1QFY2014 Result Update | Steel

August 20, 2013

Monnet Ispat
Performance highlights
Quarterly highlights (Standalone)
Particulars (` cr) Net sales EBITDA EBITDA margin (%) Net profit
Source: Company, Angel Research

BUY
CMP Target Price
Investment Period
1QFY13 521 136 26.1 69 yoy (%) (9.7) (15.7) (171)bp (23.4) 4QFY13 432 107 24.7 53 qoq (%) 8.7 7.3 (32)bp (1.0)

`96 `139
12 Months

1QFY14 470 115 24.4 52

Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Steel 609 2,370 0.6 324/93 1,505 10 18,308 5,415 MNET.BO MISP@IN

For 1QFY2014, Monnet Ispat (MIL) reported a decline in operating profit due to lower realizations. We maintain our Buy rating on the stock. Lower realizations dent top-line: MILs net sales declined by 9.7% yoy to `470cr, mainly due to lower realizations from steel and sponge iron segments which although was partially offset by higher volumes. Sponge iron and steel sales volumes increased by 6.4% and 2.1% yoy to 173,084 tonne and 25,916 tonne, respectively. However, sponge iron and steel realisations declined by 17.5% and 14.5% yoy to `18,676/tonne and `29,574/tonne, respectively. EBITDA declines by 15.7% yoy: Despite net sales declining by 9.7% yoy, other expenditure increased 17.6% yoy to `50cr. This led to the EBITDA declining by 15.7% yoy to `115cr and EBITDA margin contracted by 171bp yoy to 24.4%. Interest and depreciation expenses grew by 29.5% and 20.2% yoy to `39cr and `26cr, respectively, on account of capitalization of various projects. Consequently, the net profit decreased by 23.4% yoy to `52cr. Outlook and valuation: MIL is on the verge of a massive expansion in its steel business. The long-term stock performance will be determined by the timely expansion of the 1.5mtpa steel plant and unlocking of value in Monnet Power, which is implementing the 1,050MW power project. Although there have been delays in the commencement of these projects, most of these projects would be backed by captive resources, thus ensuring robust profitability. Hence, we recommend Buy on the stock with a target price of `139, valuing the steel business at 4.0x FY2015E EV/EBITDA and investment in Monnet Power at 0.6x P/BV.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 49.9 1.0 38.9 10.1

Abs. (%) Sensex MIL

3m (9.8)

1yr 3.5

3yr (0.8) 3.5

(48.7) (68.3)

Key financials (Standalone)

Y/E March (` cr) Net sales % chg Adj. net profit % chg EPS (`) EBITDA margin (%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) FY2012 FY2013E FY2014E FY2015E

1,897 20.6 289 2.7 44.9 25.0 2.1 0.3 13.0 7.2 1.6 6.3

1,957 3.2 250 (13.3) 37.4 25.4 2.6 0.2 10.1 6.2 1.6 6.5

2,199 12.3 206 (17.8) 30.7 21.5 3.1 0.2 7.7 5.4 1.3 6.2

2,575 17.1 259 25.7 38.6 22.8 2.5 0.2 8.9 7.1 1.0 4.5

Bhavesh Chauhan
Tel: 022- 39357800 Ext: 6821 bhaveshu.chauhan@angelbroking.com

Vinay Rachh
Tel: 022- 39357800 Ext: 6841 vinay.rachh@angelbroking.com

Source: Company, Angel Research: Note: CMP as of 19th August 2013

Please refer to important disclosures at the end of this report

Monnet Ispat | 1QFY2014 Result Update

Exhibit 1: 1QFY2014 performance (Standalone)

(` cr) Net sales Raw material % of net sales Staff cost % of net sales Other expenditure % of net sales Total expenditure % of net sales Operating profit OPM (%) Other operating income EBIDTA EBITDA margins (%) Interest Depreciation Other income Exceptional items Profit before tax % of net sales Tax % of PBT Profit after tax
Source: Company, Angel Research

1QFY14 470 289 61.4 27 5.7 50 10.6 365 77.8 104 22.2 10 115 24.4 39 26 24 0 72 15.4 20 27.6 52

1QFY13 521 323 62.0 25 4.8 42 8.2 390 75.0 130 25.0 6 136 26.1 30 22 6 0 89 17.1 21 23.1 69

% yoy (9.7) (10.6) 6.5 17.6 (6.4) (19.7) 75.3 (15.7) 29.5 20.2 329.5 (18.6) (2.8) (23.4)

4QFY13 432 257 59.5 29 6.6 45 10.5 331 76.6 101 23.4 6 107 24.7 30 23 25 0 79 18.4 26 33.3 53

% qoq 8.7 12.3 (6.1) 10.6 10.4 3.1 7.3 31.1 16.8 (6.5) (8.8) (24.5) (1.0)

FY2013 1,957 1,174 60.0 108 5.5 199 10.2 1,482 75.7 476 24.3 22 498 25.4 119 89 49 0 338 17.3 88 26.0 250

FY2012 1,897 1,142 60.2 95 5.0 186 9.8 1,423 75.0 475 25.0 0 475 25.0 87 74 63 (1) 377 19.9 88 23.4 289

% yoy 3.2 2.9 14.7 6.7 4.2 0.2 4.9 37.5 20.0 (23.0) (100.0) (10.2) (0.1) (13.3)

Poor 1QFY2014 top-line performance

MILs net sales declined by 9.7% yoy to `470cr, mainly due to lower realizations from steel and sponge iron segments which although was partially offset by higher volumes. Sponge iron and steel sales volumes increased by 6.4% and 2.1% yoy to 173,084 tonne and 25,916 tonne, respectively; however, sponge iron and steel realisations declined by 17.5% and 14.5% yoy to `18,676/tonne and `29,574/tonne respectively.

Exhibit 2: Quarterly production volume

(tonnes) Sponge iron Steel Ferro alloy Power (mn units) 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 194,171 195,609 190,266 179,126 182,153 204,396 204,210 39,523 2,267 185 54,296 2,587 225 50,057 2,489 215 42,752 2,425 212 40,016 2,414 117 43,578 3,356 176 49,124 5,279 199

Source: Company, Angel Research

August 20, 2013

Monnet Ispat | 1QFY2014 Result Update

Exhibit 3: Quarterly sales volume

(tonnes) Sponge iron Steel Ferro alloy Power (mn units) 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 160,521 157,998 162,726 184,597 157,136 164,490 173,084 22,542 2,034 172 23,541 2,147 180 25,376 2,220 173 21,093 1,710 166 38,794 1,928 82 13,884 3,180 122 25,916 4,912 120

Source: Company, Angel Research

Exhibit 4: Quarterly average realization

(`/tonne) Sponge iron Steel Ferro alloy Power (`/unit) 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 21,004 32,903 39,503 3.5 24,159 34,718 49,539 3.6 22,648 34,600 57,219 2.9 21,301 33,333 53,570 3.0 20,209 29,925 51,706 2.6 19,788 35,249 52,674 3.0 18,676 29,574 53,483 3.0

Source: Company, Angel Research

EBITDA declines by 15.7% yoy

Despite net sales declining by 9.7% yoy, other expenditure increased 17.6% yoy to `50cr. This led to the EBITDA declining by 15.7% yoy to `115cr, while the EBITDA margin contracted by 171bp yoy to 24.4%. Interest and depreciation expenses grew by 29.5% and 20.2% yoy to `39cr and `26cr, respectively, on account of capitalization of various projects. Consequently, the net profit decreased by 23.4% yoy to `52cr.

Exhibit 5: EBITDA margin trend

160 140 120 100 26.7 25.8 25.6 26.1 25.3 24.7 24.4 27 27 26 26

Exhibit 6: Net profit trend

80 70 60 76 83 69 71 58 53 52 18 16 14 12 8 6 4 2 0 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 Net Profit (LHS) Net margin (RHS) 10

( ` cr)

(%)

140

138

129

136

116

40 30 20 10 0

115

60 40

25 24

107

20 0

24 23

3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 EBITDA (LHS) EBITDA margin (RHS)

Source: Company, Angel Research

Source: Company, Angel Research

August 20, 2013

(%)

80

25

( ` cr)

50

Monnet Ispat | 1QFY2014 Result Update

Investment rationale

Steel expansion of 1.5mn tonne: MIL is setting up a 1.5mn tonne steel plant through the BF-EAF route. The total capex for the project is pegged at `3,600cr. Various plants including sinter plant, oxygen furnace, steel melting shop and plate mill are expected to begin progressive commissioning in mid-FY2014. However, meaningful benefits of these facilities would be witnessed only from FY2015.

Significant value unlocking lies ahead in Monnet Power: MIL is setting up a 1,050MW (2x525) power plant through Monnet Power. The plant is being set up at a cost of `5,000cr, with equity contribution of `1,200cr and the balance being funded through debt. MIL has diluted a 12.5% stake to Blackstone for a consideration of `275cr, thus valuing the total equity stake at `2,200cr. We expect the plant to commence commercial operations during 4QFY2014. With captive coal blocks backing this project, we expect robust profitability from the power business. same. MIL also aims to raise its capacity further by 660MW. However, the company is yet to achieve financial closure for the

Indonesian coal mine could provide further upsides: MIL had acquired two coal assets in Indonesia during CY2011, which have potential reserves of 65mn tonne. MIL is currently in the process of developing this mine.

August 20, 2013

Monnet Ispat | 1QFY2014 Result Update

Outlook and valuation

MIL is on the verge of a massive expansion in its steel business. The long-term stock performance will be determined by the timely expansion of the 1.5mtpa steel plant and unlocking of value in Monnet Power, which is implementing the 1,050MW power project. Although there have been delays in the commencement of these projects, most of these projects would be backed by captive resources, thus ensuring robust profitability. Hence, we recommend Buy on the stock with a target price of `139, valuing the steel business at 4.0x FY2015E EV/EBITDA and investment in Monnet Power at 0.6x P/BV.

Exhibit 7: SOTP valuation

Steel business 4.0x FY2015E EV/EBITDA 0.6x P/BV 52 86 139

Stake in Monnet Power

Target price (`)
Source: Company, Angel Research

Exhibit 8: Recommendation summary

Companies SAIL Monnet Tata Steel JSW Steel BSL CMP (`) 41 96 246 499 449 Target Price (`) - Neutral 139 313 Buy Buy Reco. Mcap Upside (` cr) 17,139 609 23,833 12,086 10,214 44 27 (7) P/E (x) 7.7 3.1 6.4 8.0 17.4 6.0 2.5 4.7 6.6 11.6 P/BV (x) 0.4 0.2 0.6 0.7 1.0 0.4 0.2 0.6 0.6 0.9 EV/EBITDA (x) FY14E 6.0 6.2 4.6 5.0 9.0 4.5 4.5 4.1 4.6 6.6 RoE (%) 5.2 7.7 10.4 8.5 6.1 6.5 8.9 12.9 9.6 8.5 RoCE (%) 4.7 5.4 9.1 8.5 6.6 6.6 7.1 10.6 9.0 8.9 (%) FY14E FY15E FY14E FY15E FY15E FY14E FY15E FY14E FY15E

- Neutral 419 Reduce

Source: Company, Angel Research

Company description
Incorporated in 1990, MIL principally manufactures sponge iron (capacity - 1.0mn tonne), ingots (capacity - 0.3mn tonne), structural steel (capacity - 0.2mn tonne) and ferro alloys (capacity - 58ktpa). MIL has a captive coal mine (reserves - 90mn tonne; production - 1.2mn tonne) for production of sponge iron. The companys plants are located in Raipur and Raigarh in Chhattisgarh. It has been allocated several coal blocks such as Gare Palma IV/5, Utkal B2, Urtan North, Rajgamar and Mandakini which are under various stages of clearances.

August 20, 2013

Monnet Ispat | 1QFY2014 Result Update

Profit & loss statement (Standalone)

Y/E March (` cr) Net sales Other operating income Total operating income % chg Total expenditure Net raw materials Other mfg costs Personnel Other EBITDA % chg (% of Net sales) Depreciation EBIT % chg (% of Net sales) Interest charges Other income (% of PBT) Share in profit of asso. Recurring PBT % chg Extra. Inc/(Expense) PBT (reported) Tax (% of PBT) PAT (reported) Add: Earnings of asso. Less: Minority interest Extra. Expense/(Inc.) PAT after MI (reported) ADJ. PAT % chg (% of Net sales) Basic EPS (`) Fully Diluted EPS (`) % chg

FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E 1,481 1,481 (4.4) 1,017 735 146 73 62 464 23.8 31.3 72 392 26.8 26.5 74 32 9.1 350 22.1 18 331 60 18.2 269 269 288 24.1 19.4 56.1 44.7 (1.7) 1,573 1,573 6.2 1,136 889 0 75 172 437 (5.8) 27.8 74 363 (7.4) 23.1 31 29 8.1 362 3.4 362 80 22.2 281 281 281 (2.2) 17.9 47.3 43.7 (2.2) 1,897 1,897 20.6 1,423 1,142 0 95 186 475 8.6 25.0 74 401 10.3 21.1 87 63 16.7 377 4.3 377 88 23.4 289 289 289 2.7 15.2 44.9 44.9 2.7 1,957 22 1,980 4.3 1,482 1,174 0 108 199 498 4.9 25.4 89 409 2.1 20.9 119 49 14.4 338 (10.2) 338 88 26.0 250 250 250 (13.3) 12.8 38.9 37.4 (16.8) 269 (20.6) 269 63 23.4 206 206 206 (17.8) 9.4 32.0 30.7 (17.8) 338 25.7 338 79 23.4 259 259 259 25.7 10.1 40.2 38.6 25.7 2,199 26 2,225 12.4 1,751 1,246 176 131 198 474 (4.8) 21.5 114 359 (12.2) 16.3 151 61 22.6 2,575 29 2,605 17.1 2,017 1,422 206 157 232 587 24.0 22.8 136 451 25.5 17.5 181 67 20.0

August 20, 2013

Monnet Ispat | 1QFY2014 Result Update

Balance sheet (Standalone)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders funds Share warrants Minority interest Total loans Deferred tax liability Long term prov. Total liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net Block Capital work-in-progress Goodwill Investments Loans and advances Other non-current assets Current assets Cash Loans & advances Other Current liabilities Net current assets Mis. exp. not written off Total assets

FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E 54 1,592 1,646 27 1,495 120 3,288 1,439 311 1,128 721 545 1,143 205 590 348 268 875 18 3,288 64 2,026 2,090 2,606 141 3 4,841 1,477 383 1,094 1,065 550 471 1 1,996 687 757 550 337 1,659 4,841 64 2,296 2,360 3,834 150 6 6,351 1,836 457 1,379 2,022 591 443 80 2,394 873 772 741 558 1,836 6,351 64 2,528 2,592 4,034 150 6 6,783 2,836 546 2,290 1,722 591 443 80 2,282 843 772 659 625 1,657 6,783 64 2,715 2,779 3,534 150 6 6,470 3,386 661 2,725 1,242 591 443 80 2,055 605 772 671 667 1,388 6,470 64 2,951 3,015 3,034 150 6 6,206 4,136 797 3,339 462 591 443 80 1,982 431 772 771 691 1,291 6,206

August 20, 2013

Monnet Ispat | 1QFY2014 Result Update

Cash flow statement (Standalone)

Y/E March (` cr) Profit before tax Depreciation Change in working capital Less: Other income Direct taxes paid Cash flow from operations (Inc.)/ Dec. in fixed assets (Inc.)/ Dec. in investments (Inc.)/ Dec. in loans and adv. Other income Cash flow from investing Issue of equity Inc./(Dec.) in loans Dividend paid Others Cash flow from financing Inc./(Dec.) in cash Opening cash bal. Closing cash bal.

FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E 331 72 78 61 64 478 (73) (412) (330) 15 (799) 151 216 28 58 281 (40) 246 205 362 74 (348) (27) 86 (25) (39) (792) (5) 22 176 1,177 31 1,322 483 205 688 377 74 (67) 29 75 338 (358) (956) (41) 56 (0.0) 1,228 86 1,142 181 688 869 338 89 149 88 489 (1,000) 300 (700) 200 19 181 (30) 869 843 269 114 31 63 351 (550) 480 (70) (500) 19 (519) (238) 843 605 338 136 (76) 79 319 (750) 780 30 (500) 23 (523) (174) 605 431

(814) (1,300)

August 20, 2013

Monnet Ispat | 1QFY2014 Result Update

Key ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book value DuPont analysis EBIT margin Tax retention ratio (%) Asset turnover (x) RoIC (Post-tax) Cost of debt (post tax) Leverage (x) Operating RoE Returns (%) RoCE (Pre-tax) Angel RoIC (pre-tax) RoE Turnover ratios (x) Asset turnover (gross block) Inventory (days) Receivables (days) Payables (days) WC cycle (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest coverage

FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E 2.1 1.5 0.3 5.2 0.9 2.7 0.4 56.1 44.7 65.9 5.0 307.1 26.5 81.8 0.5 11.5 4.3 0.4 14.8 13.1 17.3 18.2 1.1 103 29 61 174 0.4 1.6 5.3 2.2 1.7 0.3 5.2 1.3 4.5 0.4 47.3 43.7 55.2 5.0 324.8 23.1 77.8 0.4 7.8 1.2 0.7 12.2 8.9 13.3 14.9 1.1 113 37 50 191 0.7 3.1 11.7 2.1 1.7 0.3 5.2 1.6 6.3 0.5 44.9 44.9 56.4 5.0 366.8 21.1 76.6 0.4 6.4 2.1 1.0 10.7 7.2 12.2 13.0 1.1 139 35 29 186 1.0 5.0 4.6 2.6 1.8 0.2 2.6 1.6 6.5 0.5 38.9 37.4 52.7 2.5 402.8 20.9 74.0 0.3 5.4 2.2 1.0 8.5 6.2 10.7 10.1 0.8 150 33 40 139 1.0 5.2 3.4 3.1 1.9 0.2 2.6 1.3 6.2 0.5 32.0 30.7 49.8 2.5 431.8 16.3 76.6 0.4 4.7 3.1 0.8 6.1 5.4 8.1 7.7 0.7 140 32 50 86 0.8 4.9 2.4 2.5 1.6 0.2 3.1 1.0 4.5 0.4 40.2 38.6 61.4 3.0 468.6 17.5 76.6 0.4 6.0 4.2 0.7 7.2 7.1 9.1 8.9 0.7 140 32 50 76 0.7 3.4 2.5

August 20, 2013

Monnet Ispat | 1QFY2014 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Monnet Ispat No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

August 20, 2013

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