

26,262

-182

26,081

32.7

53,693

-21.6

3.2

53,658

-21.3

-11.2

16.1

16,049

60,098

5,053

10,303

65,348

65,396

22,128

-335

21,792

33.3

43,603

-18.8

3.2

43,568

-18.8

2.8

15.7

17,298

60,992

6,405

5,635

60,223

60,273

18,705

-352

18,353

30.5

41,920

-3.9

3.2

41,881

-3.9

95,202 102,482

241

464

95,443 102,946

35,321

-2,408

32,912

33,432

1,049

34,481

33.5

68,465

9.5

3.2

68,153

9.3

Profitability Ratios (%)

EBITDA Margin

19.8

RoE

22.0

RoCE

RoIC

Turnover Ratios

Debtors (Days)

Inventory (Days)

Creditors (Days)

Working Capital (Days)

Asset Turnover (x)

Leverage Ratio

Debt/Equity (x)

25.5

40.5

23.3

20.2

20.3

36.4

19.0

14.2

14.8

37.3

16.1

10.7

11.5

23.8

15.7

9.6

9.7

19.0

Effective Rate (%)

34.5

Reported PAT

62,531

Change (%)

Minority Interest

Adjusted PAT

Change (%)

-17.7

3.3

62,369

-26.3

-6

1.1

-4

0.8

-12

0.8

0.7

Balance Sheet (Consolidated)

Y/E March

Share Capital

Res. and Surplus

Net Worth

Loans

Def. Tax Liability

Minority Interest

2009

41,304

2010

41,304

2011E

41,304

(Rs Million)

2012E

41,304

2013E

41,304

241,702 296,086 336,296 367,012 396,027

283,006 337,390 377,600 408,316 437,331

86,665 176,378 175,612 188,112 238,112

13,277 14,301 13,619 13,284 12,932

-0.3

-0.2

0.0

0.2

0.4

Cash Flow Statement

Y/E March

OP/(Loss) bef.Tax

Dep. & Amort.

2009

2010

2011E

79,773

15,263

4,051

-26,262

10,874

83,698

-2,032

81,666

95,443 102,946

13,316 14,296

4,740

-33,432

-2,904

85,646

-1,712

83,934

(Rs Million)

2012E

65,396

16,049

5,053

-22,128

-16,980

47,389

-336

47,053

2013E

60,273

17,298

6,405

-18,705

-1,074

64,197

-353

63,844

Capital Employed 382,955 528,079 566,838 609,719 688,382

Gross Fixed Assets 335,112 374,194 380,147 420,645 491,142

Less: Depreciation 208,969 223,104 237,770 253,819 271,116

Net Fixed Assets 126,144 151,090 142,378 166,827 220,026

Capital WIP

Investments

78,949 153,822 253,768 333,768 383,768

370

447

531

Interest Paid

2,576

Direct Taxes Paid

-35,321

(Inc)/Dec in Wkg.Cap.

224

CF fr. Op. Activity

76,238

Other Items

-1,554

CF after EO Items 74,684

Curr. Assets, Loans & Advances

Inventory

Sundry Debtors

Cash & Bank Bal.

102,432 91,617 86,579 94,190

30,952 36,235 30,335 33,146

184,863 227,185 185,502 106,954

7,863

36,618

7,845

35,618

7,845

35,618

99,477

34,842

81,344

7,845

35,618

(Inc)/Dec in FA

-62,397 -113,954 -105,900 -120,498 -120,497

(Inc)/Dec in Misc Exp.

596

-3

(Pur)/Sale of Invest.

-12

-77

-84

CF fr. Inv. Activity -61,813 -114,034 -105,981 -120,498 -120,497

Free Cash Flows

Inc / (Dec) in Debt

71,240

41,155

61,713

50,418

55,699

49,874

58,498

52,983

14,425

47,788

-28,388

89,714

-4,740

-12,552

72,422

-22,282

-766

-4,051

-12,552

-17,368

-73,109

12,500

-5,053

-12,552

-5,104

-56,300

50,000

-6,405

-12,552

31,044

Int. Receiv./Accrued 10,186

Loans and Adv.

23,408

Current Liabilities

Sundry Creditors

48,046

Other Current Liab. 30,750

Provisions

95,554 64,407 63,589 63,589 63,589

Net Curr. Assets 177,491 222,717 170,160 108,592 84,056

Misc. Exp. not W/Off

Appl. of Funds

382,955 528,079 566,838 609,719 688,382

E: MOSL Estimates

Interest Paid

-2,576

Dividends Paid

-12,552

CF fr. Fin. Activity 32,661

Inc / ( Dec) in Cash 45,532 42,322 -41,683 -78,549 -25,610

Add: Opening Bal. 139,331 184,863 227,185 185,502 106,954

Closing Balance 184,863 227,185 185,502 106,954 81,344

March 2011

Metals | New Order

Ferrous Mid-caps

Companies

Ferrous (Mid-caps)

Bhushan Steel

Adhunik Metaliks

Godawari Power & Ispat

Jai Balaji Industries

Monnet Ispat

Prakash Industries

Sarda Energy & Minerals

Tata Sponge Iron

March 2011

Metals | New Order

Mid-cap steel companies - struggling to maintain

profitability

Over the next 12-15 months, ~20mtpa of steel production capacity is scheduled for

commissioning in India. The sudden increase in domestic supply will put pressure on steel

prices. During the period of global financial crisis, most mid-cap steel companies were able

to switch to sale of power instead of producing steel. However, this no longer presents a

good trade-off as merchant power rates have collapsed in the last two quarters. Also,

delays in opening of captive mines and rising raw material prices are impacting cash flows.

As a result, most mid-cap steel companies are available at attractive valuations. We

recommend buying selectively.

Steel pricing environment to get tougher as domestic steel supply increases

We expect steel supply in the domestic market to grow at a CAGR of 11% over FY10-14,

as ~20mtpa of production capacity is scheduled to get commissioned over the next 12-15

months in India. Although domestic demand is also expected to grow at 10-12% over the

same period, the sudden increase in supply due to commissioning of large scale projects

(e.g. JSW Steel, Tata Steel, etc) will create a very competitive pricing environment. We

expect smaller size steel producers to struggle in such an environment.

Subdued merchant power rates making trade-off difficult

Post the credit crisis, most mid-cap steel companies survived by switching to sale of

power instead of producing steel, which made a good trade-off when steel demand and

prices were sluggish. However, in the last two quarters, the scenario has changed. Merchant

rates have collapsed from Rs5/kwH to Rs2.5-3/kwH, and quantity of linkage coal from

Coal India (CIL) has also been reduced due to increasing thermal power capacities and

inability of CIL to ramp up production. Eventually, companies will have to increase the

proportion of imported coal or buy from e-auction/external sources, which will increase

costs.

Delays in opening of captive mines, rising raw material prices impacting

cash flows

Though many steel producers have received allotment of captive raw material mines in

the last 5-7 years, very few of them have been able to start mining operations. Procedural

delays in getting requisite approvals from state or central governments, problems in land

acquisition and lack of clarity on "No-Go" zone coal mines have delayed the opening of

captive mines. On the other hand, raw material costs are rising due to supply constraints

and increasing demand on the back of higher steel production. Iron ore prices in the

domestic market have increased at a CAGR of 19% over the last 3-4 years and coking

coal prices have moved up from US$57/ton in FY05 to over US$225/ton in FY11, putting

considerable pressure on steel producers' margins. With rising crude oil prices, derivative

product prices will also increase, which will further dent margins.

Aggregate EBITDA to increase at a CAGR of 29% to Rs69b in FY13

Aggregate EBITDA of the eight mid-cap companies under our coverage has increased at

a CAGR of 36% to Rs32b over FY04-10. We expect aggregate EBITDA to grow at a

CAGR of 29% to Rs69b over FY10-13 on the back of higher volumes and partial raw

material integration.

March 2011

Metals | New Order

Valuations attractive; buy selectively

As mid-cap steel companies are struggling to maintain their margins and earnings growth,

most of them are trading at attractive valuations. We like Adhunik Metaliks (due to aggressive

growth plans of OMM), Godawari Power and Ispat (100% iron ore integration and higher

pellet volumes), Bhushan Steel (strong volume growth) and Prakash Industries (strong

volume growth and partial integration).

Capacity ('000 tons)

Sr. Company

No.

DRI

(ktpa)

Adhunik Metaliks

Bhushan Steel

Godawari

Jai Balaji

Monnet Ispat

Prakash Industries

Sarda Energy

Tata sponge

Total

270

1,360

495

445

800

600

360

390

4,720

Pig

iron

180

1,269

509

1,958

450

2,300

400

906

300

700

240

5,296

1,200

608

600

2,408

Existing capacities

Steel

Pellet

Captive

Iron Coal

ore

1,000

700

CPP

(MW)

458

111

150

113

DRI

(ktpa)

Capacities post expansion

Captive

Pig Steel Pellet

Iron Coal CPP

iron

1,200

608

1,200

600

4,808

ore

2,000

700

(MW)

840

111

230

463

270

180

450

1,360 4,169 5,300

495

400

505

1,000

509

906

650 1,800

700

- 1,200

- 1,000

200

- 1,200

- 1,000

600

1,700 2,800 1,046

360

240

390

5,380 5,508 9,796

- 1,000

2,700 3,400 1,859

Source: Company/MOSL

Production ('000 tons)

Sr.

No.

Adhunik Metaliks

Bhushan Steel

Godawari Power

Jai Balaji

Monnet Ispat

Prakash Inds

Sarda Energy

Tata Sponge

Total

Company

FY09

125

352

280

265

600

296

176

342

2,437

200

401

286

287

710

335

203

359

2,780

Sponge Iron

FY10 FY11E FY12E FY13E

265

441

270

283

729

432

234

371

3,023

275

1,088

300

404

765

552

252

378

4,014

275

1,088

320

404

800

640

252

386

4,165

FY09

145

252

397

170

428

598

Pig Iron

FY10 FY11E FY12E FY13E

200

480

407

1,087

200

1,080

433

1,794

200

1,080

509

325

2,114

FY09

249

302

108

350

136

446

1,665

332

299

511

115

507

1,833

Steel

FY10 FY11E FY12E FY13E

380

1,200

392

127

564

380

2,100

120

531

190

663

380

2,100

160

531

540

750

2,759 4,068 4,545

Source: Company/MOSL

CAGR (%)

FY04-10 FY11-13

Summary of mid-cap companies

2004

Revenues (Rs m)

Adhunik Metaliks

Bhushan Steel

Godawari Power & Ispat

Jai Balaji Inds

Monnet Ispat

Prakash Inds

Sarda Energy & Minerals

Tata Sponge

Total

EBITDA (Rs m)

Adhunik Metaliks

Bhushan Steel

Godawari Power & Ispat

Jai Balaji Inds

Monnet Ispat

Prakash Inds

Sarda Energy & Minerals

Tata Sponge

Total

March 2011

2005

2006

2007

2008

2009

2010

2011E

2012E

2013E

334

15,647

1,076

1,220

2,471

7,859

1,173

1,749

31,529

2,585

211

130

696

747

530

5,059

1,302

26,750

1,726

2,749

5,181

7,305

2,273

2,405

49,691

157

4,030

374

188

1,782

1,016

360

922

8,827

4,223

27,940

2,335

4,327

5,325

7,993

2,157

1,930

56,230

719

3,859

360

530

1,382

1,527

200

302

8,879

7,440

38,377

4,432

10,734

6,378

9,329

3,679

10,347

42,053

8,293

13,275

11,591

12,534

6,248

12,703

51,403

10,355

17,180

15,487

15,265

9,488

14,496

56,404

7,764

19,212

14,807

15,677

5,228

18,567

70,396

8,158

21,232

15,539

17,148

8,466

24,799

85,402

9,898

24,451

20,457

22,837

9,231

26,024

86,601

10,480

26,458

25,664

28,705

9,838

2,775

4,566

6,081

5,200

6,595

6,470

6,592

83,142 108,906 137,962 138,788 166,101 203,545 220,362

1,167

6,281

794

1,527

1,742

1,987

687

321

14,504

1,677

8,354

1,690

2,379

2,503

2,845

1,684

1,447

22,579

2,051

12,120

1,154

1,660

3,590

2,976

2,230

1,840

27,621

3,844

14,527

1,226

2,449

4,456

3,525

767

1,239

32,033

5,790

20,160

1,869

3,320

4,530

3,532

1,159

1,323

41,682

6,308

32,533

2,401

4,261

5,432

5,970

1,501

1,433

59,839

6,637

33,785

2,712

6,324

8,318

8,463

1,694

1,469

69,402

Metals | New Order

Summary of mid-cap companies (Contd..)

2004

Adjusted PAT (Rs m)

Adhunik Metaliks

Bhushan Steel

Godawari Power & Ispat

Jai Balaji Inds

Monnet Ispat

Prakash Inds

Sarda Energy & Minerals

Tata Sponge

Total

Net Debt (Rs m)

Adhunik Metaliks

Bhushan Steel

Godawari Power & Ispat

Jai Balaji Inds

Monnet Ispat

Prakash Inds

Sarda Energy & Minerals

Tata Sponge

Total

Net Worth (Rs m)

Adhunik Metaliks

Bhushan Steel

Godawari Power & Ispat

Jai Balaji Inds

Monnet Ispat

Prakash Inds

Sarda Energy & Minerals

Tata Sponge

Total

No of Shares (m)

Adhunik Metaliks

Bhushan Steel

Godawari Power & Ispat

Jai Balaji Inds

Monnet Ispat

Prakash Inds

Sarda Energy & Minerals

Tata Sponge

EPS (Rs)

Adhunik Metaliks

Bhushan Steel

Godawari Power & Ispat

Jai Balaji Inds

Monnet Ispat

Prakash Inds

Sarda Energy & Minerals

Tata Sponge

903

282

1,534

268

344

3,518

260

9,193

412

240

2,504

10,460

291

-18

23,343

228

5,887

392

352

1,505

-4,306

472

834

5,364

115

1,534

241

1,222

3,726

181

609

7,670

881

13,001

825

494

2,226

6,539

727

-454

24,239

761

7,306

632

409

3,089

4,676

609

1,320

18,800

115

337

1,545

373

271

1,059

713

121

221

4,640

981

19,547

1,584

1,205

4,115

5,949

1,025

681

35,085

2,191

8,897

975

647

4,101

5,327

699

1,471

24,308

115

779

3,133

522

620

1,348

1,300

425

212

8,339

4,283

31,418

2,655

6,416

7,139

4,878

1,873

669

59,331

2,673

12,145

2,051

2,459

5,709

6,687

2,082

1,584

35,390

115

822

4,237

1,016

1,206

1,662

1,987

1,214

955

13,100

9,345

56,905

2,208

14,257

7,272

2,786

2,245

-128

468

6,041

577

2,160

2,041

1,606

1,207

14,119

1,394

7,597

514

354

2,691

2,662

268

845

16,325

2,172

10,290

820

811

3,113

2,632

417

860

21,113

2,281

13,932

1,023

1,342

3,555

3,907

906

977

27,923

2,475

13,786

1,166

3,085

4,616

5,605

1,124

1,074

32,931

102

101

-30

-5

-15

-2

-3

-2

2005

2006

2007

2008

2009

2010

2011E

2012E

2013E

CAGR (%)

FY04-10 FY11-13

13,984 17,649 19,717 20,979 19,032

79,419 112,839 127,831 132,365 119,888

2,907

11,500

10,796

2,280

4,977

-1,145

3,778

15,942

12,897

1,284

4,348

-932

4,379

17,271

21,442

4,058

4,567

-995

4,554

22,005

30,002

7,018

5,412

-2,040

4,223

23,135

26,791

4,236

5,888

-3,311

94,891 124,718 167,806 198,270 220,295 199,882

3,288

16,253

3,873

4,475

10,888

9,098

4,028

2,435

54,336

115

100

3,760

24,285

4,365

4,495

12,863

10,291

5,133

3,497

7,205

39,917

4,797

9,351

16,730

14,308

5,646

4,201

9,404

50,082

5,518

10,012

21,205

17,538

6,949

4,916

11,512

63,890

6,466

11,131

24,387

20,894

7,729

5,750

14,601

77,552

7,520

13,917

28,629

29,173

8,727

6,679

68,689 102,154 125,624 151,757 186,799

115

142

123

122

179

130

212

134

130

212

134

132

212

150

Source: Company/MOSL

March 2011

Update

SECTOR: METALS

Bhushan Steel

BSE SENSEX

S&P CNX

18,328

Bloomberg

Equity Shares (m)

52-Week Range (Rs)

1,6,12 Rel. Perf. (%)

M.Cap. (Rs b)

M.Cap. (US$ b)

5,494

BHUS IN

212.4

545/252

10/16/18

91.3

2.0

Rs430

Neutral

Emerging primary steel producer

Bhushan Steel (Bhushan) is a leading cold-rolled product manufacturer in India, with a

rich product mix. Its plants are strategically located near customers and ports. Value-

added products such as cold-rolled color coated sheets, galva and galume dominate

its revenue mix (77% in FY10). To integrate backward, Bhushan has set up a 2.2mtpa

integrated steel plant, India's only successful greenfield steel project in the last decade.

The plant is in the mineral rich state of Orissa and is being expanded further to 5mtpa

by FY13. Its captive iron ore and coal mines will start production over the next 2-3

years.

Crude steel production to grow at 32% CAGR



Y/E March

2011E 2012E 2013E

85.4

32.5

86.6

33.8

13.8

64.9

-1.0

363.5

6.6

1.2

2.4

6.3

17.9

11.9

21.5

Sales (Rs b)

70.4

EBITDA (Rs b) 20.2

NP (Rs b)

EPS (Rs)

EPS Gr. (%)

BV/Sh. (Rs)

P/E (x)

P/BV (x)

EV/Sales (x)

10.3

13.9

48.5

65.6

-72.9

35.4

234.1 299.1

8.9

1.8

3.1

6.6

1.4

2.6

6.9

21.9

12.1

23.9



EV/EBITDA (x) 10.9

RoE (%)

20.7

RoCE (%)

9.7

RoIC (%)

19.4



The Orissa plant started production of steel in 2006 in a small way, with initial

capacity of 300ktpa (phase-1). Though its 1.9mtpa HRC plant started production

in April 2010 (phase-2) and has already achieved capacity utilization of 60%,

commercial production is likely to be announced in March 2011. HRC production

is expected to grow at a CAGR of 38% to 1.62m tons over FY11-13.

Phase-III expansion to 5mtpa is expected to be commissioned by 1QFY13; the

company has already spent Rs42b out of the total project cost of Rs100b. We

expect crude steel production to grow at 32% CAGR to 2.1m tons over FY11-13.

Bhushan is setting up a 0.5mtpa ERW pipe mill (4"-25") at Khopoli at a capex of

Rs12b. Work on the mill is on track for commissioning by June 2011. This will

increase value addition.

Shareholding pattern % (Dec-10)

Iron ore and coking coal prices to push up cost of production

Others,

27.5

Foreign,

2.6

Domestic

Inst, 0.8

Promoter

69.2

At present, Bhushan sources iron ore from the mineral rich area of Barbil, Orissa.

~80% of its iron ore requirement is met through Orissa Mining Corporation mines

(~180km away from Angul) and it sources 70-85% of its coal through linkage provided

by Mahanandi Coalfields. Iron ore prices have been hardening for the last few months.

Prices of e-auction coal have also increased by ~25%. While steel prices have

increased, so have costs.

Raw material integration over 2-3 years



Stock performance (1 year)

Bhushan Steel

Sensex - Rebased

600

500

400

300

200

Mar-10

Jul-10

Nov-10 Mar-11



Though Bhushan has already been allotted captive mines for key raw materials,

development of these mines has been slow. The thermal coal mine at Orissa is at

the stage of land acquisition. The company expects to get land possession in the

next six months.

Bhushan has acquired 60% stake in Bowen Energy, Australia for US$15m with

the intention of ensuring long-term supply of coking coal. Bowen holds licenses to

explore four major coal blocks in the Bowen basin. The mine portfolio consists of

two open cast thermal mines (West Rollestone and Tarong Projects), one

underground coking coal mine (Black Water South Project) and one underground

coking, PCI, thermal coal mine (East Middlemount). The first stage of exploration

is completed and it will take 3-4 years to commence production from these mines.

March 2011

Bhushan Steel

Leveraged play on strong volume growth



Debt increased from Rs110b as of March 2010 to Rs140b as of December 2010.

Annual capex of Rs25b will keep absolute debt rising till FY12. Debt-equity ratio,

however, will decline from 2.8x in FY10 to 1.5x by FY13 due to improved internal

cash flows.

Bhushan has delivered superior margins in the last few quarters due to focus on

value addition and strict control over costs. Volumes will continue to grow as HSM's

capacity utilization is improving every quarter. Ongoing expansion to 5mtpa will add

further to steel volumes in FY13. We expect earnings to grow at a CAGR of 22% over

FY10-13. The stock is trading at 6.6x FY12E EPS and an EV of 6.9x EBITDA. We

value the stock at Rs598 (2x FY12E BV). Maintain

Neutral.

March 2011

Bhushan Steel

Crude steel volumes to grow at a CAGR of 32%

2,400

1,800

1,200

600

FY07

FY08

FY09

FY10 FY11E FY12E FY13E

CRC

Crude Steel

HRC

Steel sales volumes to grow at a CAGR of 16%

CRC

2,400

Saleable Steel

16% CAGR

32% CAGR

1,800

1,200

600

FY07

FY08

FY09

FY10 FY11E FY12E FY13E

EBITDA to grow at a CAGR of 29%

29% CAGR

Leverage to decline (Rs b)

160

120

Debt

Net w orth

D/E ratio

5.0

3.5

2.0

0.5

-1.0

FY07

FY08

FY09

FY10 FY11E FY12E FY13E

FY07

FY08

FY09

FY10

FY11E

FY12E

FY13E

Expansion plan

Product ('000 tons)

Sponge Iron

Billets

Blast furnace

Slabs

HR Coil

Power plant (MW)

Phase I

1,020

300

410

Phase II

340

1,269

2,000

1,900

Phase III (under

implementation)

2,900

3,000

2,500

Capacities post

complete expansion

1,360

300

4,169

5,000

4,400

410

FY10 revenue break-up

Others

23%

Value added

Products

48%

Mineral resources (m tons)

Block

New Patrapara - Coal

Andal East - Coal

Urdtan - Coking coal

Marsua Tirba - Iron ore

Reserves

325

235

State

Orissa

West Bengal

Madhya Pradesh

Orissa

Comm. by

end FY13

FY13

Galva

29%

Source: Company/MOSL

March 2011

Bhushan Steel

Financials and Valuation

Income Statement (Standalone)

Y/E March

Net Sales

Change (%)

Total Expenses

EBITDA

% of Net Sales

Depn. & Amortization

EBIT

Net Interest

Other income

PBT before EO

EO income

PBT after EO

Tax

Rate (%)

Reported PAT

Preference dividend

Adjusted PAT

Change (%)

2009

51,403

22.2

39,282

12,120

23.6

2,344

9,776

2,521

181

7,436

1,395

18.8

6,041

42.6

2010

56,404

9.7

41,876

14,527

25.8

2,091

12,436

2,100

320

10,655

858

11,514

3,056

26.5

8,458

7,597

25.8

2011E

70,396

24.8

50,236

20,160

28.6

2,406

17,754

4,037

392

14,109

3,783

26.8

10,326

10,290

35.4

(Rs Million)

2012E

85,402

21.3

52,869

32,533

38.1

7,480

25,053

6,122

471

19,401

5,432

28.0

13,969

13,932

35.4

2013E

86,601

1.4

52,816

33,785

39.0

8,880

24,905

6,271

565

19,199

5,376

28.0

13,823

13,786

-1.0

Ratios

Y/E March

Basic (Rs)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

EV/ton (US$/ton)

Return Ratios (%)

EBITDA Margins

Net Profit Margins

RoE

RoCE

RoIC

23.6

11.8

24.9

9.1

31.4

25.8

13.5

19.2

7.9

30.1

28.6

14.6

20.7

9.7

19.4

38.1

16.3

21.9

12.1

23.9

39.0

15.9

17.9

11.9

21.5

28.4

39.5

114.4

0.5

2.1

35.8

45.6

186.2

0.5

1.5

48.5

59.8

234.1

0.5

1.2

65.6

100.8

299.1

0.5

0.9

64.9

106.7

363.5

0.5

0.9

2009

2010

2011E

2012E

2013E

15.1

10.9

3.8

1.9

8.1

0.1

984

12.0

9.4

2.3

9.0

0.1

1,320

8.9

7.2

1.8

3.1

10.9

0.1

2,207

6.6

4.3

1.4

2.6

6.9

0.1

2,252

6.6

4.0

1.2

2.4

6.3

0.1

2,127

Balance Sheet

Y/E March

Share Capital

Preference Capital

Reserves

Net Worth

2009

425

23,860

24,285

2010

425

367

39,125

39,917

2011E

425

367

49,291

50,082

(Rs Million)

2012E

425

367

63,098

63,890

2013E

425

367

76,761

77,552

Working Capital Ratios

Fixed Asset T/O (x)

1.6

Asset Turnover (x)

Debtor (Days)

Inventory (Days)

Creditors (Days)

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Debt/Equity

0.5

1.5

0.4

127

101

0.7

0.4

100

0.7

0.4

100

0.6

0.4

100

Loans

80,662 114,041 129,041 139,041 129,041

Def. Tax Liability (net) 2,463

3,295

Capital Employed 107,411 157,253 182,419 206,226 209,889

Gross Block

Less: Accu. Deprn.

Net Fixed Assets

Capital WIP

Investments

Curr. Assets

Inventories

Sundry Debtors

Cash and Bank

Loans and Adv.

32,819

13,959

18,860

74,001

1,077

27,436

12,304

6,198

1,244

7,691

36,859

16,066

20,793

111,093

3,700

37,702

19,627

7,339

1,202

9,534

16,036

15,671

365

21,666

96,859 116,859 136,859

18,472

78,387

86,093

3,700

33,889

13,501

9,643

1,210

9,534

19,651

19,287

365

14,237

25,952 34,832

90,907 102,027

91,093

3,700

44,288

16,378

11,699

6,676

9,534

23,762

23,398

365

20,525

81,093

3,700

47,159

16,608

11,863

9,153

9,534

24,091

23,726

365

23,068

2.0

3.9

3.3

2.4

5.9

2.8

1.7

4.4

2.6

1.9

4.1

2.1

2.0

4.0

1.5

Cash Flow Statement

Y/E March

Pre-tax Profit

Depreciation

(Inc)/Dec in Wkg. Cap.

Tax paid

Other oper. activities

CF fr. Op. Activity

2009

7,436

2,278

-958

-899

2,115

9,973

2010

11,514

2,107

-8,235

-2,224

6,933

10,095

-41,132

-2,623

-43,755

367

33,379

-124

-2.331

33,619

-42

1,244

1,202

2011E

14,109

2,406

7,437

-3,783

20,169

-35,000

15,000

-124

-36.683

14,839

1,202

1,210

(Rs Million)

2012E

19,401

7,480

-822

-5,432

20,627

-25,000

10,000

-124

-36.683

9,839

5,466

1,210

6,676

2013E

19,199

8,880

-66

-5,376

22,638

-10,000

-124

-36.683

-10,161

2,477

6,676

9,153

Curr. Liab. & Prov. 13,964

Sundry Creditors

13,687

Other Liabilities & Prov. 277

Net Curr. Assets 13,472

(Inc)/Dec in FA

-31,869

(Pur)/Sale of Invest.

-493

CF fr. Inv. Activity -32,362

Equity raised/(repaid)

Appl. of Funds

107,411 157,253 182,419 206,226 209,889

E: MOSL Estimates

Debt raised/(repaid) 23,481

Dividend (incl. tax)

-124

Other Fin. Activities

CF fr. Fin. Activity

23,357

(Inc)/Dec in Cash

967

Add: opening Balance 276

Closing Balance

1,244

March 2011

Update

SECTOR: METALS

Adhunik Metaliks

BSE SENSEX

S&P CNX

18,328

Bloomberg

Equity Shares (m)

52-Week Range (Rs)

1,6,12 Rel. Perf. (%)

M.Cap. (Rs b)

M.Cap. (US$ b)

5,494

ADML IN

123.5

137/77

12/-16/-24

12.0

0.3

Rs97

Buy

Three-pronged strategy to drive earnings growth

Adhunik is in the business of mining iron ore and manganese ore and producing

special steel. It is also entering the power business. Its mining business is a cash

cow, but its steel business' margins have been under pressure. Captive iron ore mines

will improve the margins of steel business. Its power business (61% stake in APNR)

will start generating cash flows in FY13.

Mining: cash flows strong; to grow further



Adhunik's wholly-owned subsidiary, OMM's Ghatkuri iron ore mine is operational

since January 2009 with high grade reserves of 60-64% Fe content, lumps to fines

ratio of 70:30 and approved mining plan for 2mtpa. Its stripping ratio is very low

due to absence of overburden, enabling cost saving. Its iron ore production is

expected to rise from 1.1m tons in FY11 to 1.5m tons in FY13.



It has recently entered into equal partnership with the erstwhile promoters of Suleipat

mine located at Mayurbhanj, Orissa (90km from Jamshedpur, 80m tons of reserves

with 64 Fe grade ore). The total mining area is ~618 hectares, which includes 200

hectares of non-forest land. The Central Empowered Committee (CEC) has already

approved mining operations in 70 hectares of non-forest area, with a mining plan of

0.6mtpa. The company is now awaiting state approval and final clearance from the

Environmental Ministry for commencement of mining operations. The management

expects to start operations from 1QFY12 and has already placed orders for the

requisite mining equipment.



Its open-cast manganese mine (Patmunda) is operational since January 2008,

with approved mining plan of 0.36mtpa. It plans to increase manganese ore

production at Patmunda through further mechanization. It has also recently started

mining operations in the non-forest area of its three other mines, which will drive

volumes further. Manganese ore production is expected to rise from 151k tons in

9MFY11 to 300k tons in FY13.



A 1.2mtpa beneficiation and pellet plant (based on straight grate technology) to

convert iron ore fines into pellets is being set up at Jamshedpur at a capex of

Rs4.4b. Till date, Rs2.9b is already invested in the plant and all the equipment has

arrived at the plant site. The company expects to commission the beneficiation

unit in 1QFY12 and pellet plant in 3QFY12.

Special steel: captive mine and Rs4.5b capex to drive growth

Standalone steel operations (located at Rourkela) cater to the automobile, power,

engineering, hydrocarbon and construction sectors. Operating efficiencies are superior

due to the incorporation of a blast furnace, sponge iron, sinter plant and coke ovens in

the electric route of steel making. Rs4.6b capex to increase sponge iron ore capacity

by 100ktpa and 45MW CPP and captive iron ore mine will fuel earnings growth. Captive

iron ore mine has received forest and environment clearances and area has been

demarcated for mining lease. Opening of mine, though delayed repeatedly, is now

scheduled for 1QFY12.

Y/E March

2011E 2012E 2013E

25.7

6.8

2.3

4.8

17.5

4.8

78.6

5.5

1.2

1.3

5.0

22.3

15.8

25.5

28.8

7.2

2.4

7.0

18.5

5.5

100.5

5.2

1.0

4.1

18.4

16.6

28.2

Sales (Rs b)

18.6

EBITDA (Rs b) 5.8

PAT (Rs b)

2.2

Growth (%)

EPS (Rs)

EPS Gr. (%)

BV/Sh. (Rs)

P/E (x)

P/BV (x)

EV/Sales (x)

55.8

16.7

48.1

62.4

5.8

1.6

1.7

EV/EBITDA (x) 5.6

RoE (%)

26.8

RoCE (%)

14.5

RoIC (%)

22.5

Shareholding pattern % (Dec-10)

Promoter

Others,

14.9

55.5

Foreign,

16.4

Domestic

Inst, 13.1

Stock performance (1 year)

Adhunik Metaliks

Sensex - Rebased

160

135

110

Mar-10

Jul-10

Nov-10 Mar-11

March 2011

Adhunik Metaliks

Entering merchant power business

APNR, in which Adhunik has 61% stake, is setting up a 540MW independent power

project (IPP) at a capex of Rs26.5b at Jharkhand. The entire debt has been tied up and

two private equity players have already put in Rs3.75b for 39% stake. Environmental

clearance for the first unit of 270MW has been received and commissioning is likely by

1QFY13. The company plans to double the capacity at its existing location through

brownfield expansion.

Valuations attractive

We believe Adhunik is on a strong earnings growth path on the back of rich mineral

resources and focus on growth. Over FY11-13, manganese ore production will grow at a

CAGR of 18% to 300k tons and iron ore production at a CAGR of 22% to 1.5m tons.

Commissioning of pellet plant and captive iron ore mine will help expand margins further.

We expect earnings to grow at a CAGR of 19% over FY10-13 without considering estimates

of Suleipat iron ore mine and 540MW IPP. The stock is trading at an EV of 5x FY12E

EBITDA. Re-iterate

Buy.

March 2011

Adhunik Metaliks

Strong volume growth in OMM (k tons)

Manganese ore

1,152

1,010

Iron ore

1,168

1,497

Strong growth in OMM EBITDA (Rs b)

AML standalone

6.0

4.5

3.0

OMM

Conso debt

FY08

FY09

FY10

FY11E

FY12E

FY13E

324

182

143

216

260

299

1.5

0.0

FY09

FY10

FY11

FY12

FY13

Beneficiation plant: under commissioning

Pellet plant: under construction

Pellet plant: equipment at the site

Note: Pictures taken on 17 December 2010 during site visit

Mineral reserves

Mineral

Merchant Mining (OMM)

Iron ore

Iron ore (JV co)

Manganese ore

Steel (captive) AML

Iron ore

Coal

Power (captive) APNRL

Coal

Reserves

(m tons)

Ghatkuri, Jharkhand

Suleipat, Orissa

Patmunda, Orissa

Koira, Orissa

Keonjhar, Orissa

Talcher, Orissa

Ganeshpur, Jharkhand

Fe 60-64 grade; Operational since Jan-09

Fe 64+; 200Ha non forest area; By 1QFY12

Avg grade 32% Mn; Operational since Jan-08

Avg grade 32% Mn; Recently opened 3 mines

ML expected soon; By 1QFY12

JV with Bhushan Steel; by 4QFY13

JV Tata Steel; expected by 4QFY13

Source: Company/MOSL

March 2011

Location

Remarks

Adhunik Metaliks

Financials and Valuation

Income Statement (Consolidated)

Y/E March

Net Sales

Change (%)

Total Expenses

EBITDA

% of Net Sales

Depn. & Amortization

EBIT

Net Interest

Other income

PBT before EO

EO Income

PBT after EO

Tax

Rate (%)

Reported PAT

Adjusted PAT

Change (%)

2009

12,703

22.8

10,652

2,051

16.1

402

1,649

1,201

282

730

-7

723

263

36.4

460

468

-43.1

2010

14,496

14.1

10,652

3,844

26.5

677

3,167

1,595

448

2,021

-21

2,000

629

31.5

1,371

1,394

198.2

2011E

18,567

28.1

12,777

5,790

31.2

1,028

4,762

1,792

3,000

738

24.6

2,262

2,172

55.8

(Rs Million)

2012E

25,670

38.3

18,883

6,787

26.4

1,078

5,709

2,223

3,562

1,168

32.8

2,393

2,276

4.8

2013E

28,761

12.0

21,572

7,190

25.0

1,133

6,057

2,153

3,982

1,397

35.1

2,585

2,434

7.0

Ratios

Y/E March

Basic (Rs)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

EBITDA Margins

Net Profit Margins

RoE

RoCE

RoIC

5.1

9.5

31.2

1.0

23.2

11.3

16.8

48.3

1.2

12.6

16.7

24.6

62.4

1.2

8.1

17.5

25.8

78.6

1.2

7.6

18.5

27.1

100.5

1.2

7.2

2009

2010

2011E

2012E

2013E

18.9

10.2

3.1

1.8

11.1

1.0

8.6

5.8

2.0

7.7

1.2

5.8

3.9

1.6

1.7

5.6

1.2

5.5

3.8

1.2

1.3

5.0

1.2

5.2

3.6

1.0

4.1

1.2

16.1

3.7

16.4

7.8

11.9

26.5

9.6

23.4

11.1

16.6

31.2

11.7

26.8

14.5

22.5

26.4

8.9

22.3

15.8

25.5

25.0

8.5

18.4

16.6

28.2

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Loans

Secured

2009

912

2,847

3,760

15,357

11,354

2010

1,235

5,970

7,205

19,435

16,967

2,468

1,459

28,642

18,232

1,649

16,583

7,752

11,125

5,257

2,206

1,786

1,875

6,825

6,363

461

4,301

28,642

2011E

1,299

8,106

9,404

21,395

18,927

2,468

1,459

32,892

20,151

2,676

17,475

9,752

301

10,801

5,344

1,904

1,678

1,875

5,442

4,981

461

5,359

32,892

(Rs Million)

2012E

1,299

10,208

11,507

22,395

19,927

2,468

1,459

36,112

21,651

3,754

17,897

11,752

601

13,193

7,323

2,635

1,359

1,875

7,336

6,875

461

5,857

36,112

2013E

1,317

13,239

14,555

19,635

17,167

2,468

1,459

36,550

21,731

4,887

16,845

11,752

601

15,446

7,875

2,974

2,722

1,875

8,099

7,638

461

7,347

36,550

Working Capital Ratios

Fixed Asset Turnover (x)1.1

Asset Turnover (x)

Debtor (Days)

Inventory (Days)

Creditors (Days)

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Debt/Equity

0.6

110

113

0.8

0.5

132

160

0.9

0.6

105

1.2

0.7

104

1.3

0.8

100

Unsecured

4,003

Def. Tax Liability (net) 1,051

Capital Employed 21,092

Gross Block

11,559

2.1

1.4

4.9

1.6

2.0

3.0

2.0

2.7

2.4

1.8

2.6

2.1

1.9

2.8

1.3

Less: Accum. Deprn.

901

Net Fixed Assets 10,658

Capital WIP

Investments

Curr. Assets

Inventories

Sundry Debtors

Cash and Bank

Loans and Adv.

Curr. Liab. & Prov.

5,654

201

8,695

3,834

1,576

1,373

1,912

4,117

Cash Flow Statement

Y/E March

Pre-tax Profit

Depreciation

2009

723

389

2010

2,000

747

690

-570

-622

2,246

-8,770

200

-8,570

323

2,510

4,078

-173

6,737

413

1,373

1,786

2011E

3,000

1,028

-1,167

-738

146

2,269

-3,919

-300

-4,219

1,960

-182

1,842

-108

1,786

1,678

(Rs Million)

2012E

3,562

1,078

-817

-1,168

2,663

-3,500

-300

-3,800

1,000

-182

818

-319

1,678

1,359

2013E

3,982

1,133

-128

-1,397

781

4,371

-80

-2,760

-185

-2,927

1,363

1,359

2,722

(Inc)/Dec in Wkg. Cap. -827

Tax Paid

-231

Other Oper. Activities 1,039

CF fr. Op. Activity

1,093

(Inc)/Dec in FA

-5,836

(Pur)/Sale of Invest.

211

CF fr. Inv. Activity

-5,625

Sundry Creditors

3,946

Other Liabilities & Prov. 171

Net Curr. Assets

4,578

Misc. Exp. (not w/off)

Appl. of Funds

21,092

E: MOSL Estimates

Sh. cap. raised/(repaid)

Share Premium

Debt raised/(repaid)

Dividend (incl. tax)

CF fr. Fin. Activity

5,478

-107

5,371

(Inc)/Dec in Cash

839

Add: opening Balance 534

Closing Balance

1,373

March 2011

Update

SECTOR: METALS

Godawari Power & Ispat

BSE SENSEX

S&P CNX

18,328

Bloomberg

Equity Shares (m)

52-Week Range

1,6,12 Rel. Perf. (%)

M.Cap. (Rs b)

M.Cap. (US$ m)

5,494

GODPI IN

28.1

320/157

8/-18/-23

5.0

110.1

Rs177

Buy

Pellet plant stabilizing



Y/E March

Sales (Rs b)

EBITDA (Rs b)

PAT (Rs b)

Growth (%)

EPS (Rs)

EPS Gr. (%)

BV/Sh. (Rs)

P/E (x)

P/BV (x)

EV/Sales (x)

EV/EBITDA (x)

RoE (%)

RoCE (%)

RoIC (%)

2011E 2012E 2013E

8.2

1.9

0.8

9.9

2.4

1.0

10.5

2.7

1.2

14.0

36.7

14.0

226.7

4.8

0.8

0.9

3.6

16.2

14.7

18.5



59.5

24.8

29.2

32.2

59.5

10.2

186.6 193.5

6.1

5.5

0.9

1.1

5.0

15.7

14.0

17.7

0.9

1.0

4.2

16.6

14.5

18.0



Shareholding pattern % (Dec-10)

Promoter

Others,

28.6

59.0



Foreign,

6.2

Domestic

Inst, 6.2

Godawari Power and Ispat produces steel via the sponge iron route and generates

captive power from waste gases produced at the kilns. The company doubled its

sponge iron capacity to 495ktpa and steel billet capacity to 400ktpa along with a

53MW captive power plant (CPP) in FY08. Since then, it has shifted focus to

reducing costs through backward integration. Its 700ktpa iron ore mine and 600ktpa

pellet plant started operations in FY10. The 20MW biomass based power plant

has been commissioned in December 2010.

The company has focused on sponge iron production and power generation. Its

steel production keeps fluctuating depending on the economics between value

addition and merchant sale of power.

After initial teething problems in the last few quarters, the pellet plant is getting

stabilized. In 3QFY11, Godawari produced 103k tons of pellets, achieving capacity

utilization of 69%. Prices of special grade iron ore needed for sponge iron production

have shot up due to shortage in the country. Low cost pellets produced from

captive iron ore have substituted expensive iron ore, thereby generating significant

savings. The captive iron ore lumps and pellets are meeting 90-95% of its

requirement.

Iron ore production is expected to ramp up from 309k tons in 9MFY11 to 480k tons

in FY12 and 700k tons in FY13. Another iron ore mine at Boria Tibu in Chhattisgarh

is awaiting forest clearance. Statutory clearance for captive coal blocks (Nakia I &

II and Madanpur) is still pending.

The 20MW biomass-based power unit at Raipur is under stabilization phase and

will boost earnings further. The company is also setting up a 1,200MW independent

power project (IPP) through a 100% subsidiary (Godawari Energy Limited). It is

awaiting regulatory clearances and coal linkages before beginning work on the

project.

We expect iron ore and pellet production to increase at a CAGR of 28% and 37%

over FY11-13 to 700k tons and 500k tons, respectively. Widening spread between

thermal coal and steel prices is the key earnings driver. We expect earnings to

grow at a CAGR of 26% over FY10-13. The stock trades at an EV of 4.2x FY12E

EBITDA. Re-iterate

Buy.

Mineral resources

Stock performance (1 year)

Godaw ari Pow er & Ispat

Sensex - Rebased

350

300

250

200

150

Mar-10

Jul-10

Nov-10 Mar-11

Mine/ Blocks

Iron Ore

Ari Dongri

Boria Tibu

Dallirajhara

Coal

Nakia I & II

Madanpur

Reserves (m tons)

Status

Operational

Approvals awaited

PL received for 754 hectares of area

Approvals awaited

Stuck under No-Go zone

March 2011

Godawari Power & Ispat

Higher pellet and iron ore production…

Pellet (kt)

Steel (kt)

Sponge Iron (kt)

Iron ore (kt)

..leading to improvement in EBIDTA margins

EBITDA (Rs m)

740

540

340

140

-60

Margin (%) - RHS

28.0

20.0

12.0

4.0

-4.0

160

120

Ramping up pellet and iron ore production

Iron ore (kt)

800

600

400

200

FY10

FY11E

FY12E

FY13E

Pellet (kt)

Power volumes to grow at 16% CAGR

Pow er (MU)

500

375

250

125

FY06

FY07

FY08

FY09

FY10 FY11E FY12E FY13E

Sponge Iron (kt)

Steel (kt)

EBITDA to grow at a CAGR of 20% (Rs m)

Revenue composition (FY10)

Pow er

Generation

11%

Ferro

Alloys

Others

Sponge

Iron

41%

Steel

Wires

27%

FY06

FY07

FY08

FY09

FY10

FY11E FY12E FY13E

Steel Billets

16%

Source: Company/MOSL

March 2011

Godawari Power & Ispat

Financials and Valuation

Income Statement (Standalone)

Y/E March

Net Sales

Change (%)

Total Expenses

EBITDA

% of Net Sales

Depn. & Amortization

EBIT

Net Interest

Other income

PBT

Tax

Rate (%)

Reported PAT

Adjusted PAT

Change (%)

2009

10,355

24.9

9,201

1,154

11.1

264

890

342

104

653

11.5

577

-43.2

2010

7,764

-25.0

6,538

1,226

15.8

316

910

320

620

106

17.1

514

-10.9

2011E

8,158

5.1

6,289

1,869

22.9

418

1,451

440

1,027

207

20.2

820

59.5

(Rs Million)

2012E

9,898

21.3

7,496

2,401

24.3

727

1,675

420

1,278

256

20.0

1,023

24.8

2013E

10,480

5.9

7,768

2,712

25.9

857

1,854

431

1,457

291

20.0

1,166

14.0

Ratios

Y/E March

Basic (Rs)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

EV/ton (US$/ton)

Return Ratios (%)

20.6

30.0

145.5

2.5

14.2

18.3

29.6

160.9

2.5

16.0

29.2

44.1

186.6

3.0

12.0

32.2

55.1

193.5

3.0

10.9

36.7

63.7

226.7

3.0

9.6

2009

2010

2011E

2012E

2013E

8.6

5.9

1.2

0.8

6.8

1.4

1,613

9.7

6.0

1.1

7.1

1.4

3,431

6.1

4.0

0.9

1.1

5.0

1.7

3,451

5.5

3.2

0.9

1.0

4.2

1.7

1,879

4.8

2.8

0.8

0.9

3.6

1.7

1,363

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Loans

Capital Employed

Gross Block

2009

281

4,084

4,365

3,318

7,682

4,588

2010

281

4,516

4,797

3,915

8,712

6,907

1,101

5,806

602

715

2,554

1,586

358

137

473

965

779

186

1,589

8,712

2011E

281

5,237

5,518

4,815

10,333

8,407

1,519

6,888

802

915

2,361

1,006

447

436

473

633

447

186

1,728

10,333

(Rs Million)

2012E

318

6,148

6,466

5,065

11,531

9,907

2,246

7,661

802

915

2,881

1,356

542

511

473

728

542

186

2,153

11,531

2013E

318

7,202

7,520

5,065

12,585

11,407

3,103

8,303

802

915

3,325

1,436

574

842

473

760

574

186

2,565

12,585

EBITDA Margins

Net Profit Margins

RoE

RoCE

RoIC

11.1

5.6

14.1

11.6

17.4

15.8

6.6

11.4

10.4

12.5

22.9

10.0

15.7

14.0

17.7

24.3

10.3

16.6

14.5

18.0

25.9

11.1

16.2

14.7

18.5

Working Capital Ratios

Fixed Asset T/O (x)

Asset Turnover (x)

Debtor (Days)

Inventory (Days)

Creditors (Days)

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Debt/Equity

3.3

2.6

0.7

2.6

2.8

0.8

3.7

3.3

0.8

4.0

0.7

4.4

4.3

0.6

2.3

1.3

1.1

0.9

1.0

0.8

1.0

0.9

0.8

Less: Accum. Deprn.

788

Net Fixed Assets

3,800

Capital WIP

Investments

Curr. Assets

Inventories

Sundry Debtors

Cash and Bank

Loans and Advances

1,714

446

2,463

1,348

303

410

402

Cash Flow Statement

Y/E March

Pre-tax Profit

Depreciation

(Inc)/Dec in Wkg. Cap.

Tax Paid

Other Oper. Activities

CF fr. Op. Activity

(Inc)/Dec in FA

2009

653

264

485

-75

-4

1,323

-1,814

2010

620

313

-139

-106

688

-1,207

-270

-1,477

597

-82

515

-273

410

137

2011E

1,027

418

160

-205

-2

1,397

-1,700

-200

-1,900

900

-99

801

299

137

436

(Rs Million)

2012E

1,278

727

-350

-256

1,400

-1,500

250

-112

175

436

511

2013E

1,457

857

-80

-291

1,943

-1,500

-112

332

511

842

Curr. Liability & Prov. 740

Sundry Creditors

556

Other Liab. & Prov.

185

Net Current Assets 1,723

Appl. of Funds

7,682

E: MOSL Estimates

(Pur)/Sale of Invest.

-126

CF fr. Inv. Activity -1,940

Debt raised/(repaid)

476

Dividend (incl. tax)

-82

CF from Fin. Activity 393

(Inc)/Dec in Cash

-224

Add: opening Balance 634

Closing Balance

410

March 2011

Update

SECTOR: METALS

Jai Balaji Industries

BSE SENSEX

S&P CNX

18,328

Bloomberg

Equity Shares (m)

52-Week Range (Rs)

1,6,12 Rel. Perf. (%)

M.Cap. (Rs b)

M.Cap. (US$ b)

5,494

JBIL IN

63.8

333/168

-10/-32/-36

11.5

0.3

Rs180

Buy

Big ambitions in coal mining



Y/E March

2011E 2012E 2013E

24.5

4.3

26.5

6.3

3.1

48.4

129.8

208.2

3.7

0.9

1.3

5.5

23.2

13.0

14.4

Sales (Rs b)

21.2

EBITDA (Rs b) 3.3

NP (Rs b)

EPS (Rs)

EPS Gr. (%)

BV/Sh. (Rs)

P/E (x)

P/BV (x)

EV/Sales (x)

EV/EBITDA (x)

RoE (%)

RoCE (%)

RoIC (%)

0.8

1.3

12.7

21.1

129.0

65.6

147.0 164.5

14.2

1.2

1.4

8.7

8.6

8.7

10.5

8.6

1.1

1.4

7.9

12.8

9.7

12.6



Shareholding pattern % (Dec-10)

Promoter

50.8

Others,

20.5



Foreign,

26.2

Domestic

Inst, 2.6



Stock performance (1 year)

Jai Balaji Inds

Sensex - Rebased

350

300

250

200

150

Mar-10

Jul-10

Nov-10 Mar-11



Jai Balaji Industries (JBIL) has increased its metallic and crude steel production

capacities at a CAGR of 62% and 42% to 954ktpa and 906ktpa, respectively over

FY07-10 through organic as well as inorganic means (merger of Sri Ramrupai

Balaji, acquisition of sponge capacities from HEG and Nilachal, etc). Capacity

utilization of aggregate DRI and pig iron facilities has improved consistently over

the years to 65% and 84%, respectively.

It has set up a 608ktpa sinter plant to reduce dependency on external lumps; this

plant is running at 100% capacity utilization and is contributing significantly to

reducing the cost of production of hot metal.

Its 111MW CPP utilizes waste gases of DRI kilns, blast furnaces and solid waste

generated from integrated operations, which helps to keep cost of power generation

low at Rs1.25/unit.

JBIL has set up a 240ktpa ductile iron (DI) pipe mill to improve product mix and tap

the increasing domestic demand for DI pipes. The mill started commercial production

in 3QFY11 and is expected to contribute significantly to margins in the near term.

The company has orders worth 50,000 tons in hand, as demand remains robust.

JBIL has rich reserves of coal allotted by state and central governments over the

years. These coal mines are at different stages of development. Dumri (non-coking

coal) and Rohne (coking coal) blocks are in advanced stages; forest and few more

statutory clearances are pending. Management expects to receive all approvals

for Dumri in 2-3 months. Coking coal production from Rohne block is expected to

start from June 2011. JBIL has total coal reserves of ~700m tons, the largest

among mid-cap steel companies in India.

It is setting up 0.35mtpa coke oven batteries at a capex of Rs3.6b, which will

further reduce its cost of production of hot metal.

JBIL is further planning to set up a 5mtpa integrated steel plant with 1,215MW

CPP in modular phases wherein it has firmed up phase-1 capex of Rs18.7b. It will

consist of a 1.2mtpa pellet plant, a 0.7mtpa sponge iron unit, a 75MW CPP based

on waste-heat recovery and a 450ktpa EAF steel making facility. JBIL has already

achieved financial closure of Rs12.3b for the same; the rest will be funded through

a mix of internal accruals and equity.

JBIL is focusing on ramping up DI pipe production, completion of coke oven facilities

and starting of captive coal in the near term. Capex requirement will remain high

over the next few years due to Purulia project. We expect capex of Rs2.5b in

FY11 and Rs6b in FY12.

Large coal reserves along with significant capacity addition plans to monetize

these reserves will help the company to post strong earnings growth over the next

3-4 years. We expect earnings to grow at a CAGR of 110% (on a lower base of

FY10, when JBIL suffered on account of high coking coal costs and reduced

demand) over FY10-13. The stock trades at 8.6x FY12E EPS and an EV of 7.9x

FY12E EBITDA. Maintain

Buy.

March 2011

Jai Balaji Industries

42% CAGR in steel capacity over FY07-10 ('000 tons)

Crude steel

1,000

750

500

250

DRI

Pig

Production trend improving again ('000 tons)

Crude steel

600

450

300

150

DRI

Pig

Margins will rise due to better product mix

EBITDA (Rs m) - LHS

1,000

600

200

-200

-600

Margin (%) - RHS

28.0%

14.0%

0.0%

-14.0%

EBITDA to grow at a CAGR of 37% over FY10-13 (Rs b)

EBITDA

DEBT

-28.0%

FY06 FY07 FY08

FY09

FY10 FY11E FY12E FY13E

Source: Company/MOSL

-2

Rich reserves of coal

Coal Mines

Dumri

Rohne (Coking coal)

Ardhgram

Andal

Jagannathpur A & B

State

Jharkhand

West Bengal

Reserves (m tons)

230

450

Status

Statutory clearance expected in 2-3 months

Expected in 2HFY12

Expected in 2-3 years

Expected in 3-4 years

Started exploration and drilling activities

Source: Company/MOSL

March 2011

Jai Balaji Industries

Financials and Valuation

Income Statement

Y/E March

Net Sales

Change (%)

Total Expenses

EBITDA

% of Net Sales

Depn. & Amortization

EBIT

Net Interest

Other income

PBT

Tax

Rate (%)

Reported PAT

Adjusted PAT

Change (%)

2009

17,180

29.4

15,520

1,660

9.7

541

1,119

1,324

316

111

82.5

-98.4

2010

19,212

11.8

16,764

2,449

12.7

728

1,720

1,442

269

548

194

35.4

354

1,725.7

2011E

21,232

10.5

17,912

3,320

15.6

813

2,507

1,369

1,175

365

31.0

811

129.0

(Rs Million)

2012E

24,451

15.2

20,190

4,261

17.4

896

3,364

1,458

1,947

604

31.0

1,342

65.6

2013E

26,458

8.2

20,134

6,324

23.9

1,301

5,023

1,696

529

3,856

771

20.0

3,085

129.8

Ratios

Y/E March

Basic (Rs)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

EV/ton (US$/ton)

Return Ratios (%)

0.4

11.9

85.4

0.5

133.9

5.6

17.0

136.6

1.0

8.4

12.7

25.5

147.0

2.0

18.4

21.1

35.1

164.5

3.0

16.7

48.4

68.8

208.2

4.0

9.7

2009

2010

2011E

2012E

2013E

437.4

15.1

2.1

1.2

12.0

0.3

553

32.4

10.6

1.3

1.4

11.2

0.6

675

14.2

7.1

1.2

1.4

8.7

1.1

637

8.6

5.1

1.1

1.4

7.9

1.7

742

3.7

2.6

0.9

1.3

5.5

2.2

511

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Loans

2009

471

4,024

4,495

18,187

2010

638

8,713

9,351

16,175

965

26,491

14,703

2,227

12,476

6,329

11,506

5,002

3,399

233

2,872

3,855

3,779

7,651

26,491

2011E

638

9,374

10,012

17,675

965

28,653

19,113

3,040

16,073

4,399

10,548

4,072

3,199

404

2,872

2,403

2,327

8,145

28,653

(Rs Million)

2012E

638

10,493

11,131

22,675

965

34,771

22,063

3,937

18,126

7,449

11,915

4,689

3,684

670

2,872

2,756

2,680

9,160

34,771

2013E

638

13,279

13,917

23,675

965

38,558

31,063

5,238

25,825

3,199

12,473

5,074

3,987

540

2,872

2,976

2,900

9,498

38,558

EBITDA Margins

Net Profit Margins

RoE

RoCE

RoIC

9.7

0.1

0.5

4.8

5.6

12.7

1.8

4.1

6.5

8.6

15.6

3.8

8.6

8.7

10.5

17.4

5.5

12.8

9.7

12.6

23.9

11.7

23.2

13.0

14.4

Working Capital Ratios

Fixed Asset Turnover (x)1.2

Asset Turnover (x)

0.7

Debtor (Days)

Inventory (Days)

Creditors (Days)

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Debt/Equity

3.3

0.8

4.5

3.0

1.2

1.8

4.4

1.8

4.3

2.3

2.1

4.2

3.0

1.7

113

1.3

0.7

1.1

0.7

1.1

0.7

0.9

0.7

Def. Tax Liability (net) 772

Capital Employed 23,454

Gross Block

14,119

Less: Accum. Deprn. 1,512

Net Fixed Assets

Capital WIP

Investments

Curr. Assets

Inventories

Sundry Debtors

Cash and Bank

Loans and Adv.

Curr. Liab. & Prov.

Sundry Creditors

12,606

3,207

10,906

5,305

2,626

225

2,750

3,303

3,258

Cash Flow Statement

Y/E March

Pre-tax Profit

Depreciation

(Inc)/Dec in Wkg. Cap.

Tax paid

Other Oper. Activities

CF from Op. Activity

(Inc)/Dec in FA

2009

111

545

106

-29

772

2010

548

715

-39

-125

-63

1,036

-3,706

-3,705

4,719

-2,012

-30

2,678

225

233

2011E

1,175

813

-323

-235

-124

1,306

-2,480

1,500

-149

1,351

177

233

404

(Rs Million)

2012E

1,947

896

-750

-389

-184

1,520

-6,000

5,000

-224

4,776

296

404

670

2013E

3,856

1,301

-467

-771

3,919

-4,750

1,000

-298

702

-129

670

540

Other Liabilities & Prov. 45

Net Current Assets 7,603

Appl. of Funds

23,454

E: MOSL Estimates

-4,453

(Pur)/Sale of Invest.

CF fr. Inv. Activity -4,452

Equity raised/(repaid)

Debt raised/(repaid) 3,717

Dividend (incl. tax)

-26

CF fr. Fin. Activity

(Inc)/Dec in Cash

Add: Opening Balance

Closing Balance

3,691

213

225

March 2011

Update

SECTOR: METALS

Monnet Ispat

BSE SENSEX

S&P CNX

18,328

Bloomberg

Equity Shares (m)

52-Week Range (Rs)

1,6,12 Rel. Perf. (%)

M.Cap. (Rs b)

M.Cap. (US$ b)

5,494

MISP IN

63.9

682/351

-8/3/28

34.0

0.8

Rs532

Neutral

Coal mining to drive growth



Y/E March

2011E 2012E 2013E

20.5

5.4

3.6

25.7

8.3

4.6

29.8

72.2

29.8

435.1

7.4

1.2

2.4

7.3

16.6

11.1

15.4

Sales (Rs b)

15.5

EBITDA (Rs b) 4.5

PAT (Rs b)

3.1

Growth (%)

EPS (Rs)

EPS Gr. (%)

BV/Sh. (Rs)

P/E (x)

P/BV (x)

EV/Sales (x)



15.7

14.2

48.7

55.6

-5.4

14.2

318.9 368.7

10.9

1.7

3.6

9.6

1.4

3.1

11.8

15.1

7.6

18.5



EV/EBITDA (x) 12.2

RoE (%)

15.3

RoCE (%)

8.1

RoIC (%)

20.7



Shareholding pattern % (Dec-10)

Promoter

47.1

Others,

15.4



Foreign,

30.9

Domestic

Inst, 6.5

Stock performance (1 year)

Monnet Ispat

Sensex - Rebased

680

580

480

380

280

Mar-10

Jul-10

Nov-10 Mar-11



Monnet Ispat operates a 0.8mtpa sponge iron plant, a 0.3mtpa steel plant and a

150MW captive power plant (CPP) in the mineral rich state of Chhattisgarh. It is

setting up a 1.5mtpa integrated steel project at Raigarh and is also venturing into

the power generation business through a subsidiary to set up 1,050MW of IPP at

Angul, Orissa.

0.5mtpa of its total DRI capacity and 90MW CPP is strategically located close to

its coal mines in Raigarh. Rest of its DRI facilities is located at Raipur. It produces

~1m ton of coal from its existing underground mine at Mand Raigarh Coalfields,

which improves its overall margins in the DRI as well as power business.

Monnet is setting up a 1.5mtpa integrated steel project in Raigarh at a capex of

Rs25b, which includes a 0.6mtpa blast furnace, 1.2mtpa pellet plant, 0.9mtpa

sinter plant, 0.4mtpa coke oven plant, 0.75mtpa finished mills and 80MW CPP.

Monnet currently sells ~2/3rd of the power it generates at merchant rates. In the

first phase of expansion, it plans an 80MW CPP, to be commissioned in 1QFY12.

This will drive earnings in the near term.

The steel project is expected to start commissioning from September 2011 starting

with blast furnace and steel melting shop followed by finished mills. Timely

commissioning of the pellet plant will improve margins.

Captive iron ore mine at Rameshwaram Steel and Power (97% subsidiary) is

expected to start operations by 1QFY13. The mine has high quality reserves (30m

tons; Fe grade 64-66) with annual extraction capacity of 0.8mtpa. Land acquisition

is under process and clearance from the Ministry of Environment and Forests is

expected in 2QFY11.

Monnet has received environment clearance for two of its coal mines recently -

Utkal B2 and Mandakini Block in Orissa. Last stage of forest clearance is expected

soon and mining operations can be started immediately at the Utkal B2 mine, as

it is an open cast mine.

Monnet is also venturing into the power generation business by setting up a pithead

1,050MW power project near its coal block at Angul, Orissa through its 87.5%

subsidiary, Monnet Power Company Limited. Financial closure for Rs50b capex

has been achieved, while ~85% of land has been already acquired. Order for the

BTG package was placed with BHEL in June 2009. First phase of the project

(525MW) is expected to be commissioned by January 2013. PPA has been signed

with PTC for 400MW and with the state for 300MW. Balance 32% power will be

sold in the merchant market. This project is expected to have high profitability due

to low cost structure.

In the longer term, Monnet plans to augment power generation capacity to

3,000MW, which will include 600MW unit at the existing 1,050MW project.

Monnet has recently merged Mounteverest Trading and Investment Company

(promoter group company involved in acquisition of Orissa Sponge Iron and Steel

Limited) with itself. Thus, Rs3.5b investment in Orissa Sponge has been brought

to the books of Monnet Ispat. Shareholders of Mounteverest have received 4.7m

shares i.e. ~7% of Monnet's expanded equity.

March 2011

Monnet Ispat



Orissa Sponge Iron has iron ore and coal mines, with reserves of 120m tons and

125m tons, respectively in Orissa. It has undertaken Rs12b capex to expand steel

making capacity to 1mtpa. Blast furnace capacity of 0.6mtpa has been ordered

though some other facilities are yet to be ordered.

During 9MFY11, 4.7m shares were issued on conversion of warrants, 4.7m shares

on merger of Mounteverest and 2.2m shares on conversion of FCCB. As a result,

paid up number of shares has increased from 52.3m to 63.9m. Promoter holding has

increased from 44.3% to 51.1%.

We expect Monnet's earnings to grow at a CAGR of 12% over FY10-13. We value

the stock at Rs510 based on 6.5x FY12E core business EBITDA, Rs23b for its

equity stake of 87.5% in Monnet Power (1,050MW project) and Rs4.2b for Orissa

Sponge. The stock is trading at 9.6x FY12E EPS and an EV of 11.8x FY12E EBITDA.

Though our target price still does not fully capture the value of its coal mining assets,

there remains project execution risk. Maintain

Neutral.

March 2011

Monnet Ispat

Ongoing expansion to increase capacities in FY12 ('000 tons) Steel production to grow at 67% CAGR

DRI

2,000

1,500

1,000

500

Pig

Pow er (RHS)

Steel billets

320

900

675

Sponge

Pig

Steel

1,600

1,200

800

400

240

160

450

225

Power sale to increase at 4% CAGR (MU)

Generation

Captive requirement

Captive coal keeping power generation cost low (Rs m)

EBITDA (LHS)

10,000

7,500

5,000

2,500

Coal (kt)

Pow er (MU)

1,600

1,200

800

400

FY06

FY07

FY08

FY09

FY10

FY11E FY12E FY13E

Power substitutes steel production in dull market

Steel prod (ton)

Pow er sales (MU)

Leverage to come down in FY13 (Rs b)

Debt

Net Worth

D/E ratio (RHS)

1.6

1.2

0.8

0.4

0.0

FY06 FY07 FY08 FY09

FY10 FY11E FY12E FY13E

80,000

60,000

40,000

20,000

300

225

150

Rich reserves of raw materials

Mines

Milupara, Mand Raigarh

Utkal B2, Angul

Mandakini, Talcher

Rajgamar, Chhattisgarh

Rameshwaram, Raigarh

Urtan, MP

Mineral

Coal

Iron ore

Coking coal

Reserves Extraction cap

(m tons)

(mtpa)

1.0

3.5

1.7

0.8

Mine

Type

U/G

O/C

U/G

Grade

B-D

E,F

B-E

Fe 64-66

Coking

Status

Operational

Land acquired; expecting MoEF soon

Pending Forest, exp in 1HFY13

Procured geological report; exp in 1QFY14

Pending MoEF clearance; exp by 1QFY13

Mining lease exp by 1QFY14

Source: Company/MOSL

March 2011

Monnet Ispat

Financials and Valuation

Income Statement (Standalone)

Y/E March

Net Sales

Change (%)

Total Expenses

EBITDA

% of Net Sales

Depn. & Amortization

EBIT

Net Interest

Other income

PBT before EO

EO Income

PBT after EO

Tax

Rate (%)

Reported PAT

Adjusted PAT

Change (%)

2009

15,487

33.6

11,898

3,590

23.2

653

2,937

706

477

2,707

547

20.2

2,160

30.0

2010

14,807

-4.4

10,351

4,456

30.1

717

3,739

744

318

3,313

622

18.8

2,691

24.6

2011E

15,539

4.9

11,009

4,530

29.2

759

3,771

441

524

3,854

3,903

750

19.2

3,153

3,113

15.7

(Rs Million)

2012E

20,457

31.7

15,026

5,432

26.6

1,048

4,383

516

577

4,444

889

20.0

3,555

14.2

2013E

25,664

25.5

17,346

8,318

32.4

1,789

6,529

1,341

583

5,770

1,154

20.0

4,616

29.8

Ratios

Y/E March

Basic (Rs)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

EBITDA Margins

Net Profit Margins

RoE

RoCE

RoIC

45.0

58.7

241.0

5.0

13.0

51.5

65.2

306.5

5.5

12.4

48.7

60.6

318.9

5.0

11.9

55.6

72.0

368.7

5.0

10.5

72.2

100.2

435.1

5.0

8.1

2009

2010

2011E

2012E

2013E

11.8

9.1

2.2

2.3

10.1

0.9

10.3

8.2

1.7

2.7

9.1

1.0

10.9

8.8

1.7

3.6

12.2

0.9

9.6

7.4

1.4

3.1

11.8

0.9

7.4

5.3

1.2

2.4

7.3

0.9

23.2

13.9

18.7

10.8

15.7

30.1

18.2

16.8

11.4

20.8

29.2

20.0

15.3

8.1

20.7

26.6

17.4

15.1

7.6

18.5

32.4

18.0

16.6

11.1

15.4

Balance Sheet

Y/E March

Share Capital

Reserves

2009

480

12,383

2010

523

16,208

16,730

14,950

1,196

32,876

14,391

3,108

11,283

7,212

5,454

11,427

2,188

1,289

2,052

5,898

2,685

1,803

882

8,743

32,876

2011E

639

20,566

21,205

24,248

1,196

46,649

15,391

3,868

11,524

19,962

5,454

12,110

2,129

1,277

2,806

5,898

2,585

1,703

882

9,525

46,649

(Rs Million)

2012E

639

23,747

24,387

32,248

1,196

57,830

21,391

4,916

16,475

26,212

5,454

12,628

2,802

1,681

2,246

5,898

3,124

2,242

882

9,505

57,830

2013E

639

27,990

28,629

29,248

1,196

59,073

41,391

6,705

34,686

8,462

5,454

13,981

3,516

2,109

2,458

5,898

3,694

2,812

882

10,286

59,073

Working Capital Ratios

Fixed Asset T/Or (x)

1.1

Asset Turnover (x)

Debtor (Days)

Inventory (Days)

Creditors (Days)

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Debt/Equity

0.6

1.0

0.5

1.0

0.3

1.0

0.4

0.6

0.4

Net Worth

12,863

Loans

13,252

Def. Tax Liability (net) 1,140

Capital Employed 27,254

Gross Block

13,665

Less: Accum. Deprn. 2,396

Net Fixed Assets

Capital WIP

Investments

Curr. Assets

Inventories

Sundry Debtors

Cash and Bank

Loans and Adv.

11,269

3,097

2,156

12,225

1,845

1,097

2,456

6,827

5.3

4.2

0.9

4.3

5.0

0.8

4.7

8.6

1.1

4.0

8.5

1.3

3.8

4.9

1.0

Cash Flow Statement

Y/E March

Pre-tax Profit

2009

2,707

2010

3,313

712

760

-566

-1,715

2,505

-4,842

-3,298

-8,140

3,868

1,698

-334

5,231

-403

2,456

2,052

2011E

3,903

759

-29

-750

3,883

-13,750

1,696

9,298

-374

10,620

753

2,052

2,806

(Rs Million)

2012E

4,444

1,048

-539

-889

4,065

-12,250

8,000

-374

7,626

-559

2,806

2,246

2013E

5,770

1,789

-571

-1,154

5,835

-2,250

-3,000

-374

-3,374

211

2,246

2,458

Depreciation

648

(Inc)/Dec in Wkg.Cap. -2,800

Tax Paid

-316

Other Oper. Activities -2,705

CF fr. Op. Activity -2,467

(Inc)/Dec in FA

-1,979

(Pur)/Sale of Invest.

-772

CF fr. Inv. Activity

-2,751

Curr. Liab. & Prov. 2,318

Sundry Creditors

1,437

Other Liabilities & Prov. 882

Net Current Assets 9,906

Appl. of Funds

27,254

E: MOSL Estimates

Equity raised/(repaid) 1,975

Debt raised/(repaid)

Dividend (incl. tax)

CF fr. Fin. Activity

(Inc)/Dec in Cash

Add: Opening Bal.

Closing Balance

2,271

-281

3,966

-1,252

3,708

2,456

March 2011

Update

SECTOR: METALS

Prakash Industries

BSE SENSEX

S&P CNX

18,328

Bloomberg

Equity Shares (m)

52-Week Range (Rs)

1,6,12 Rel. Perf. (%)

M.Cap. (Rs b)

M.Cap. (US$ b)

5,494

PKI IN

134.5

244/71

-20/-48/-73

10.4

0.2

Rs78

Buy

Growth outlook intact



Y/E March

2011E 2012E 2013E

23.0

6.2

3.6

40.6

27.0

40.6

29.1

8.7

5.3

46.9

35.6

31.7

179.4

2.2

0.4

0.6

1.9

19.8

20.6

23.3

Sales (Rs b)

17.1

EBITDA (Rs b) 3.5

PAT (Rs b)

2.6

Growth (%)

EPS (Rs)

EPS Gr. (%)

BV/Sh. (Rs)

P/E (x)

P/BV (x)

-2.9

19.2

-12.1



118.8 141.8

4.0

2.9

0.7

0.5

0.8

2.9

19.1

17.6

20.1



EV/Sales (x)

0.8

EV/EBITDA (x) 4.1

RoE (%)

16.2

RoCE (%)

RoIC (%)

12.1

14.6



Shareholding pattern % (Dec-10)

Promoter

Others,

32.5

49.3



Foreign,

14.1

Domestic

Inst, 4.1



Stock performance (1 year)

Prakash Inds

Sensex - Rebased

350

275

200

125

Mar-10

Jul-10

Nov-10 Mar-11



Prakash Industries (PKI) has emerged as an integrated steel producer through its

focus on backward integration over the last 8-10 years. It has a steelmaking capacity

of 0.7mtpa, backed by 0.6mtpa sponge iron units and 112MW of captive power.

Most of the crude steel it produces is converted into value-added products such

as structural/TMT (capacity of 0.3mtpa) and wire rods (capacity of 0.45mtpa).

PKI is setting up a 625MW thermal power plant at a capex of Rs25b in phases as

part of its Rs33b modular expansion in steel and power. The first phase of 125MW

is expected to get commissioned by the end of 1QFY12. Its steel operations

require ~130MW of power; we expect ~70MW of power to be available for merchant

sale.

BTG equipment for the next phases of 200MW and 300MW has already been

ordered. PKI expects the first unit of 100MW (of phase-II) to be commissioned in

June 2012 and rest 100MW by March 2013. We expect power generation to grow

at a CAGR of 84% to 386MU over FY11-13.

The company has recently expanded its steel capacity from 550ktpa to 700ktpa

as part of its expansion to 1mtpa. However, it has temporarily delayed further steel

expansion due to current volatility in the steel market and delays in receiving iron

ore mining approvals. PKI has spent ~Rs350m out of the Rs1b steel capex.

Sponge iron capacity is expected to increase to 0.8mtpa by 1QFY12 as the fourth

200ktpa DRI kiln is under commissioning. DRI production is likely to grow at a

CAGR of 22% over FY11-13 to 640k tons. This will help to reduce external purchase

of metallic further.

PKI had applied for captive mine allocation in 2003 and received three coal mining

blocks and two iron ore mines. Its captive mines have reserves of 150mt of coal

and 85mt of iron ore. Its Chotia coal mine has been operational for the last four

years. It produces ~1m tons of coal per year, which is used by PKI's sponge and

power plants.

Commissioning of its Madanpur coal mine is delayed due to the MoEF's "No-Go"

classification. Work on the Fatehpur mine (allotted for 625MW IPP) is on track.

Bank guarantees have been submitted and it is expected to start production in the

next 30 months.

The company has applied for tapering coal linkage for the 625MW IPP, which is

expected to receive coal from March 2011. Currently, it has a captive power

generation capacity of 112MW and imports the rest of its power requirement from

the grid.

Production from captive iron ore mines has been delayed by three quarters due to

procedural delays in Orissa and delays on account of stringent implementation of

environment and forest norms by MoEF.

Though the mining plan for the Sirkaguttu (Orissa) mine has been approved, it will

take 5-6 months to start operations, subject to receipt of mining lease. We have

cut our FY12 iron ore integration assumption to just 30%. If we assume zero iron

ore integration for FY12, our EPS estimate will get downgraded further by 21% to

Rs21.2 from the current Rs27.

March 2011

Prakash Industries



PKI has planned the entire capacity addition schedule in such a way that it will be

able to execute it with internal accruals and modest debt. However, looking at the

existing difficult scenario in the steel market, we expect PKI to add ~Rs3b of debt,

which would take its peak debt to Rs7.8b (including FCCB) in FY12.

PKI's earnings will be driven by margin expansion due to increased production of

sponge iron and topline growth on account of volume growth in the steel business

and sale of surplus power from its 625MW over five years. Early start of captive iron

ore mines will be a bonus, which will drive up margins significantly.

We expect earnings to grow at a CAGR of 18% over FY10-13 on commissioning of

125MW power plant and partial raw material integration. The stock trades at 2.9x

FY12E EPS, 0.5x FY12E BV and at an EV of 2.9x FY12E EBITDA. Maintain

Buy.

Sponge production to grow at 24% CAGR

Sponge Iron

800

600

400

200

FY08

FY09

FY10

FY11E FY12E FY13E

Steel Billets

Pow er (MW - RHS)

700

500

Power generation to grow at 84% over FY11-13

Captive Requirement

Pow er Generation

386

219

300

100

-100

FY08

FY09

FY10

FY11E

FY12E

FY13E

86 75

93 83

112

100

122

115

137

150

EBITDA margin is set to improve…

Net Sales (Rs b)

EBITDA Margin (%)

26.9

21.3

19.1

22.7

19.5

22.5

20.6

29.8

...though debt will increase in the near term

Debt

Net w orth

D/E ratio (RHS)

1.6

1.2

0.8

0.4

0.0

FY06 FY07 FY08 FY09 FY10 FY11EFY 12E FY13E

Source: Company/MOSL

FY06

FY07

FY08

FY09

FY10

FY11E FY12E FY13E

March 2011

Prakash Industries

Financials and Valuation

Income statement (consolidated)

Y/E March

Net Sales

Change (%)

Total Expenses

EBITDA

% of Net Sales

Power in EBITDA (%)

Depn. & Amortization

EBIT

Net Interest

Other Income

PBT before EO

EO income

PBT after EO

Tax

Rate (%)

Reported PAT

Adjusted PAT

Change (%)

2009

15,265

21.8

12,289

2,976

19.5

425

2,552

605

101

2,048

1,980

0.3

1,974

2,041

2.7

2010

15,677

2.7

12,152

3,525

22.5

568

2,957

255

2,733

2.6

2,662

30.4

2011E

17,148

9.4

13,616

3,532

20.6

738

2,794

107

2,726

2,712

141

5.2

2,572

2,584

-2.9

(Rs million)

2012E

22,972

34.0

16,790

6,182

26.9

1,053

5,130

630

4,542

908

20.0

3,634

40.6

2013E

29,097

26.7

20,416

8,681

29.8

1,351

7,330

705

6,671

1,334

20.0

5,337

46.9

Ratios

Y/E March

Basic (Rs)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

EBITDA Margins

Net Profit Margins

RoE

RoCE

RoIC

19.5

13.4

22.8

18.8

24.0

22.5

17.0

20.6

17.0

22.5

20.6

15.1

16.2

12.1

14.6

26.9

15.8

19.1

17.6

20.1

29.8

18.3

19.8

20.6

23.3

17.7

21.4

77.5

21.9

26.5

106.2

19.2

24.7

118.8

3.0

18.4

27.0

34.8

141.8

3.5

15.2

35.6

44.6

179.4

4.0

13.2

2009

2010

2011E

2012E

2013E

4.4

3.6

1.0

0.7

3.8

3.6

2.9

0.7

3.0

4.0

3.1

0.7

0.8

4.1

3.9

2.9

2.2

0.5

0.8

2.9

4.5

2.2

1.7

0.4

0.6

1.9

5.1

Balance Sheet

Y/E March

Share Capital

Reserves

2009

1,155

9,137

2010

1,217

13,091

14,308

2,301

772

17,381

17,829

7,082

10,747

3,026

5,226

1,019

820

1,018

2,370

1,804

1,023

781

3,422

17,381

2011E

1,345

16,146

17,490

4,801

772

23,064

24,354

7,820

16,533

3,026

5,273

564

1,644

696

2,370

1,956

1,175

781

3,318

23,064

(Rs Million)

2012E

1,345

19,228

20,573

7,801

772

29,147

31,379

8,873

22,506

3,026

5,783

755

2,203

455

2,370

2,355

1,573

781

3,428

29,147

2013E

1,500

27,085

28,585

6,301

772

35,658

38,404

10,224

28,180

2,496

7,570

957

2,790

1,454

2,370

2,774

1,993

781

4,796

35,658

Net Worth

10,291

Loans

2,593

Def. Tax Liability (net) 702

Capital Employed 13,587

Gross Block

15,242

Less: Accum. Deprn. 6,370

Net Fixed Assets

Capital WIP

Investments

Curr. Assets

Inventories

Sundry Debtors

Cash and Bank

Loans and Adv.

8,872

2,413

4,153

820

1,085

313

1,935

Working Capital Ratios

Fixed Asset T/O (x)

1.0

Asset Turnover (x)

Debtor (Days)

Inventory (Days)

Creditors (Days)

Leverage Ratio (x)

Current Ratio

Debt/Equity

1.1

0.9

0.7

0.8

2.0

0.3

2.9

0.1

2.7

0.3

2.5

0.4

2.7

0.2

Cash Flow Statement

Y/E March

Pre-tax Profit

Depreciation

(Inc)/Dec in Wkg. Cap.

Tax Paid

Other Oper. Activities

CF fr. Op. Activity

(Inc)/Dec in FA

2009

1,980

302

371

-6

-61

2,586

-2,058

2010

2,733

712

-629

-473

593

2,937

-3,200

1,260

-292

968

705

313

1,018

2011E

2,712

738

-218

-141

3,092

-6,525

1,083

2,500

-472

3,111

-322

1,018

696

(Rs Million)

2012E

4,542

1,053

-351

-908

4,335

-7,025

3,000

-551

2,449

-241

696

455

2013E

6,671

1,351

-369

-1,334

6,319

-6,495

3,377

-1,500

-702

1,175

999

455

1,454

Curr. Liab. & Prov. 2,064

Sundry Creditors

1,349

Other Liabilities & Prov. 715

Net Current Assets 2,089

Appl. of Funds

13,587

E: MOSL Estimates

(Pur)/Sale of Invest.

-21

CF fr. Inv. Activity -2,080

Equity raised/(repaid)

Debt raised/(repaid) -1,038

Dividend (incl. tax)

CF fr. Fin. Activity

-1,038

(Inc)/Dec in Cash

-532

Add: Opening Balance 845

Closing Balance

313

March 2011

Update

SECTOR: METALS

Sarda Energy & Minerals

BSE SENSEX

S&P CNX

18,328

Bloomberg

Equity Shares (m)

52-Week Range (Rs)

1,6,12 Rel. Perf. (%)

M.Cap. (Rs b)

M.Cap. (US$ m)

5,494

SEML IN

34.0

382/172

-10/-26/-16

6.6

146.3

Rs194

Neutral

Execution disappointing



Y/E March

Sales (Rs b)

EBITDA (Rs b)

PAT (Rs b)

2011E 2012E 2013E

8.5

1.2

0.4

9.2

1.5

0.9

9.8

1.7

1.1

24.1

31.4

24.1

233.4

6.2

0.8

1.3

7.6

13.4

8.1

18.9

Growth (%)

55.8 117.3

EPS (Rs)

11.6

25.3

EPS Gr.h (%) 48.0 117.3

BV/Sh. (Rs) 183.8 205.6

P/E (x)

P/BV (x)

EV/Sales (x)

EV/EBITDA (x)

RoE (%)

RoCE (%)

RoIC (%)

16.7

1.1

1.4

9.9

6.3

5.0

9.5

7.7

0.9

1.3

8.2

12.3

7.7

16.3



Shareholding pattern % (Dec-10)

Others,

14.4



Foreign,

11.7

Domestic

Inst, 7.4

Promoter

66.5



Stock performance (1 year)

Sarda Energy

Sensex - Rebased

440

360

280

200

120

Mar-10

Jul-10

Nov-10 Mar-11



Sarda Energy (SEML) is a Raipur-based ferroalloy cum steel producer, with a rich

mineral portfolio. It uses the DRI route to produce steel and has capacities of

360ktpa sponge, 240ktpa steel and 72ktpa of ferroalloys. It also has rich reserves

of coal, iron and manganese ore allotted across India. However, it currently sources

only coal from its captive mines.

Its captive iron ore mine in the Rajnandgaon district has not been operational for

the last two years, as the area is impacted by naxalite operations. Though material

and labor movement in the area began in early 2QFY11, its mines are still closed

due to operational difficulties. The hardening iron ore prices in the last two years

have dented SEML's performance.

To utilize its captive iron ore fines, SEML commissioned its 0.6mtpa pellet plant in

FY10. However, the pellet plant continues to operate at low capacity utilization

even after undergoing various technical modifications in the recent quarters. The

ramp up of pellet production is not likely to happen in the next few months. SEML

has paid dearly by the way of lost opportunity over the last few quarters. The

spread between cost of pellet and market price is too large to ignore operational

failure for such a long period. We model in slower ramp-up of the pellet plant in our

estimates (300k tons in FY12 and 360k tons in FY13).

The captive coal mine at Karwahi, Raigarh continues to operate satisfactorily, with

298k tons of coal production in 9MFY11.

SEML has recently received consent to operate the third FBC boiler installed at

Raipur, which has taken its captive power generating capacity to 81.5MW. We

expect faster ramp-up of the power unit, enabling captive power for full operations.

Power generation is expected to grow at a CAGR of 14% to 516MU over FY11-13.

SEML is setting up a greenfield ferroalloy project (125ktpa with 2x33MVA

submerged arc furnace and 80MW CPP) at Vizag at a capex of Rs5.5b. This

project is progressing on schedule to get commissioned by 1QFY13. The company

has already tied up entire debt for the project and has invested Rs1b in terms of

equity (out of Rs1.37b). BTG orders for the 80MW CPP have been placed and

equipment has started arriving at the site.

SEML is working on numerous projects such as manganese ore mining in Goa,

over 1,800MW of hydro and thermal power projects in Chhattisgarh, and 1.1mtpa

steel project at Raipur, which are in different stages. We expect these projects to

contribute significantly to the consolidated earnings over the next 5-10 years.

Leverage is likely to remain on the higher side, as the company is investing Rs1.5b-

2b every year on a number of projects that it has undertaken.

SEML has received Rs920m of preferential equity investment from Asia Minerals,

Hong Kong. This will be invested in its ongoing expansion projects. SEML has

allotted 1.8m shares (at a premium of Rs500/share), diluting equity by 5.3% to

358m in 3QFY11.

Faster ramp-up of pellet production, re-starting of iron ore mine and timely

completion of Vizag ferro project will drive earnings and help to reduce leverage.

However, in the near term, execution risk remains. Though it has a very rich mineral

portfolio, raw material integration is likely to be lower in the near term. The stock

is trading at 7.7x FY12E EPS and an EV of 8.2x FY12E EBITDA. Maintain

Neutral.

March 2011

Sarda Energy & Minerals

Higher pellet and power production to drive earnings…

DRI

400

300

200

100

FY06 FY07 FY08 FY09 FY10 FY11EFY12EFY13E

Steel

Pellets

Pow er (MU; RHS)

600

2,400

EBITDA (Rs m)

Margin (%) - RHS

3,200

420

1,600

240

800

-120

Pellet plant is not yet stabilized

Sponge Iron

Pellets

Steel

Ferro Alloys (RHS)

Ferro sales volumes will increase to 80ktpa ('000 tons)

Sponge Iron

Ferro Alloys

-2

Debt to remain on higher side

Debt

10.0

7.5

5.0

2.5

0.0

Net w orth

D/E ratio (RHS)

2.0

1.5

1.0

0.5

0.0

Rich reserves with huge potential

Resources

Iron ore

Rajnandgaon

5 mines in CG

Navelem, Goa

Coal

Raigarh

Madanpur South SPV

Indonesia coal JV

Manganese Ore

Navelem, Goa

Balaghat

230

100

300

Not operational

1 PL recd, 4 recommended

ML received

Operational

Expected in 2011

Land acquisition in progress

ML received

PL received

RP received

Reserves

(m tons)

Status

Focusing on too many projects at a time

Projects

Manganese ore

Coal mines

Indonesia Coal mines

Iron ore mines

Hydro power

Thermal power

Ferro alloys

Steel

Capacity/ Area

54 hectares

319 hectares

20.3% stake, 36m tons

10,000 hectares

150 hectares

230MW

350MW pit head

1,320MW IPP

2*33 MVA + 80MW CPP

1.1mtpa

Location

Goa

Madhya Pradesh

Madanpur South, Chhattisgarh

Indonesia

Narangsur, Chhattisgarh

Sikkim, Uttarakhand, Chhattisgarh

Chhattisgarh

Visakhapatnam

Siltara, Chhattisgarh

Status

Recived Mining lease

Received Prospecting license

Allotted in JV; awaited forest clearance

Mining lease, environment clearance done

Granted prospecting license

7 projects in different stages

Land, water done; statutory clearance awaited

ToR cleared by MoEF, land acquired

Expected by 1QFY13

Granted consent, land acquired

Source: Company/MOSL

March 2011

Sarda Energy & Minerals

Financials and Valuation

Income statement

Y/E March

Net Sales

Change (%)

Total Expenses

EBITDA

% of Net Sales

Depn. & Amortization

EBIT

Net Interest

Other Income

PBT before EO

EO income

PBT after EO

Tax

Rate (%)

Reported PAT

Adjusted PAT

Change (%)

2009

9,488

51.8

7,258

2,230

23.5

279

1,951

1,942

-450

1,492

258

17.3

1,234

1,606

32.2

2010

5,228

-44.9

4,461

767

14.7

388

379

127

325

447

772

140

17.7

632

268

-83.3

2011E

8,466

61.9

7,307

1,159

13.7

546

613

116

579

127

706

197

28.0

508

417

55.8

(Rs million)

2012E

9,231

9.0

7,730

1,501

16.3

451

1,050

-16

1,132

226

20.0

906

117.3

2013E

9,838

6.6

8,144

1,694

17.2

475

1,218

-121

1,405

281

20.0

1,124

24.1

Ratios

Y/E March

Basic (Rs)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

EBITDA Margins

Net Profit Margins

RoE

RoCE

RoIC

23.5

16.9

33.5

18.2

31.9

14.7

5.1

5.0

3.6

6.3

13.7

4.9

6.3

5.0

9.5

16.3

9.8

12.3

7.7

16.3

17.2

11.4

13.4

8.1

18.9

47.2

55.4

140.8

3.0

9.7

7.9

19.3

155.8

3.0

18.9

11.6

26.9

183.8

3.0

24.8

25.3

37.8

205.6

3.0

13.9

31.4

44.6

233.4

3.0

11.2

2009

2010

2011E

2012E

2013E

4.1

3.5

1.4

1.2

5.2

1.5

24.7

10.1

1.2

2.1

14.3

1.5

16.7

7.2

1.1

1.4

9.9

1.5

7.7

5.1

0.9

1.3

8.2

1.5

6.2

4.3

0.8

1.3

7.6

1.5

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

2009

340

4,793

5,133

2010

340

5,305

5,646

4,595

286

10,527

5,913

1,468

4,445

3,554

665

2,823

1,520

144

247

912

959

840

119

1,864

10,527

2011E

358

6,590

6,949

5,095

286

12,330

6,263

2,014

4,249

4,704

665

3,644

1,392

812

528

912

931

812

119

2,713

12,330

(Rs Million)

2012E

358

7,370

7,729

5,595

286

13,610

6,613

2,464

4,148

6,304

665

3,498

1,517

885

183

912

1,005

885

119

2,493

13,610

2013E

358

8,369

8,727

6,095

286

15,108

6,963

2,940

4,023

7,804

665

3,680

1,617

943

207

912

1,063

943

119

2,617

15,108

Working Capital Ratios

Fixed Asset T/Or (x)

1.9

Asset Turnover (x)

Debtor (Days)

Inventory (Days)

Creditors (Days)

0.9

0.5

106

1.4

0.7

1.4

0.7

1.4

0.7

Loans

5,330

Def. Tax Liability (net) 282

Capital Employed 10,745

Gross Block

4,984

Less: Accum. Deprn. 1,468

Net Fixed Assets

3,516

Capital WIP

Investments

Curr. Assets

Inventories

Sundry Debtors

3,554

726

3,522

996

183

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Net Debt/Equity

6.1

42.5

1.0

2.9

3.0

0.8

3.9

5.3

0.7

3.5

-66.3

0.7

3.5

-10.1

0.7

Cash Flow Statement

Y/E March

Pre-tax Profit

2009

1,492

2010

772

980

-136

1,615

-929

-867

-735

-119

-854

-106

353

247

2011E

706

546

-567

-197

487

-1,500

920

500

-126

1,295

282

247

528

(Rs Million)

2012E

1,132

451

-126

-226

1,231

-1,950

500

-126

374

-345

528

183

2013E

1,405

475

-100

-281

1,500

-1,850

500

-126

374

183

207

Cash and Bank

353

Loans and Advances 1,991

Curr. Liability & Prov. 573

Sundry Creditors

454

Other Liabilities & Prov. 119

Net Current Assets 2,949

Appl. of Funds

10,745

E: MOSL Estimates

Depreciation

252

(Inc)/Dec in Wkg. Cap. -992

Tax paid

-170

CF from Op. Activity

(Inc)/Dec in FA

535

-2,648

(Pur)/Sale of Invest.

-546

CF fr. Inv. Activity -3,195

Equity raised/(repaid)

Debt raised/(repaid) 2,091

Dividend (incl. tax)

-119

CF fr. Fin. Activity

2,019

(Inc)/Dec in Cash

-640

Add: Opening Balance 993

Closing Balance

353

March 2011

Update

SECTOR: METALS

Tata Sponge Iron

BSE SENSEX

S&P CNX

18,328

Bloomberg

Equity Shares (m)

52-Week Range (Rs)

1,6,12 Rel. Perf. (%)

M.Cap. (Rs b)

M.Cap. (US$ m)

5,494

TTSP IN

15.4

405/295

-1/-9/-15

5.1

111.9

Rs328

Buy

Missing growth



Y/E March

Sales (Rs b)

EBITDA (Rs b)

PAT (Rs b)

Growth (%)

EPS (Rs)

EPS Gr. (%)

BV/Sh. (Rs)

P/E (x)

P/BV (x)

2011E 2012E 2013E

6.6

1.3

0.9

1.7

55.8

1.7

6.5

1.4

1.0

13.7

63.5

13.7

6.6

1.5

1.1

9.9

69.7

9.9

423.7

4.7

0.8

0.3

1.2

16.5

16.6

69.6



309.2 363.3

5.9

5.2

1.1

0.9

0.5

2.1

17.5

19.1

59.4



EV/Sales (x)

0.6

EV/EBITDA (x) 3.1

RoE (%)

18.1

RoCE (%)

RoIC (%)

21.0

47.9

Shareholding pattern % (Dec-10)

Promoter

Others,

42.7



Domestic

Foreign,

Inst, 7.3

6.4

Tata Sponge (TTSP) has its manufacturing facility at Bilaipada near Joda in the

Keonjhar district of Orissa. It has sponge iron production capacity of 390,000tpa

(3 kilns; 2x120ktpa and 1x150ktpa) and a 26MW captive power plant based on

waste heat recovery from its kilns.

Its power facilities are adequate to meet its captive needs and it sells ~70% of the

power generated to the state electricity grid at notified rates.

TTSP's plant is ideally located in close proximity to iron ore mines (25km from

plants) and sponge iron consumers in the eastern region, which helps to save

transportation costs. The company's strategic tie-up with Tata Steel secures its

iron ore requirement in future years. Tata Steel's Khondbond mine in Orissa supplies

iron ore to TTSP largely on long-term pricing basis.

TTSP imports ~35% of its coal requirement for blending with inferior grade domestic

coal. It sources the balance 65% through linkage and e-auction from Coal India.

Its average coal cost is Rs4,000-4,500 per ton.

To get coal with ash content less than 22% from diverse sources remains a

challenge. In FY10, TTSP imported ~200k tons of coal from South Africa.

Development of Radhikapur (East) captive coal block in Talcher coal fields, Orissa

is underway. Environment clearance has been obtained. About 2,500 acres of land

has been allotted. However, the company still does not have possession of the

land. So far, TTSP has paid Rs1.1b towards the coal mines. Forest clearance is

still pending. Total cost of developing the mine will be nearly Rs5b. The coal block

has reserves of 115m tons and TTSP's share is ~50m tons. Scaw industries and

SPS Sponge are the other joint allottees. TTSP will be the leader and invest 100%

of the project cost. Coal will be supplied to the joint allottees at cost plus fixed

return on investment.

TTSP is planning to add another 25MW captive power plant at the existing location,

which will use unburnt coal from the sponge iron kiln.

TTSP is one of the best managed sponge iron plants in the country. Its location in

Barbil is of strategic advantage in sourcing iron ore. The arrangement with Tata

Steel helps in sourcing iron ore at reasonable long-term prices. It has a strong

balance sheet with surplus cash (Rs1.3b) and consistent track record of paying

dividend (80%). Valuations are attractive. The stock trades at 5.2x FY12E EPS

and at an EV of 2.1x FY12E EBITDA. Maintain

Buy.

Stock performance (1 year)

Tata Sponge

Sensex - Rebased

460

410

360

310

260

Mar-10

Jul-10

Nov-10 Mar-11

March 2011

Tata Sponge Iron

Volume growth muted

Sponge iron (k tons)

329

280

207

112

FY06

FY07

FY08

FY09

FY10

FY11E FY12E FY13E

123

141

140

139

138

343

361

Pow er (MU)

371

378

386

Quarterly production trend

Production tons)

Production (k (k tons)

101

RoIC to grow to 70% in FY13…

EBITDA (Rs m)

2,000

1,500

1,000

500

FY06 FY07 FY08 FY09 FY10 FY11EFY12EFY13E

RoIC (%; RHS)

…driven by sponge iron prices

EBITDA (Rs/t)

12,000

9,000

6,000

3,000

DRI realization (RHS, Rs/t)

24,000

18,000

12,000

6,000

Iron ore cost lower than peers (US$/ton)

Tata Sponge

Monnet Ispat

116

112

Consistent track record of paying dividend (Rs/share)

Book value

Dividend per share

FY06

FY07

FY08

FY09

FY10

FY06

FY07

FY08

FY09

FY10

FY11E FY12E FY13E

Source: Company/MOSL

March 2011

Tata Sponge Iron

Financials and Valuation

Income statement (consolidated)

Y/E March

Net Sales

Change (%)

Total Expenses

EBITDA

% of Net Sales

Depn. & Amortization

EBIT

Net Interest

Other Income

PBT

Tax

Rate (%)

Reported PAT

Adjusted PAT

Change (%)

2009

6,081

33.2

4,242

1,840

30.3

183

1,657

201

1,812

605

33.4

1,207

26.3

2010

5,200

-14.5

3,961

1,239

23.8

194

1,045

219

1,262

417

33.0

845

-30.0

2011E

6,595

26.8

5,272

1,323

20.1

196

1,127

156

1,283

423

33.0

860

1.7

(Rs million)

2012E

6,470

-1.9

5,037

1,433

22.2

208

1,225

234

1,459

481

33.0

977

13.7

2013E

6,592

1.9

5,123

1,469

22.3

208

1,261

342

1,603

529

33.0

1,074

9.9

Ratios

Y/E March

Basic (Rs)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

78.4

90.2

217.1

8.0

11.9

54.9

67.5

262.8

8.0

17.1

55.8

68.5

309.2

8.0

16.8

63.5

77.0

363.3

8.0

14.7

69.7

83.3

423.7

8.0

13.4

2009

2010

2011E

2012E

2013E

4.2

3.6

1.5

0.6

2.1

2.4

6.0

4.9

1.2

0.8

3.3

2.4

5.9

4.8

1.1

0.6

3.1

2.4

5.2

4.3

0.9

0.5

2.1

2.4

4.7

3.9

0.8

0.3

1.2

2.4

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Loans

2009

154

3,343

3,497

2010

154

4,047

4,201

459

4,661

3,592

1,536

2,057

1,217

2,155

683

375

933

164

775

401

375

1,379

4,661

2011E

154

4,762

4,916

459

5,377

3,592

1,732

1,861

2,017

2,407

813

434

997

164

917

542

375

1,491

5,377

(Rs Million)

2012E

154

5,596

5,750

678

6,429

3,592

1,940

1,653

2,317

3,358

798

355

2,042

164

907

532

375

2,451

6,429

2013E

154

6,525

6,679

918

7,599

3,592

2,148

1,444

2,467

4,560

722

361

3,313

164

881

506

375

3,680

7,599

EBITDA Margins

Net Profit Margins

RoE

RoCE

RoIC

30.3

19.8

36.1

41.4

62.9

23.8

16.3

20.9

22.4

41.8

20.1

13.0

18.1

21.0

47.9

22.2

15.1

17.5

19.1

59.4

22.3

16.3

16.5

16.6

69.6

Def. Tax Liability (net) 503

Capital Employed

4,002

Gross Block

3,591

Less: Accum. Deprn. 1,357

Net Fixed Assets

Capital WIP

Investments

Curr. Assets

Inventories

Sundry Debtors

Cash and Bank

Loans and Adv.

2,234

213

2,096

508

199

1,146

243

Working Capital Ratios

Fixed Asset T/O (x)

1.7

Asset Turnover (x)

Debtor (Days)

Inventory (Days)

Creditors (Days)

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Debt/Equity

1.5

1.4

1.1

1.8

1.2

1.8

1.0

1.8

0.9

3.8

35.7

-0.3

2.8

-0.2

2.6

-0.2

3.7

-0.4

5.2

-0.5

Cash Flow Statement

Y/E March

Pre-tax Profit

2009

1,812

2010

1,262

179

-46

-461

937

-1,006

-144

-213

1,146

933

2011E

1,283

196

-47

-423

1,008

-800

-144

933

997

(Rs Million)

2012E

1,459

208

-263

1,489

-300

-144

1,045

997

2,042

2013E

1,603

208

-288

1,565

-150

-144

1,271

2,042

3,313

Curr. Liability & Prov. 549

Sundry Creditors

286

Other Liabilities & prov. 263

Net Current Assets 1,546

Appl. of Funds

4,002

E: MOSL Estimates; Consolidated

Depreciation

179

(Inc)/Dec in Wkg. Cap. -227

Tax paid

-631

Other Oper. Activities

CF fr. Op. Activity

1,132

(Inc)/Dec in FA + CWIP

CF from Inv. Activity

Debt Raised/(Repaid)

Dividend (incl. tax)

CF fr. Fin. Activity

-843

-144

-987

(Inc)/Dec in Cash

174

Add: Opening Balance 972

Closing Balance

1,146

March 2011

Metals | New Order

Non-ferrous

Companies

Non-ferrous

Sterlite Industries

Hindalco

Hindustan Zinc

Nalco

March 2011

Metals | New Order

Non-ferrous industry - getting new projects a challenge

In the non-ferrous space, we like zinc. The outlook on zinc prices is bullish due to global

supply-side constraints. The Indian aluminum sector is facing challenges due to shortage

of coal, rising input costs, and project delays. The copper business in India is limited to

custom smelting and is, therefore, less significant.

Zinc: Global supply growth will taper

Zinc is used in protecting steel, in alloy castings, and in a range of chemical applications.

Over 2004-2010, global consumption of refined zinc grew at a CAGR of 2.7% to 12.5m

tons, mainly due to strong consumption growth in China. Chinese zinc consumption grew

at a robust 12% CAGR to 5.4m tons over the period, on strong steel production growth.

Consumption in the western world, however, declined at 1.3% CAGR to 6.6m tons. Refined

zinc production grew faster at 3.5% CAGR to 12.8m tons over 2004-2010. Mine production

grew at 4%. As a result, the zinc market turned from peak deficit of 388,000 tons in 2005

to peak surplus of 446,000 tons in 2009. This trend has, however, turned. The metal surplus

shrank to 264,000 tons in 2010.

Refined Zinc: Demand and Supply ('000 tons)

2004

Mine Production

YoY Change (%)

Metal Production

YoY Change (%)

Metal Consumption

9,735

2.3

10,396

4.9

10,651

2005

10,146

4.2

10,221

-1.7

10,609

-0.4

-388

1,393

2006

10,447

3.0

10,655

4.2

11,015

3.8

-360

3,248

2007

11,119

6.4

11,360

6.6

11,307

2.7

3,249

2008

11,654

4.8

11,645

2.5

11,436

1.1

209

1,901

2009

11,315

-2.9

11,263

-3.3

10,817

-5.4

446

1,689

2010

12,309

8.8

12,764

13.3

12,500

15.6

264

2,185

2011E

13,294

8.0

13,479

5.6

13,287

6.3

192

2,200

YoY Change (%)

8.2

Metal Balance

-255

LME (3M) average US$/ton 1,064

Source: ILZSG, December 2010/MOSL

Global usage of refined zinc metal grew 15.6% in 2010, surpassing the 12m tons mark for

the first time, mainly due to recovery in developed nations such as US, Netherlands, Canada,

Japan, Belgium and also in Brazil and Korea. Most of the capacity suspended during the

financial crisis has been brought back on stream. Refined metal production grew 13.3% in

2010. Hindustan Zinc added 210,000tpa of smelting capacity in 2010 while Votorantim's

160,000tpa smelter was commissioned in May 2010 in Peru. Mine production growth,

however, lagged at 8.8% due to destocking of 455,000 tons of metal in concentrate.

According to the ILZSG forecast, world zinc metal production is expected to grow at

5.6% in 2011 while metal usage is expected to grow at 6.3% on sizeable recoveries in

Japan, Brazil and Mexico and continued strong growth from China and India. Chinese zinc

demand is expected to grow at 8.8% in 2011. The zinc market has been in surplus for the

last four years. The surplus is expected to narrow to 192,000 tons in 2011. To sustain such

production growth, mine production will have to grow at 8%.

Globally, a couple of mines among the top-10 and several smaller mines are approaching

the end of mine life. Minmetals operated Century, which is currently producing ~500,000tpa

of zinc MIC is likely to get exhausted by 2015. Brunswick, which has a capacity of

March 2011

Metals | New Order

300,000tpa and is operated by Xstrata, has already started reporting production decline.

Brunswick is expected to close by 2013. Many of these mines have nearby projects,

which are getting developed to replace the existing mines. However, most of these projects

are less significant. Though 2.5mtpa of new zinc supply is likely to hit the market, the net

addition will be only 0.5mtpa over 3-5 years.

Zinc inventories at LME have risen

LME ZINC

5,250

3,500

1,750

-1,750

SPOT ($)

Fw d prem 15m/3m ( $)

Inventories (tons)

800,000

600,000

400,000

200,000

Zinc surplus will narrow in 2011

Surplus/ (Def icit) in k tons

446

264

209

192

2007

2008

2009

2010

2011E

Source: Bloomberg/MOSL

Aluminum: Project delays will drag production growth in FY12

India's aluminum consumption has grown at a CAGR of 10.6% over FY00-FY10, while

real GDP has grown at a CAGR of 7.2%. This implies that aluminum consumption has

been growing 47% faster than the GDP growth rate. Aluminum production too grew strongly

at a CAGR of 9.6% over this period but still fell short of consumption growth. During

FY11-FY14, we expect aluminum demand to growth at a CAGR of 13.2%. Production

too is expected to grow at a CAGR of 15% but most of the growth will be back-ended.

Production growth is likely to be only 3.3% in FY12 because new projects are delayed,

while existing capacities can be ramped up only marginally. Alumina production is expected

to grow in FY12 due to expansion of Nalco's refinery, but the surplus will be exported

rather than becoming available to domestic smelters.

March 2011

Metals | New Order

Aluminum: Domestic demand and supply

Production

3.0

2.5

2.0

1.5

1.0

0.5

Consumption

Imports

Exports

1.3

1.0

0.8

0.5

0.3

0.0

Source: MOSL

Aluminum production

Sr.

No.

Hindalco

Company Cap.

(ktpa)

545

Bauxite Captive

captive)

100

(MW) FY07

1,188

443

FY08

478

Production ('000 tons)

FY09

523

FY10 FY11E FY12E FY13E FY14E (ktpa)

555

532

564

750

1,200

545

359

Nalco

Balco

460

245

100

1,200

810

359

313

360

359

366

357

431

268

435

245

460

245

460

245

460

245

359

460

570

2012

2013

2015

900

Projects

CPP

(Mw)

Location

Renukoot

& Hirakud

Orissa

Jharkhand

Angul

Korba

Jharsuguda

Salem

Hold 1,200

Hold 1,215

5,115

VAL

500

Malco

Total

1,790

Change (%) YoY

1,215

265

500

700

825

<------------- Mothballed ------------>

4,488 1,151 1,234 1,355 1,520 1,712 1,769 1,955 2,605 3,477

15.3

7.2

9.8

12.2

12.6

3.3

10.5

33.2

Note: - MP=Madhya Pradesh;AP=Andhra Pradesh; ktpa=thousand ton per annum

Alumina production

Sr.

No.

Company

Hindalco

Capacity

(ktpa) FY06

1,550

1,203

FY07

1,199

Production ('000 tons)

Projects

FY08 FY09 FY10 FY11E FY12E FY13E FY14E (ktpa)

Location

1,193

1,237 1,307

1,373

1,500

2,500

2,900

1,500 Mar-12 Utkal (O)

Nalco

Balco

Malco

Vedanta Alumina

Domestic Production

Chg. (%) YoY

Domestic Consumption

Exports

1,575

200

1,400

4,795

1,590

219

3,096

1,475

230

2,987

1,576

230

267

3,348

1,577 1,592

230

544

762

3,671 3,661

1,577

800

3,749

2,100

1,000

4,600

2,100

1,000

5,600

2,100

1,000

6,000

1,500 Dec-14 Aditya (O)

525 Apr-11 Damanjori (O)

3,600

7,125

Hold

-3.5

1,898 2,188

1,198

799

12.1

9.6

-0.3

2,344 2,575 2,889

1,004 1,096

772

2.4

22.7

21.7

7.1

3,253 3,361 3,715 4,950

497 1,239 1,886 1,051

Note: MP = Madhya Pradesh; AP = Andhra Pradesh; O = Orissa

March 2011

Metals | New Order

Non-ferrous Factories

Talwandi Sabu STLT 2640MW IPP#

Dariba HZ

210ktpa +

Debari HZ

88ktpa zinc

smelter

Mahan HNDL 359ktpa smelter + 900MW CPP

Korba Balco 245ktpa smelter ->570ktpa* + 810MW CPP

Renukoot HNDL 390ktpa smelter + 821MW CPP

Jharsuguda VAL 1.75mtpa smelter + STLT 2400MW IPP#

Chanderia HZ 525ktpa zinc smelter

Jharkhand HNDL 359ktpa AL + 900MW CPP# + Muri 0.45mtpa refinery

Dahej copper smelter 500ktpa HNDL

Silvassa STLT

195ktpa copper

refinery

Angul NACL 0.46mtpa smelter

Hirakud HNDL 155ktpa smelter + 368MW CPP + Aditya project

Utkal HNDL 1.5mtpa AL refinery#

Langigarh VAL 1mtpa AL refinery ->6mtpa*

Damanjodi NACL 2.1mtpa AL refinery#

Aditya refinery 1.5mtpa HNDL+mines

Vizag 56ktpa HZ smelter

Belgaum HNDL 0.35mtpa refinery

Tuticorin STLT 0.4mtpa copper smelter

Aluminum Complex

Zinc Smelter

Copper Complex

Ongoing capacity expansion

Greenfield projects

March 2011

Metals | New Order

Non-ferrous Mines

Hasdeo-Arand coal fields JV

Mainpat STLT

Samri HNDL

Auranga 95mt HNDL

Lohardaga/Gumla HNDL

Rampura Agucha HZ

Zawar HZ

Sindesar Khurd HZ

N Karanpura 447mt JV

Mahan 150mt HNDL JV

Raniganj 753mt JV

Mand Raigarh (Gare) coalfields

Talcher coalfields JV

IB Valley JV

Talabira 2/3 Aditya HNDL

Panchpatmali NACL

Pottangi NACL

Chandgad HNDL

Maliparbat HNDL

Koraput Aditya HNDL

Bauxite Mine

Zinc Mine

Coal Mine

March 2011

Metals | New Order

In the non-ferrous space,

Sterlite Industries is

our top pick

Sterlite and Hindalco are our top picks in the non-ferrous space

In the non-ferrous space, Sterlite Industries is our top pick due to strong earnings growth

in zinc, lead, silver and energy business, though uncertainties over power sale, sourcing of

coal and bauxite, and minority stake buyouts continue to haunt. The outlook on zinc prices

is bullish primarily from the supply side, as a couple of large mines are expected to get

depleted over the next 2-3 years. Though 3.5mtpa of new zinc supply is likely to hit the

market, the net addition will be only 0.5mtpa. We recently visited Hindustan Zinc's silver

rich Sindesur Kurd (SK) mine, where the expansion is running ahead of schedule. The

contribution of silver to Hindustan Zinc's EBITDA will increase from 10% currently to 20-

25% by FY13. We expect its zinc production to grow at a CAGR of 6.2% to 800k tons

over FY11-FY13 following the recent expansion. We remain positive on Hindustan Zinc

due to strong volume growth in both zinc and lead over the next few years.

We have Buy rating on Hindalco as well due to the group's strong operating cash flows.

Though its smelter projects have been delayed significantly, Utkal Alumina remains on

track, with a small delay of six months. Sourcing of coal for the captive power plant of

Mahan smelter remains uncertain. The start of its captive coal mine is uncertain due to

'Go/No Go Zone' classification. If the Mahan smelter were to obtain coal from sources

other than Coal India/captive mines, its margins are likely to be thin. Valuations are not

demanding.

Nalco trades at expensive valuations and its margins are coming under pressure due to

rising cost of raw materials, labor and maintenance, despite access to captive bauxite and

low cost coal from Coal India.

We also have a Buy

rating on Hindalco

However, we believe

Nalco is expensive

Valuations: Indian companies

Rating

Non-ferrous

Sterlite Inds.

Hindustan Zinc

CMP MCAP

EPS (INR)

P/E (x)

EV/EBITDA (x)

P/BV (x)

(INR) (US$m) FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13E

165

131

464

209

12,290

12,262

6,624

9,188

12.7

10.3

16.4

15.3

22.3

12.7

18.1

17.7

23.6

13.9

17.4

19.2

12.9

12.7

28.3

13.6

7.4

10.3

25.7

11.8

7.0

9.4

26.7

10.9

9.7

8.0

15.9

7.1

5.7

5.8

14.1

6.5

4.4

4.6

14.8

5.9

1.4

2.5

2.7

1.2

2.0

1.0

1.7

Buy

Nalco

Sell

Hindalco

Buy

CMP=current market price

2.5

2.4

2.2

1.9

Source: MOSL

March 2011

Update

SECTOR: METALS

Sterlite Industries

BSE SENSEX

S&P CNX

18,328

Bloomberg

Equity Shares (m)

52-Week Range (Rs)

1,6,12 Rel. Perf. (%)

M.Cap. (Rs b)

M.Cap. (US$ b)

5,494

STLT IN

3,361.6

223/149

-3/1/-25

554.7

12.3

Rs165

Buy

Value at discount



We expect Sterlite Industries to post earnings CAGR of 36% over FY11-13, driven

by volume growth in zinc, lead and silver, and merchant power sales by Sterlite

Energy and Balco. As the company has used some of its cash to acquire zinc

assets from Anglo, the gap between RoIC and RoE is narrowing.

Y/E March

2011E 2012E 2013E

403.0

140.8

79.2

5.6

23.6

5.6

159.6

7.0

1.0

4.4

14.8

14.5

19.2

Sales (Rs b) 287.2 387.0

EBITDA (Rs b) 71.7 125.0

PAT (Rs b)

42.9

75.0

Growth (%)

EPS (Rs)

EPS Gr. (%)

BV/Sh. (Rs)

P/E (x)

P/BV (x)

6.1

12.7

6.1

75.0

22.3

75.0

119.1 138.7

12.9

7.4

1.4

1.2

1.3

5.7

16.1

14.2

19.0

EV/Sales (x)

1.8

EV/EBITDA (x) 9.7

RoE (%)

10.7

RoCE (%)

RoIC (%)

9.5

13.6

Zinc, lead and silver - inorganic and organic growth to pay off



We expect the attributable zinc, lead and silver volumes to grow at a rapid CAGR

of 37%, 51% and 45%, respectively to 837k tons, 120k tons and 211 tons over

FY11-FY13 on account of organic growth at Hindustan Zinc and addition of Anglo's

business. The growth momentum is likely to be maintained, as full ramp-up of

capacity progresses.



The Rampur Agucha mine has been expanded by 20% to 6mtpa and the Sindesar

Kurd (SK) mine is being expanded from 0.5mtpa to 1.5mtpa.



Production at Lisheen, Skorpion and Black mountain is likely to be maintained.

The Gamsberg project has the potential to add ~400ktpa capacity over 3-4 years

at a capex of ~US$1b.



The outlook for zinc prices remains bullish due to expected depletion of few large-

scale mines. We expect segmental attributable EBITDA to grow at a CAGR of

26% over FY11-FY13 to Rs58b. The international zinc business will add Rs14b-

17b to the Rs58b EBITDA, while other income will be lower by Rs4b.

Power sales to deliver growth; aluminum expansions on hold



The company is looking to cash in on the merchant sale of power post the

commissioning of Sterlite Energy's 2,400MW and Balco's 1,200MW projects over

the next 12-15 months. Aluminum expansions at both Vedanta Aluminum (VAL)

and Balco have been put on hold.



Sterlite Industries will be selling an attributable 3,111MW to third parties as against

~140MW in FY11. Power sales will add Rs30b to EBITDA over FY11-FY13.



Given the shortage in the country, sourcing coal is a bit challenging. We factor

average coal cost of Rs1,600/ton. Balco's captive coal mines, expected to be

operational in six months subject to stage-2 forest clearances, will reduce fuel

costs significantly.

Trades at significant discount to SOTP value; Buy

Sterlite has underperformed due to a trail of setbacks - bauxite mining, minority buyouts,

Tuticorin smelter, etc. Yet, earnings growth remains intact. The stock now trades at a

significant discount to its intrinsic valuation of Rs221 (based on SOTP), implying that

negatives are factored in. We believe the stock will get re-rated once projects get

delivered. Maintain

Buy.

Shareholding pattern % (Dec-10)

Promoter

Others,

11.9

52.8

Foreign,

27.0

Domestic

Inst, 8.3

Stock performance (1 year)

Sterlite Inds.

Sensex - Rebased

280

240

200

160

120

Mar-10

Jul-10

Nov-10 Mar-11

March 2011

Sterlite Industries

Power plant commissioning schedule (MW)

Existing

Capacity

Sterlie Energy

Expansion

Cumulative Capacity

Sale to State grid @Rs3.2/kwh

Merchant Sales

Expansion

Cumulative Capacity

Captive Consumption

Merchant Sales

3rd party sales

(less; minority interest

in Balco)

* Trial run production

State Grid

Merchant Sales

Total Power Sales

810

540

270

1,200

Jun

-11

1,200

600

300

1,110

540

570

Sep

-11

600

1,800

600

1,200

300

1,410

540

870

Dec

-11

600

2,400

600

1,800

1,410

540

870

Mar

-12

2,400

600

1,800

300

1,710

540

1,170

Jun

-12

2,400

600

1,800

300

2,010

540

1,470

Avg. available capacities

FY11

400

300

100

810

540

270

300

238

538

FY12

1,650

600

1,050

983

540

443

600

1,276

1,876

FY13

2,400

600

1,800

1,935

540

1,395

600

2,511

3,111

Balco

Source: Company/MOSL

Sum of the parts valuations (based on FY12 estimates) - (Rs b)

Net EBITDA

sales

Stand-alone

Hindustan Zinc

Balco

CMT (less intersegment)

VAL

Skorpion Zinc

Lisheen Zinc

Black Mountain Zinc

Sterlite Energy

164

104

PAT

Net

debt

-198

-15

225

-13

-20

-2

Net

worth

231

176

-75

Valuation

basis

6.5x EBITDA

5.0x EBITDA

6.5x EBITDA

3.5x EBITDA

10.0x EBITDA

15.0x PE

402

107

165

Equity

value

600

143

990

Stake

(%)

100

64.9

100

29.5

100

Attrib.

equity

389

Rs/

116

453

150

105

119

Note: - Aluminum prices US$2,200/ton, zinc & lead prices = US$2,200/ton

100

143

SOTP

743

221

Source: Company/MOSL

March 2011

Sterlite Industries

Segment-wise volumes (attributable, B Kwh)

Zinc (kt)

Silver (tons)

Aluminium (kt)

Lead (kt)

Copper (kt)

Pow er (RHS)

Price assumptions

Copper

Lead

Aluminium

Alumina

Zinc

Pow er (RHS)

5.0

3.8

2.5

1.3

0.0

FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14

130

10,000

7,500

5,000

161

184

FY 07

183

226

FY 08

182

277

FY 09

137

359

FY 10

122

100

176

211

804

448

837

2,500

FY 11

FY 12

FY 13

EBITDA (attributable, Rs b)

Standalone

Balco

Zinc - international

CMT & intersegment etc

Hindustan Zinc

Sterlite Energy

FY 08

FY 09

FY 10

FY 11

FY 12

Net debt (attributable, Rs b)

Net

Sterlite Energy

Copper

Hindustan Zinc

Balco

Zinc - international

-19

-34

-50

FY 07

FY 13

Other income (attributable, Rs b)

Zinc

Advances to VAL

Standalone

FY 07

FY 08

FY 09

FY 10

FY 11

FY 12

FY 13

Cash & equivalents (attributable, Rs b)

Advances to VAL

Standalone

FY 09

FY 10

FY 11

FY 12

FY 13

104

114

Zinc assets

Subsidiaries

216

163

Significant unemployed capital (Rs b)

900

675

450

Copper

Zinc - international

Sterlite Energy

Unemployed

Hindustan Zinc

Balco

VAL

Gap between RoIC and RoE will narrow in FY12 (Rs b)

RoE

RoIC

FY 11

FY 12

225

FY 07

FY 08

FY 09

FY 10

FY 11

FY 12

FY 13

FY 07

FY 10

FY 08

FY 09

FY 13

Source: Company/MOSL

March 2011

Sterlite Industries

Financials and Valuation

Income Statement (Consolidated)

Y/E March

Net Sales

Change (%)

Total Expenses

EBITDA

2009

2010

2011E

(Rs Million)

2012E

2013E

Ratios

Y/E March

Basic (Rs)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

EBITDA Margins

Net Profit Margins

RoE

RoCE

RoIC

12.3

14.8

90.4

1.7

14.2

12.0

14.3

110.1

1.9

15.6

12.7

15.5

119.1

1.8

13.7

22.3

27.1

138.7

1.8

7.8

23.6

29.1

159.6

1.8

7.4

2009

2010

2011E

2012E

2013E

211,442 244,103 287,220 386,965 403,038

-14.5

15.4

17.7

34.7

4.2

164,401 183,386 215,536 261,999 262,189

47,041 60,718 71,684 124,966 140,849

-40.2

22.2

7,007

40,035

3,973

21,543

57,604

8,550

14.8

49,054

-553

49,607

12,671

-1,536

34,847

-19.9

29.1

24.9

7,498

53,220

3,424

19,594

69,390

12,330

17.8

57,060

2,970

54,091

17,241

588

40,407

16.0

18.1

25.0

9,333

74.3

32.3

16,123

12.7

34.9

18,642

Change (YoY %)

As % of Net Sales

Depn. & Amortization

EBIT

Net Interest

Other income

PBT

Tax

Rate (%)

PAT

EO Income

Adj. PAT

Minority interests

Share in Asso.

Attrib. PAT

Change (YoY %)

62,351 108,844 122,207

3,167

9,638

11,635

20,712 20,142 24,095

79,897 119,347 134,668

16,660 23,483 26,525

20.9

19.7

63,237

1,631

61,607

17,510

-2,873

42,854

6.1

95,864 108,142

22,965

2,092

74,991

75.0

29,247

308

79,203

5.6

13.4

11.2

1.8

4.0

25.0

1.1

13.7

11.6

1.5

1.8

11.1

1.1

12.9

10.6

1.4

1.8

9.7

1.1

7.4

6.1

1.2

1.3

5.7

1.1

7.0

5.7

1.0

4.4

1.1

22.2

23.5

13.6

9.8

19.3

24.9

22.2

10.9

9.5

17.6

25.0

21.4

10.7

9.5

13.6

32.3

24.8

16.1

14.2

19.0

34.9

26.8

14.8

14.5

19.2

Balance sheet (Consolidated)

Y/E March

Share Capital

Reserves

Net Worth

Minority Interest

Total Loans

Def. Tax Liability

2009

1,417

2010

1,681

2011E

3,362

(Rs Million)

2012E

3,362

2013E

3,362

Working Capital Ratios

Fixed Asset Turnover (x)1.4

Asset Turnover (x)

0.5

Debtor (Days)

Inventory (Days)

Working Capital (Days) 128

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Debt/Equity

2.8

10.1

-0.2

1.3

0.4

188

1.0

0.4

168

1.0

0.5

139

0.9

0.5

146

254,715 368,439 397,052 463,015 533,190

256,132 370,120 400,414 466,377 536,552

68,132

70,135

14,076

84,096 105,761 127,191 154,902

92,600 132,600 149,600 127,600

15,524

18,789

21,081

23,535

Capital Employed 408,475 562,340 657,563 764,248 842,589

Gross Block

153,867 181,789 297,736 396,761 453,849

3.6

15.5

-0.2

3.8

19.7

-0.1

3.8

11.3

-0.1

3.8

10.5

-0.2

Cash Flow Statement

Y/E March

EBITDA

2009

47,041

2010

60,718

2011E

(Rs Million)

2012E

2013E

71,684 124,966 140,849

1,971

4,381

-3,071

-5,753

-2,946

2,431

-13,712 -21,191 -24,071

54,190 105,211 116,138

-52,605

-54,789

14,099

-93,216

17,000

-6,883

-9,638

479

12,474

54,611

67,086

-16,752

-66,842

16,867

252

-66,476

-22,000

-11,635

-33,635

16,027

67,086

83,113

Less: Accu. Deprn. 51,549 59,133 68,302 84,352 102,950

Net Fixed Assets 102,319 122,656 229,434 312,409 350,899

Capital WIP

Investments

Liquid invest.

69,786 110,844 115,717

69,297

28,962

162,062 203,045 180,110 234,899 301,741

137,823 198,283 171,923 220,020 286,555

Non cash exp. (inc) 6,227

1,135

(Inc)/Dec in Wkg. Cap.13,636 -8,487

Tax paid

-8,522 -11,549

CF fr. Op. Activity 58,382 41,817

(Inc)/Dec in FA

-40,095

(Pur)/Sale of Invest. 2,747

Curr. Assets

116,360 175,114 179,336 200,433 219,168

Inventory

24,591 29,827 33,918 39,036 40,417

Account Receivables 8,760

5,709 14,839 17,411 17,754

Cash and Bank Bal. 55,048 33,378

Loans and advances 27,961 106,200

Curr. Liab. & Prov. 42,051

Account Payables

23,747

Provisions & Others 18,304

49,319

28,827

20,492

54,611

75,967

47,033

36,295

10,738

67,086

76,901

52,790

41,039

11,752

83,113

77,883

58,180

45,195

12,986

-61,819 -120,820

-36,725 22,935

14,499

20,479

-62,907

40,000

-6,883

-3,167

29,951

21,234

33,378

54,611

Int.& Div. Income

12,801 12,279

Loans and Adv.

-6,974 -65,445

CF fr. Inv. Activity -31,521 -151,710

Equity raised/(repaid)

76,248

21,795

-4,352

-5,469

88,222

-21,671

55,048

33,378

Net Curr. Assets 74,309 125,795 132,303 147,643 160,987

Appl. of Funds

408,475 562,340 657,563 764,249 842,590

E: MOSL Estimates

Debt raised/(repaid) 11,682

Dividend (incl. tax)

-3,938

Interest paid

-4,093

CF fr. Fin. Activity

(Inc)/Dec in Cash

Add: Opening Bal.

Closing Balance

3,651

30,513

24,536

55,048

March 2011

Update

SECTOR: METALS

Hindalco

BSE SENSEX

S&P CNX

18,328

Bloomberg

Equity Shares (m)

52-Week Range (Rs)

1,6,12 Rel. Perf. (%)

M.Cap. (Rs b)

M.Cap. (US$ b)

5,494

HNDL IN

1,984.4

252/129

-14/17/21

414.7

9.2

Rs209

Buy

Delaying projects



Y/E March

Sales (Rs b)

2011E 2012E 2013E

703.0

686.7

93.2

35.2

17.7

15.5

94.3

11.8

2.2

0.9

6.5

18.8

10.4

16.5

730.7

104.6

38.1

19.2

8.3

111.8

10.9

1.9

0.8

5.9

17.2

10.6

14.3



EBITDA (Rs b) 84.5

NP (Rs b)

30.4

EPS (Rs)

15.3

EPS Gr. (%)

BV/Sh. (Rs)

P/E (x)

P/BV (x)

EV/Sales (x)

EV/EBITDA (x)

RoE (%)

RoCE (%)

RoIC

59.1

78.4

13.6

2.7

0.9

7.1

19.6

9.8

14.1



Shareholding pattern % (Dec-10)

Others,

12.6

Promoter

32.1



Foreign,

41,9

Domestic

Inst, 14.4



Stock performance (1 year)

Hindalco

Sensex - Rebased

280

240

200

160

120

Mar-10

Jul-10

Nov-10 Mar-11

Hindalco is investing US$5b in greenfield projects to raise aluminum capacity 3x

to 1.6m tons and alumina capacity 2x to 3mtpa. Progress on the projects had

picked up momentum in the last 1-2 years and timelines were being maintained.

However, the projects are now delayed.

Alumina capacity is likely to double. Though the Uktal Alumina project has been

delayed by six months, we expect it to ramp-up production in FY13. Statutory

clearances for the captive bauxite mines are in place. Hence, margins in alumina

production are likely to be robust.

Primary aluminum production will dip a bit in FY11 due to breakdown at the Hirakud

smelter following torrential rain and lightning during the monsoon season. Over

FY11-FY13, the production is likely to increase at a CAGR of 19% to 750k tons

due to expansion of Hirakud and commissioning of the 359ktpa Mahan smelter.

The Mahan smelter has been allotted a coal block, but statutory clearances are

pending due to new classification of "Go/No Go" zone introduced by the Ministry

of Environment and Forest (MoEF). In the absence of coal linkages, the profitability

of the smelter has become questionable.

Gains on account of stronger LME prices are getting eroded by persisting cost

pressure for aluminum smelter in India. Hindalco has a strong pipeline of aluminum

and alumina projects, but execution delays remain a risk to our volume assumption.

Though the Mahan smelter's captive power plant has been allotted captive coal

mines, delays in operating the coal block or alternative coal linkages can adversely

impact margins.

Novelis has already surpassed its guidance of US$1b EBITDA on trailing 12-

month basis. However, margin pressure was seen in European business in 3QFY11.

Demand for FRP products remains strong. Novelis continues to focus on cost

reduction and increase in volumes through de-bottlenecking and capacity

expansion. We expect volumes to increase 20% over 3-4 years. We model EBITDA

of US$1.14b for FY12 and US$1.2b for FY13.

Novelis has returned US$1.7b (as return of capital) to Hindalco, which has been

utilized to repay acquisition debt. Consolidated interest expense for FY12 has

increased by Rs3.7b due to increase of debt at Novelis level. The benefit of reduction

in interest expense on receipt of US$650m will be going to capital account rather

than revenue account because the proceeds will be utilized for greenfield projects.

We recently cut our FY11E EPS by 9% to model lower than expected 3QFY11

results for both standalone and Novelis. We have cut our volume assumptions of

alumina and metal for FY12 and FY13 to incorporate delays in commissioning of

projects. Our FY12 alumina production estimate is cut from 1.8m tons to 1.5m

tons. Similarly, our FY13 metal production estimate is cut from 0.8m tons to

0.75m tons. We have cut our EPS estimates by 3% to Rs17.7 for FY12 and by

4% to Rs20 for FY13. The stock trades at 11.8x FY12E EPS and an EV of 6.5x

FY12E EBITDA. Maintain

Buy.

March 2011

Hindalco

Smelter capacity to rise 3x

Existing Capacity

addition by FY12

359

155

359

1,680

359

Aluminum production to grow at 19% CAGR

800

700

600

500

400

CAGR 4%

CAGR 19%

390

Renukoot Hirakud

Mahan

Aditya

Hirakud Jharkhand Total

Refinery capacity to double

Existing Capacity

addition by FY12

1,500

4,500

1,500

Alumina production to grow at 35% CAGR

2,600

2,200

CAGR 3%

1,800

1,400

1,000

CAGR

35%

1,500

Copper smelter - steady income

EBITDA

8.0

20.3

6.0

4.0

2.0

0.9

0.0

FY05 FY06 FY07 FY08 FY09 FY10 FY11E

11.8

16.6

12.9

EBIT

Average Rs7.1b

18.9

16.9 18

SG alumina - steady income

EBITDA (Rs b)

389

323

300

260

238

242

250

280

298

Volume (000 tons)

Average Rs3.3b

FY05 FY06 FY07 FY08 FY09

FY10 FY11E FY12E FY13E

EBITDA (US$ m): 16% CAGR over FY11-13

2,500

2,000

Novelis

Aluminium

Copper

Others

Novelis EBITDA (US$m): End of upgrade cycle

290

263

231

200

199

238

1,500

1,000

500

FY08

FY09

FY10

FY11E

FY12E

FY13E

124

1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11

Source: Company/MOSL

March 2011

Hindalco

Financials and Valuation

Income Statement (Consolidated)

Y/E March

Net Sales

Change (%)

Total Expenses

EBITDA

2009

2010

2011E

(Rs Million)

2012E

2013E

Ratios

Y/E March

Basic (Rs)

EPS

Cash EPS

BV/Share (adj.)

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

RoE

RoCE

RoIC

Growth (%)

27.4

4.8

-4.7

14.0

8.3

10.9

19.6

9.8

14.1

18.8

10.4

16.5

17.2

10.6

14.3

11.9

53.1

43.5

1.4

67.7

9.6

36.0

68.7

1.4

6.2

15.3

28.6

78.4

1.5

10.5

17.7

32.9

94.3

1.5

7.8

19.2

36.4

111.8

1.5

7.2

2009

2010

2011E

2012E

2013E

656,252 607,221 703,023 686,733 730,720

9.4

-7.5

15.8

-2.3

6.4

602,631 536,753 618,512 593,517 626,167

53,622 70,468

84,511 93,215 104,553

11.6

27,836

42,632

14,085

3,227

31,774

30,034

61,808

18,289

29.6

43,519

4,237

-27

19,132

-8.2

12.0

28,251

56,260

12,484

5,034

48,810

-7,948

40,862

12,382

30.3

28,480

3,335

-27

30,443

59.1

13.6

27,309

65,907

16,087

4,238

54,058

16,103

29.8

37,954

2,777

-27

35,150

15.5

14.3

30,760

73,793

17,315

4,113

60,591

19,046

31.4

41,545

3,450

-27

38,068

8.3

% of Net Sales

8.2

Depn. & Amortization 30,378

EBIT

23,244

Net Interest

Other Income

PBT before EO

EO income

PBT after EO

Tax

Rate (%)

Reported PAT

Minority Interests

Share of Asso.

Adjusted PAT

Change (%)

12,323

6,878

17,799

-23,848

-6,049

-9,537

157.7

3,488

-1,718

-353

20,831

1.5

17.6

3.9

4.8

0.9

10.9

0.6

21.7

5.8

3.0

0.9

8.1

0.6

13.6

7.3

2.7

0.9

7.1

0.7

11.8

6.4

2.2

0.9

6.5

0.7

10.9

5.7

1.9

0.8

5.9

0.7

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Minority Interest

Total Loans

2009

2010

2011E

(Rs million)

2012E

2013E

1,750

1,984

156,782 213,462 232,601 264,323 298,962

158,532 215,446 234,585 266,307 300,947

12,866 17,372 17,372 17,372 17,372

283,098 239,987 273,737 293,737 318,737

Sales

EBITDA

PAT

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Debt/Equity

9.4

-19.2

1.5

-7.5

31.4

-8.2

15.8

19.9

59.1

-2.3

10.3

15.5

6.4

12.2

8.3

1.4

1.9

2.9

1.6

3.0

1.2

1.8

4.5

1.2

1.9

4.1

1.0

2.0

4.3

0.9

Def. Tax Liability

27,571 39,382 46,512 53,281 61,180

Capital Employed 482,066 512,187 572,206 630,697 698,235

Gross Block

Less: Acc. Deprn.

Goodwill on cons.

Capital WIP

Investments

Curr. Assets

Inventory

383,315 375,915 387,415 421,470 518,370

108,066 130,243 158,494 185,802 216,562

82,419

29,495

22,362

79,101 79,101 79,101 79,101

58,008 110,887 150,129 131,715

18,652

Cash Flow Statement

Y/E March

EBITDA

Non-cash items

2009

53,622

-4,879

2010

70,468

-8,811

-6,353

-5,984

49,321

-41,708

4,741

-36,967

27,539

-3,209

-16,771

-3,274

4,284

16,637

64,353

80,990

2011E

84,511

-5,252

-19,115

60,143

-64,379

1,672

-62,707

33,750

-12,484

-3,429

17,837

15,273

(Rs Million)

2012E

-9,334

3,477

87,358

-73,297

1,434

-71,863

20,000

-16,087

-3,429

484

15,979

2013E

-11,147

-5,914

87,492

-78,486

636

-77,850

25,000

-17,315

-3,429

4,256

13,898

93,215 104,553

Net Fixed Assets 275,249 245,672 228,921 235,668 301,808

tax paid

-8,432

Change in Wkg. Cap. 2,591

CF fr. Op. Activity

42,903

235,144 290,920 297,637 307,436 334,437

85,241 112,754 113,623 108,641 117,896

65,437

80,990

31,739

66,509 65,311 69,159

85,765 101,744 115,643

31,739 31,739 31,739

(Inc)/Dec in FA

-25,988

(Pur)/Sale of Invest.

894

CF fr. Inv. Activity -25,094

Equity raised/(repaid)50,623

Debt raised/(repaid) -91,954

Interest

-22,449

Dividend (incl. tax)

-3,532

CF fr. Fin. Activity -67,313

(Inc)/Dec in Cash -49,504

Add: Opening Bal.

Closing Balance

113,857

64,353

Account Receiv.

66,733

Cash and Bank Bal. 64,353

Others

18,817

Curr. Liab. & Prov.162,602 180,166 162,992 160,288 167,478

Account Payables

96,078 130,996 114,000 111,297 118,486

Provisions & Others 66,523 49,169 48,992 48,992 48,992

Net Curr. Assets 72,542 110,755 134,645 147,147 166,960

Appl. of Funds

482,066 512,187 572,206 630,697 698,235

E: MOSL Estimates

80,990 96,263 112,243

96,263 112,243 126,141

March 2011

Update

SECTOR: METALS

Hindustan Zinc

BSE SENSEX

S&P CNX

18,328

Bloomberg

Equity Shares (m)

52-Week Range (Rs)

1,6,12 Rel. Perf. (%)

M.Cap. (Rs b)

M.Cap. (US$ b)

5,494

HZ IN

4,225.3

144/90

4/22/3

553.5

12.3

Rs131

Buy

Silver and lead to grow faster



Y/E March

2011E 2012E 2013E

109.5

64.8

58.6

13.9

9.5

77.1

9.4

1.7

2.7

4.6

18.0

17.7

66.0

Sales (Rs b)

92.8 104.1

EBITDA (Rs b) 50.9

61.8

NP (Rs b)

EPS (Rs)

EPS Gr. (%)

BV/Sh. (Rs)

P/E (x)

P/BV (x)

EV/Sales (x)

43.7

10.3

8.0

52.4

12.7

2.5

4.4

53.5

12.7

22.6

64.1

10.3

2.0

3.4

5.8

19.7

20.2

62.9



EV/EBITDA (x) 8.0

RoE (%)

19.7

RoCE (%)

20.1

RoIC (%)

52.2



Shareholding pattern % (Dec-10)

Promoter

Others,

31.3

64.9



Domestic

Inst, 2.0

Foreign,

1.6

We expect zinc production to grow at a CAGR of 6.2% to 800k tons over FY11-

FY13 due to recent expansion of zinc refining capacity. The company had expanded

its smelting capacity to 879ktpa in mid-2010. In 3QFY11, its smelters achieved

highest production of 178k tons, implying annualized production of 713k tons.

Lead production will grow at a CAGR of 41% to 120k tons over FY11-FY13. A new

lead smelter, with capacity of 100ktpa is expected to be commissioned in 4QFY11.

Since incremental internal requirement will rise at just 6%, more lead will be available

for third party sales.

Silver production will grow at a CAGR of 44% to 324 tons over FY11-FY13. Silver

capacity will be expanded to 500tpa along with the lead smelter. Sindesur Kurd

(SK) mine is rich in silver. SK mine produced 0.7m tons in FY11, while the current

production rate has already reached 1.2mtpa. In FY12, SK mine is expected to

produce 1.5m tons and 2m tons in FY13. Silver production is expected to more

than double to 400 tons in FY12, which is ahead of 270 tons in our estimates.

Mine production too is being ramped up to match the refining capacity. Post

expansion of Rampur Agucha mines, the total mine capacity has been increased

to 8.6mtpa. During FY10, the ore production was 7.1m tons. SK mine will be

further expanded to 1.2mtpa. Sale of zinc and lead concentrates has been

discontinued but for exceptional situations.

The cost of production remains one of the lowest in world. Including royalties, the

cost of production of zinc has been US$800-1,000/ton in the last five years.

Although its 100ktpa lead smelter is delayed again by a quarter, second unit of

80MW (in 160MW CPP) has commenced trail runs in 3QFY11.

The company has recently announced addition of 150MW capacity to its existing

123.2MW power generation capacity, with an additional capex of Rs8.65b in two

phases. The first phase of 50MW will be commissioned by 1QFY12 while the

balance 50MW will be commissioned by 3QFY12.

Cash and equivalents stand at Rs131b, of which Rs6.6b is invested in debt mutual

funds. Recently, the company announced a bonus of 1:1 and stock split of 1:5.

We remain positive on Hindustan Zinc due to strong volume growth of zinc metal

and sharper growth in lead and silver production over the next few years. The stock

trades at 10.3x FY12E EPS and an EV of 5.8x FY12E EBITDA, assuming zinc

and lead prices of US$2,200/ton. Every US$100/ton change in LME prices impacts

EPS by 5-6%. Maintain

Buy.

Stock performance (1 year)

Snapshot of mining operations

160

140

120

100

Mar-10

Hindustan Zinc

Sensex - Rebased

Mines-->

Type of mine

Reserves (m tons)

Resources (m tons)

Reserve grade Zinc (%)

Reserve grade Lead (%)

FY10 Ore prod cap (mtpa)

FY10 Ore production (mtpa)

Rampura

Agucha

Open cast

75.71

44.65

14.23

1.99

5.14

10.74

50.08

5.45

2.95

0.5

0.44

Sindesar

Khurd

Rajpura

Dariba

Underground

7.80

34.41

6.25

1.4

0.9

0.50

7.85

53.36

3.66

1.95

1.2

1.02

Zawar

Jul-10

Nov-10 Mar-11

March 2011

100

Hindustan Zinc

Expect PAT growth of 16% over FY11-FY13 (Rs b)

PAT

Net Sales

FY09

104

EBITDA

109

Lead and silver gaining share in revenue (Rs b)

Silver

Refined Lead

Refined Zinc

FY10

FY11E

FY12E

FY13E

FY06

FY07

FY08

FY09

FY10

FY11E FY12E FY13E

Production of refined zinc, lead and silver

Refined Zinc (kt)

1,000

750

500

250

FY06 FY07

FY08 FY09 FY10 FY11E FY12E FY13E

Refined Lead (kt)

Silver (tons)

240

180

120

Ref ined Zinc

Ref ined Lead

Silver (RHS)

Realization (Rs/ton)

Refined Zinc

200,000

150,000

100,000

50,000

FY07 FY08 FY09 FY10 FY11E FY12E FY13E

Ref ined Lead

Sulphuric acid (RHS)

12,000

9,000

6,000

68,750

3,000

50,000

3,000

Ref ined Zinc

125,000

106,250

87,500

Ref ined Lead

Sulphuric acid (RHS)

12,000

9,000

6,000

Cost of production of zinc (US$/ton)

Pow er

Mf g

Labor

200

144

108

310

177

FY06

238

215

149

FY07

214

FY08

255

FY09

196

FY10

129

121

317

Admin & Selling

115

333

Royalty

Despite high RoIC, mounting cash chest dragging RoE

Cash

155

166

124

RoE

RoIC

FY07

FY08

FY09

109

FY10

246

138

189

336

FY06

FY11E FY12E FY13E

Source: Company/MOSL

March 2011

101

Hindustan Zinc

Financials and Valuation

Income Statement

Y/E March

Net Sales

Change (%)

Total Expenses

EBITDA

2009

56,803

-27.9

29,461

27,342

2010

80,170

41.1

33,469

46,701

58.3

3,343

43,358

439

7,222

50,141

9,727

19.4

40,414

48.2

2011E

15.8

41,873

50,925

54.9

4,658

46,266

111

7,594

53,750

-212

53,538

10,047

18.8

43,491

43,663

8.0

(Rs Million)

2012E

12.2

42,328

61,779

59.3

4,843

56,936

196

10,155

66,895

13,379

20.0

53,516

22.6

2013E

5.1

44,652

64,806

59.2

4,825

59,980

196

13,491

73,276

14,655

20.0

58,621

9.5

92,797 104,107 109,457

Ratios

Y/E March

Basic (Rs)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

EBITDA Margins (%)

Net Profit Margins (%)

RoE

RoCE

RoIC

6.5

7.1

34.0

4.0

7.2

9.6

10.4

42.9

6.0

7.3

10.3

11.4

52.4

7.0

7.9

12.7

13.8

64.1

8.0

7.4

13.9

15.0

77.1

8.0

6.7

2009

2010

2011E

2012E

2013E

% of Net Sales

48.1

Depn. & Amortization 2,853

EBIT

24,489

Net Interest

Other Income

PBT before EO

EO Income

PBT after EO

Tax

Rate (%)

Reported PAT

Adjusted PAT

Change (%)

219

9,312

33,582

6,306

18.8

27,276

-38.0

20.3

18.4

3.9

8.0

16.7

3.1

13.7

12.6

3.1

5.4

9.3

4.6

12.7

11.5

2.5

4.4

8.0

5.3

10.3

9.5

2.0

3.4

5.8

6.1

9.4

8.7

1.7

2.7

4.6

6.1

48.1

48.0

19.0

16.4

47.7

58.3

50.4

22.3

22.9

59.2

54.9

47.1

19.7

20.1

52.2

59.3

51.4

19.7

20.2

62.9

59.2

53.6

18.0

17.7

66.0

Balance Sheet

Y/E March

Share Capital

Reserves

2009

2010

2011E

(Rs Million)

2012E

2013E

4,225

8,451

139,351 177,014 213,032 262,593 317,259

Net Worth

143,576 181,240 221,482 271,044 325,709

Total Loans

605

Deferred Tax Liability 5,589

7,112

8,548 10,459 12,552

Capital Employed 149,251 188,957 230,634 282,107 338,866

Gross Block

58,555

Less: Accum. Deprn. 17,506

Net Fixed Assets

Capital WIP

Investments

Curr. Assets

Inventory

41,049

82,407

20,766

61,641

99,012 103,012 107,012

24,526 28,298 32,081

74,487

74,714

74,931

Working Capital Ratios

Fixed Asset T/O (x)

1.0

Asset Turnover (x)

0.4

Debtor (Days)

10.6

Inventory (Days)

9.6

Wkg. Capital T/O (Days) 1.1

Payable (Days)

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

23.9

1.0

0.4

6.9

5.6

-3.2

21.7

0.9

0.4

6.6

5.4

-2.6

20.7

1.0

0.4

6.6

5.4

-2.2

20.7

1.0

0.3

6.6

5.4

-2.0

20.7

11,084 11,130

11,084 11,084

11,084

69,289 109,492 138,244 189,320 245,783

37,839

5,457

19,953

4,517

1,518

9,275

4,642

13,258

4,777

8,481

20,555

4,968

1,670

9,275

4,642

13,735

5,253

8,481

21,364

5,574

1,873

9,275

4,642

14,375

5,893

8,481

21,746

5,860

1,970

9,275

4,642

14,678

6,196

8,481

3.8

111.9

1.5

98.7

1.5

418.7

1.5

290.5

1.5

306.0

Cash Flow Statement

Y/E March

Pre-tax Profit

2009

33,582

2010

50,141

3,343

3,219

-8,309

229

48,623

2011E

53,538

4,658

-126

-8,611

-686

48,773

(Rs Million)

2012E

66,895

4,843

-169

-11,468

-1,071

59,031

-4,000

-51,076

-55,076

-3,955

9,275

2013E

73,276

4,825

-80

-12,562

-1,042

64,418

-4,000

-56,463

-60,463

-3,955

9,275

Account Receivables 1,649

Cash and Bank Bal. 27,192

Others

3,542

Curr. Liab. & Prov. 10,010

Account Payables

3,722

Provisions & Others 6,287

Depreciation

2,853

(Inc)/Dec in Wkg. Cap. 3,866

Tax paid

-5,209

Other oper. activities

-503

CF fr. Op. Activity 34,589

(Inc)/Dec in FA

-13,166

(Pur)/Sale of Invest. -5,964

CF fr. Inv. Activity -19,131

Debt Raised/(Repaid)

Dividend (incl. tax)

CF fr. Fin. Activity

(Inc)/Dec in Cash

Add: opening Bal.

Closing Balance

-1,977

-1,894

13,564

13,628

27,192

Net Curr. Assets 27,830

6,695

6,820

6,989

7,069

Appl. of Funds

149,251 188,957 230,634 282,107 338,866

E: MOSL Estimates

-23,897 -16,560

-40,203 -28,752

-64,100

518

-2,956

-2,439

-17,916

27,192

9,275

-45,312

-3,461

9,275

March 2011

102

Update

SECTOR: METALS

Nalco

BSE SENSEX

S&P CNX

18,328

Bloomberg

Equity Shares (m)

52-Week Range (Rs)

1,6,12 Rel. Perf. (%)

M.Cap. (Rs b)

M.Cap. (US$ b)

5,494

NACL IN

644.3

471/334

8/16/10

299.0

6.6

Rs464

Sell

Cost pressure squeezing margins



Y/E March

2011E 2012E 2013E

68.2

17.3

66.0

15.9

11.2

17.4

-3.9

196.8

26.7

2.4

3.6

14.8

8.8

9.0

16.9

Sales (Rs b)

58.1

EBITDA (Rs b) 15.6

NP (Rs b)

EPS (Rs)

EPS Gr. (%)

BV/Sh. (Rs)

P/E (x)

P/BV (x)

EV/Sales (x)



10.6

11.6

16.4

18.1

31.5

10.3

173.1 185.3

28.3

2.7

4.3

25.7

2.5

3.6

14.1

9.8

10.6

18.1



EV/EBITDA (x) 15.9

RoE (%)

9.5

RoCE (%)

9.9

RoIC (%)

18.1



Shareholding pattern % (Dec-10)

Others,

Foreign,

3.1

4.4

Domestic

Inst, 5.4



Promoter

87.2



Stock performance (1 year)

Nalco

Sensex - Rebased

500

450

400

350

300

Mar-10

Jul-10

Nov-10 Mar-11

Nalco has invested ~US$900m over the last 3-4 years to increase smelter capacity

from 345ktpa to 460ktpa, captive power capacity from 960MW to 1,200MW, and

alumina capacity from 1.6mtpa to 2.1mtpa. The balance sheet has remained debt-

free with cash surplus of Rs35b-40b.

The smelter has been fully ramped-up, with estimated production of 435kt in FY11.

Metal production will grow 2-3%, as operating efficiencies improve.

Alumina capacity expansion is running behind schedule and is now expected to

be completed by April 2011. As the production of alumina ramps up, alumina sales

will grow and drive revenue growth.

Cost of production has continuously risen. In FY06, cost of production used to be

US$110/ton for alumina and US$1,100/ton for aluminum. Since then, there has

been huge cost inflation due to shortage of coal, rising maintenance cost due to

aging smelter, faster labor cost inflation than productivity improvement and rising

commodity prices. Cost of aluminum production has risen to US$2,070/ton by

3QFY11.

Fixed cost has risen 52% due to aging of smelter and wage cost inflation during

FY06-FY11. The trend is likely to continue because public sector productivity

improvement usually lags manpower cost increase.

Power and fuel cost has risen 2.3x in five years, as the captive power plant has

increasingly been sourcing coal through e-auction and imports because coal

linkages have moved down from 100% to 80%.

Growth will continue to elude Nalco, though the company is working on a number

of expansion projects (Indonesia, Orissa, nuclear power, titanium, etc). However,

there is no visibility of any of these projects. Also, Nalco's intention of getting into

unrelated project (though with the help of JV partner) is also worrisome. The

government may try to extract cash from Nalco by selling equity of other public

sector companies like Hindustan Copper.

Though Nalco's assets are one of the best in world, with strategic location of

alumina refinery close to captive bauxite mines and the smelter's location close to

coal mines, it is still unable to contain costs. Costs continue to rise on all fronts.

We have cut our FY11E EPS by 11% to Rs16.1 to factor lower than expected

3QFY11 results and rising coal costs. We have also reduced our assumption of

coal linkage from 90% to 80% for FY12 and FY13. Our EPS estimates are cut

from Rs22.7 to Rs18.1 for FY12 and from Rs24.5 to Rs17.4 for FY13. The stock

trades at 25.7x FY12E EPS and an EV of 14.1x FY12E EBITDA. Maintain

Sell.

March 2011

103

Nalco

Metal production is muted (000 tons)

431

359

358

361

445

460

Alumina production will drive revenue (000 tons)

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

Cost of production on the rise (USD/ton)

Alumina

Pow er Smelter

Other consumables

529

551

348

217

301

236

FY06

411

251

276

266

FY07

276

350

325

FY08

556

335

381

335

FY09

540

267

406

356

FY10

750

348

FY11

758

351

FY12

744

358

FY13

384

Fixed Cost

534

388

550

330

EBITDA growth will be muted

LME (US$/ton)

EBITDA (Rs b)

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

Aluminum CoP and EBIT (USD/ton)

3,200

2,400

1,600

800

CoP

EBIT

Realizations (Rs/ton)

12,000

9,000

6,000

3,000

Alumina

Aluminium

75,000

50,000

25,000

-25,000

Mounting cash chest… (Rs b)

…dragging RoE

RoE (%)

RoIC (%)

FY10

FY11

FY12

FY13

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY06

FY07

FY08

FY09

Source: Company/MOSL

March 2011

104

Nalco

Financials and Valuation

Income Statement

Y/E March

Net Sales

Change (%)

Total Expenses

EBITDA

2009

50,945

2.1

34,038

16,907

2010

50,557

-0.8

40,635

9,922

19.6

3,194

6,728

4,688

11,392

156

11,549

3,406

29.5

8,142

8,032

-36.3

2011E

58,099

14.9

42,530

15,569

26.8

3,848

11,721

3,628

15,348

4,790

31.2

10,558

31.5

(Rs Million)

2012E

68,248

17.5

50,903

17,345

25.4

4,006

13,339

4,298

17,638

5,997

34.0

11,641

10.3

2013E

66,002

-3.3

50,110

15,892

24.1

3,906

11,986

4,969

16,955

5,765

34.0

11,190

-3.9

Ratios

Y/E March

Basic (Rs)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

RoE

RoCE

RoIC

19.6

24.0

151.6

5.0

29.6

12.5

17.6

161.3

2.5

23.1

16.4

22.4

173.1

4.0

28.6

18.1

24.3

185.3

5.0

32.4

17.4

23.4

196.8

5.0

33.7

2009

2010

2011E

2012E

2013E

% of Net Sales

33.2

Depn. & Amortization 2,724

EBIT

14,182

Net Interest

Other Income

PBT before EO

EO income

PBT after EO

Tax

Rate (%)

Reported PAT

Adjusted PAT

Change (%)

4,958

19,101

170

19,272

6,549

34.0

12,723

12,610

-23.5

23.7

19.4

3.1

5.1

15.5

1.1

37.2

26.4

2.9

5.1

26.0

0.5

28.3

20.8

2.7

4.3

15.9

0.9

25.7

19.1

2.5

3.6

14.1

1.1

26.7

19.8

2.4

3.6

14.8

1.1

12.9

13.6

24.9

7.7

6.1

10.1

9.5

9.9

18.1

9.8

10.6

18.1

8.8

9.0

16.9

Balance Sheet

Y/E March

Share Capital

Reserves

2009

6,443

91,255

2010

2011E

(Rs Million)

2012E

2013E

6,443

97,513 105,056 112,927 120,348

Working Capital Ratios

Fixed Asset Turnover (x)0.5

Asset Turnover (x)

Debtor (Days)

Inventory (Days)

Wkg. Capital T/O (Days)

Leverage Ratio (x)

Current Ratio

0.5

-5

0.5

(3)

0.5

(12)

0.6

0.5

(1)

0.5

(1)

Net Worth

97,698 103,956 111,499 119,370 126,791

Def. Tax Liability

6,214

6,606

Capital Employed 103,912 110,562 118,105 125,976 133,397

Gross Block

Less: Accu. Deprn.

Net Fixed Assets

Capital WIP

Investments

Curr. Assets

98,998 110,180 117,180 119,180 121,180

58,673

40,325

28,671

8,959

45,288

61,817

48,363

22,434

9,868

52,096

9,449

1,818

31,524

9,306

22,199

18,500

3,700

29,897

65,665

51,515

22,434

9,868

59,673

8,280

812

41,275

9,306

25,385

21,685

3,700

34,289

69,671

49,509

22,434

9,868

64,694

9,349

935

45,105

9,306

20,528

16,828

3,700

44,166

73,577

47,603

22,434

9,868

73,467

9,041

904

54,216

9,306

19,974

16,274

3,700

53,493

2.3

2.4

3.2

3.7

Cash Flow Statement

Y/E March

Pre-tax Profit

2009

19,272

2010

11,549

3,194

-1,108

-3,014

-50

10,570

-4,944

-908

-5,852

-1,885

2,833

28,690

31,524

2011E

15,348

3,848

5,360

-4,790

19,767

-7,000

-3,015

9,752

31,524

41,275

(Rs Million)

2012E

17,638

4,006

-6,048

-5,997

9,599

-2,000

-3,769

3,829

41,275

45,105

2013E

16,955

3,906

-215

-5,765

14,881

-2,000

-3,769

9,111

45,105

54,216

Inventories

8,419

Account Receivables

265

Cash and Bank Bal. 28,690

Others

7,914

Depreciation

2,724

(Inc)/Dec in Wkg. Cap. 2,575

Tax Paid

-6,410

Other Oper. Activities

-1

CF fr. Op. Activity 18,160

(Inc)/Dec in FA

-12,951

(Pur)/Sale of Invest. -7,809

CF fr. Inv. Activity -20,760

Dividend (incl. tax)

Other fin. activities

CF fr. Fin. Activity

(Inc)/Dec in Cash

Add: opening Bal.

Closing Balance

-3,769

-105

-3,874

-6,474

35,165

28,690

Curr. Liab. & Prov. 19,332

Account Payables

16,034

Provisions & Others 3,298

Net Curr. Assets 25,956

Appl. of Funds

103,912 110,562 118,105 125,976 133,397

E: MOSL Estimates

March 2011

105

Metals | New Order

Appendix: Vedanta Group site visit

Silver lining amid uncertainties

Vedanta group all-India site visit takeaways

During March 1-4, we visited mines and plant sites of Vedanta group of companies across India. The companies covered

were (1) Hindustan Zinc, (2) Sterlite Energy, (3) Vedanta Aluminium and (4) Sesa Goa. We present our key takeaways below.

Hindustan Zinc: SK mines ahead of schedule



We were positively surprised by the progress of Hindustan Zinc's (HZ IN, Mkt Cap US$12.5b, CMP Rs131, Buy)

silver-rich SK mines, where the expansion is running ahead of schedule.



HZL is targeting silver production of 400 tons v/s our estimate of 270 tons in FY12.



Cost of production will remain constant despite deepening of mines as stripping ratio will come down.

We are keeping our estimates unchanged for now but we will look to upgrade as we see ramp-up of sliver production.

Sterlite Energy: Ramp-up delayed



Sterlite Energy's power plant ramp-up has been delayed in past due to bottlenecks in evacuation of power. With 950-

1,000MW of transmission capacity in place now, generation ramp-up at 1,200MW can be expected.



Sterlite Energy's 2 units of 600MW each will start commercial production from April 2011. Other 2 units of 600MW

each are scheduled to start in September and December 2011, but risk of delay remains.



We have factored average of 1,500MW to be available for FY12, which looks achievable but we need to monitor the

projects carefully.

Vedanta Aluminium and Balco: Smelters on hold



VAL's 1.25mtpa smelter is 80% complete but put on hold due to shortage of alumina and better margins in selling

power. VAL will continue to operate only 500ktpa smelter and 1mtpa refinery. Captive power plant gets 35% of its

coal requirement through linkages.



Cost of production of aluminium is US$1,750-1,800/ton. Balco's landed cost of alumina converted by VAL from its

captive bauxite is US$300/ton.



Balco's 1,200MW project is on track, while 325ktpa smelter is put on hold. Captive coal mine is expected to start

production by December 2011 subject to getting permissions.

Sesa Goa: thrust on R&R



Sesa Goa (SESA IN, Mkt Cap US$5.4b, CMP Rs272, Buy) indicated that R&R would be enhanced at year-end.



It remains keen on expansion to 40mtpa subject to permissions. Infrastructure investment in Orissa in on track.



Sesa currently is trading at unjustified discount to DCF valuations of Rs319 (assuming long-term iron ore prices of

US$120/dmt on fob basis).

Valuation and view



We believe Hindustan Zinc and Sesa Goa are trading at attractive valuations with upside risk to our estimates.



Sterlite Industries (STLT IN, Mkt Cap US$12.4b, CMP Rs166, Buy) is likely to post strong EPS growth of 76.3% to

Rs22.5 in FY12 due to growth in HZL, Anglo, Balco and Sterlite Energy businesses.



We have a

Buy

rating on HZL, Sesa Goa and Sterlite Industries.

March 2011

106

Metals | New Order

Day 1 at Jharsuguda

Balco: 1,200MW CPP expansion on track



Balco is currently operating 245ktpa smelter, 540MW CPP and 270MW merchant

power plant. Balco has focused on enriching product mix. Value-added products have

increased from 80% in FY10 to 92% in FY11. Rod production increased from 148kt in

FY10 to 165kt in FY11, while rolled products remained at 66kt.



Cost of production (CoP) ranges from US$1,750-1,800/ton. Alumina is produced on

conversion basis by sending bauxite from its mines to Lanjigarh. VAL charges

approximately Rs8,000 for conversion of one ton of alumina. Thus, cost of alumina to

Balco is approx US$300/ton. Balco's captive power plants receive coal through linkages.

Manpower has been right-sized and rationalized by 1,000 persons since April 1, 2009

through VRS. Hot metal costs consist of US$60/ton on account of surplus manpower

of dismantled Soderberg smelter.



It is currently implementing expansion of 325ktpa of smelter and 1,200MW captive

power plant. Though the smelter commissioning has been put on hold, 1,200MW CPP

remains on track. First unit of 300MW is expected to commission by June 2011. The

400KV power transmission lines are expected by end of March 2011. Second, third

and fourth units are schedule for commissioning by September 2011, March 2012 and

June 2013.



1,200MW power plant's captive coal mine is expected to start production by December

2011. Traimar coal block with R&R of 211m tons is located 70km from the plant site.

Coal mine has achieved significant progress with approval of TOR by MoEF, mining

plan by Ministry of Coal, in-principle mining lease by state government, in-principle

diversion of forest, and public hearing for environment clearance. Final forest clearance

is expected by July 2011 and mining lease by August 2011. Coal production can be

expected to start by December 2011.

VAL: 1.2mtpa smelter remains on hold



1.25mtpa smelter with 4 lines of 336 pots each is nearly 80% complete. Project has

been kept on hold due to denial of bauxite from Nyamgiri mines. Lanjigarh alumina

refinery has completed 100% of purchase, while 60% of project construction is

complete.



500ktpa smelter was operating near capacity. Neary 50% of alumina is received from

Lanjigarh refinery and rest is imported. Cost of alumina at Jharsuguda is US$420/ton.

Landed cost of 3rd party bauxite at Lanjigarh is ~Rs1,900/ton, which has increased by

Rs200 in last 2 years. Cost of production of aluminium is US$1,974/ton.



Cost of power generation is Rs2.30/kwh (Rs2/kwh for coal and Paise30/kwh for

O&M).



1,215MW CPP receives 35% coal through linkages, while remaining coal is purchased

through e-auction, forward auction, and imports. Nearly 60% of total coal consumed

is transported by road, while balance 40% by rail.

Sterlite Energy: 1,200MW commissioned

Sterlite Energy (SEL) has already started power generation at 2 units of 600MW each.

Unit 2 was started in September 2010. The 600MW unit was producing 321.1MW i.e.

PLF of 53%.

March 2011

107

Metals | New Order

Sterlite Energy Unit 2 (600MW)

Source: Company/MOSL



Evonics Energy, a German contractor, has been given O&M contract. This unit is

supplying power to state grid through 450MW line, which can take maximum of 500MW.

PLF ramp up remains slow due to lack of demand from state. State grid (Gridco) is

buying power at Rs3.2/kwh. Coal cost is pass-through in agreement with state grid.



600MW Unit 1 too has been started. Though the unit was ready operationally some

time ago, power generation was delayed due to delay in getting transmission line.

600MW Line-in Line-out (LILO-1) was charged towards end of February i.e. couple

of days before our site visit. The unit was being readied for charging to the grid. As

shown in the following picture, the control shows 0% PLF. Chinese contractor has

been hired for O&M of this unit as seen in the following picture.

Unit 1 (600MW)

Source: Company/MOSL



The power plants are heavily dependent on purchase of coal through e-auction and

forward auctions because linkage coal from Coal India is only 65%. Nearly 10% of

coal consumed is imported. Though the coal mines are in proximity, the availability of

rakes remains poor. Nearly 60% of coal is transported through roads. An average

2,500 trucks remain engaged for delivery of coal. Since the e-auction coal is not

uniformly distributed through the month, the number of trucks touches 6,000 in peak

days. Commercial generation of 1,200MW i.e. first 2 units is expected to start from

April, 2011.

108

March 2011

Metals | New Order



Unit 3 and 4 are expected to start generation by September and December 2011

respectively. The power evacuation will remain dependent on getting 1,000MW LILO-

2 and IB-Meramundli tansmission line. Though LILO-2 will be ready in next 6 months,

the IB-Meramundli line will take 12-15 months.

Unit 4: Schedule to start in 3QFY12

Unit 3: Schedule to start by 2QFY12

Boiler house: 3rd units (blue) completion; 4th unit (brown)

still under construction

VAL’s 0.5mtpa aluminum smelter potline

Source: Company/MOSL



To strengthen the logistics to handle huge requirement of raw materials, the company

is laying out 85km of railway lines at cost of Rs4b. Two projects have been completed.

3rd project will be completed by March 2011. 17-18km of Dhutra line is expected in

4QFY11. A merry-go-around to connect to captive coal mines is expected by 2013.



Currently 50,000 tons per month of coal is being imported, which will go to 100,000tpm

at full production rate. At Jharsuguda, 4,400 acres of land has been acquired. Land for

ash pond is under acquisition.

March 2011

109

Metals | New Order

Sum of the parts valuations (based on FY12 estimates) - (Rs b)

Net EBITDA

sales

Stand-alone

Hindustan Zinc

Balco

CMT (less intersegment)

VAL

Skorpion Zinc

Lisheen Zinc

Black Mountain Zinc

Sterlite Energy

164

104

PAT

Net

debt

-198

-15

225

-13

-20

-2

Net

worth

231

176

-75

Valuation

basis

6.5x EBITDA

5.0x EBITDA

6.5x EBITDA

3.5x EBITDA

10.0x EBITDA

15.0x PE

402

107

165

Equity

value

600

143

990

Stake

(%)

100

64.9

100

29.5

100

Attrib.

equity

389

Rs/

116

453

150

105

119

Note: - Aluminum prices US$2,200/ton, zinc & lead prices = US$2,200/ton

100

143

SOTP

743

221

Source: Company/MOSL

Day 2 at Hindustan

Zinc: Dariba Smelter

and SK mines

Hindustan Zinc: Dariba Smelter and SK mines



On March 2, we visited Hindustan Zinc's Dariba smelter and Sindesur Kurd (SK)

underground zinc mine.



210ktpa zinc smelter was operating at full capacity, while lead and silver smelter is

expected to start operation by end of March 2011. SK mines development is running

ahead of schedule. Both lead and silver production is expected to get a boost with

commissioning of Dariba lead and silver smelters.



SK mine produced 0.7m tons in FY11, while the current production rate has already

reached 1.2mtpa. In FY12, SK mine is expected to produce 1.5m tons and 2m tons in

FY13. Silver production is expected to more than double to 400 tons in FY12, which is

ahead of 270 tons in our estimates.



Hindustan Zinc has invested heavily in drilling and exploration activities to expand

R&R by 186m tons (including depletion of 33.4m tons) to 299m tons. Nearly 70,000

meters of drilling is carried out every year. A team of 46 geologists is engaged in the

task.

Zinc-lead-silver mines (m tons)

Reserves

Resources

FY04

FY05

FY06

FY07

FY08

FY09

FY10

Source: Company/MOSL

March 2011

110

Metals | New Order

Hindustan Zinc: Mining assets

Hindustan Zinc: Smelters and captive power plants

Source: Company/MOSL

After a presentation on Hindustan Zinc, we visited Dariba complex. Zinc smelter was

operating at full capacity, while lead and silver smelters are expected to start production

by end of March 2011. Thereafter, we visited underground SK mine.

March 2011

111

Metals | New Order

Dariba Zinc Smelter: Cell house and output of zinc in sheet form

Dariba Lead-Silver Smelter: Entry gate

Dumper exiting silver-rich SK mines

Source: Company/MOSL

Day 3 at Hindustan

Zinc: Rampura Agucha

and Chanderiya

Hindustan Zinc: Rampura Agucha and Chanderiya



On day 3 we visited the Rampura Agucha mines and Chanderiya smelter. Rampura

Agucha zinc and lead mine is currently operating at depth of 190 meters. Total depth

of zinc ore body (vein) is about 1,200 meters. Open cut mining will continue to the

depth of 372 meters. Thereafter, underground mine will have to be undertaken. Open

cut mining will last until 2020 though simultaneous underground mining will start in

next 3 years to sustain current production levels.



The stripping ratio currently is about 1:13 versus average of 1:10 for entire mine life.

Currently, the stripping ratio has increased because the preparations for mining next

stage of hanging wall are currently on. This is visible in the following photograph

(Rampura Agucha mine) on the left side of pit. Left wall of pit is called hanging wall

because it is sitting on top of ore body, which is moving from right to left downwards.

The wall on right side is called footwall because it is below the ore body and is not

required to be mined further. This wall is used for evacuating the ore, while hanging

wall is used for evacuating overburden. The stripping ratio will decline over time.

Thus cost of production will remain constant.



The average cost of zinc concentrate is US$300/ton for all the mines. Rampura Agucha

mine's cost of production is lower at US$250/ton of MIC. Cost of production for

underground mines is approximately US$400/ton of MIC exclusive of royalties.

112

March 2011

Metals | New Order

Rampura Agucha open pit mine

Rampura Agucha: Elevation (left) and mine cutting plan (right) - replica of actual mine

Chanderiya smelter: Cell house (left) and robot stacking zinc slabs (right)

Source: Company/MOSL

March 2011

113

Metals | New Order

Day 4 at Sesa Goa:

Shonshi-Surla mine

complex

Sesa Goa: Shonshi-Surla mine complex

On March 4, we arrived in Goa and directly reached the Shonshi Surla mine complex,

which has R&R of 50m tons. Currently, this complex produces 5mtpa. Surla mine came to

Sesa's fold when Dempo was acquired. These are two adjoining mines. Thus, there are

synergies in R&R and cost of production. The average grade of this complex is 57%. The

mining activities are currently being carried out are at the depth of 70 meters below mean

sea level. The maximum depth when fully mined will be 200 meters below mean sea level.

These mines can double the production subject to getting statutory clearances. The mined

ore is transported to Amona beneficiation plant, which is situated on the banks of Mandovi

River. After beneficiation, the ore is loaded onto barges, which is subsequently loaded

mid-sea with the help of trans-shippers on to outgoing capesize vessels.

Sesa Goa: Shonshi mines - full mine view (left) and zoomed to ore body (right)

Sesa: North Goa mines map (left) and out going barge (right) loaded with iron ore

Source: Company/MOSL



The site visit was followed by presentation by management. Sesa continues to pursue

mine capacity expansion. Currently, the R&R stand at 275m tons, which has been

increased by 120m tons since acquisition by Vedanta. Nearly 85m tons of R&R were

added to erstwhile Sesa and 35m tons of R&R have been added to Dempo's assets

through continuous drilling and exploration. Sesa indicated that R&R are further

expected to be enhanced once the results of exploration are announced along with the

annual results for FY11.

114

March 2011

Metals | New Order



Sesa has permission to mine total of 22mtpa (16mtpa in Goa and 6mtpa in Karnataka).

The shipments are expected to be flat at 20.5m tons in FY11 and 25m tons in FY12

subject to getting permission to expand Karnataka mines from 6mtpa to 10mtpa and

lifting of export ban. Karnataka mines are currently selling to domestic producers at

discount of US$35/ton to the export parity prices. The realization is likely to further dip

due to enhancement of export duty to 20%. Karnataka mines dispatched 3.5m tons in

FY10 and 2.5m tons in FY11, while the target for FY12 is 6m tons. Though Karnataka

mine expansion and logistics debottlenecking have achieved many milestones, some

more approvals are still pending. There is apparently no visibility over mine expansion

permission for Goa mines though management is targeting to expand total mine capacity

to 30mtpa by end of FY12 and 40mtpa by end of FY13.



We met couple of local mining companies to understand the sentiments. Goa miners

are very disappointed with the recent hike in export duty to 20% on fines. Most miners

are currently sharpening the axe to make presentation to ministry against hike in duty.

There is very high probability that export duty on fines may be lowered because

exports of very low grade like 48% Fe, which fetches as low as US$30/ton (though

63% Fe grade ore is selling at US$170/dmt) have become unviable. Also, there are

possibilities of introducing more slabs for low-grade ore to reduce the burden of royalty

on very low grade ore.

March 2011

115

N O T E S

March 2011

116

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Retail:

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Disclosure of Interest Statement

Tata Steel

JSW Steel

Sesa Goa

SAIL

Bhushan Steel

Adhunik Metaliks

Godawari Power & Ispat

Jai Balaji Industries

Monnet Ispat

Prakash Industries

Sarda Energy

Tata Sponge Iron

Sterlite Industries

Hindalco

Hindustan Zinc

Nalco

Analyst ownership

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Yes

Group/Directors ownership

with of the stock

Yes

Broking relationship

company covered

Investment Banking relationship

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