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Indian Steel Companies Report – ENAM

November 13, 2007

Taking into scenario the Asian factors, ENAM after conducting an exclusive study in China, has rated the leading Indian Steel manufacturers – SAIL, Tata Steel, Jindal Steel & Power and JSW Steel Ltd.

Steel Authority of India Ltd:
Sizable presence and domestic leadership. Captive 2.9 bn tonnes iron ore reserves, scalable and integrated. Capacity: To rise from 12mn to 24+mn tonnes in FY11 through internal growth and acquisitions. Cost competitiveness: Captive resources (iron ore, coal) and modernization. The company enjoys attractive valuations, Iron Ore reserves are valued at Rs 276 / share and Steel Business is valued at Rs 133 / share. Taking the debt factor of Rs 27.7 / share, the company’s stock is valued at Rs 437 / share and ENAM recommends an out performer rating on the stock.

Tata Steel:
Equity raising and capacity expansion are the key to future success of Tata Steel. Higher interest costs on bridge debt financing. Tax inefficiencies for one of the SPVs (Tata Steel Asia). Corus (>50% of op profits) to face margin pressure on rising costs of iron ore, coking coal and freight. Improving margin by enhancing integrated operations in India Corus synergy gains/ reducing the high operating leverage.

Tata’s Steels Mines are valued at Rs 361 / share, while its steel making business is valued at Rs 1,142 / share. Debt component of the company is too high at Rs 517 / share thus taking the effective sum of the parts valuation of Tata Steel to Rs 941 / share. ENAM maintains a NEUTRAL rating on the stock.

Jindal Steel and Power:
Iron ore & thermal coal reserves used in steel & power. Profitable and rapidly growing business ( 75% of FY07 EBIT). Steel expansion: 2.5 mtpa steel capacity already in place; volumes to nearly triple in two years from current level.

Power Business:
Hugely profitable business – (25% of FY07 EBIT). Power capacity to increase nearly four times from current 340 MW through subsidiary; setting up 1,000 MW mega thermal power project using captive coal. High ROE business (~30% ROE) , merchant power plant outside the purview of regulated returns.

Valuations of Jindal Steel & Power:
Recent spike in valuations discounts upside on access to huge 20 bn iron ore resources of Bolivia. We recommend to wait for clarity on the outcome of the Bolivian deal. Expensive valuations; reiterate sector Underperformer rating with a target price of Rs 6,096

JSW Steel Ltd
Set to grow from 3.8 mtpa to 10 mtpa by FY11. Diversified product mix: Long products capacity & acquisition of plate mill in USA. Capacity expansion at capital cost of ~USD 540/ tonne. Total project cost – Rs 171bn. Timely commissioning of facilities holds the key.

Financial risks, arising out of leverage would offset valuation upside, until project execution milestones are reached. Valuations already capture near term upsides. Recommendation changed to Sector Underperformer rating with a target price of Rs 741

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