CRISIL lowers MSP Steel`s fair value to Rs 39

CRISIL Research has come out with its report on MSP Steel & Power. According to the research firm, the company is expected to generate Rs 2,223 mn and Rs 1,889 mn sales in FY13 and FY14 from sale of pellets and expanding its steel capacity to 0.27 mn MTPA by FY13-end. The CRISIL has maintained the fundamental grade of 2/5 to the company in its October 15, 2012.

Mid-sized non-integrated steel player MSP Steel & Power Ltd (MSP) has survived the current challenging scenario – supply constraint-led scaling raw material prices – courtesy of its pellet plant. The recently expanded pellet capacity is expected to support both top and bottom lines. However, overall profitability is expected to remain low as sponge and steel segments are likely to remain under pressure due to high raw material prices. The company is in the process of expanding its steel capacity (to be completed by FY13-end), which will drive PAT growth over the next two years. However, working capital is expected to be tight. We lower our earnings estimates for FY13 and FY14, and maintain the fundamental grade of 2/5, indicating that its fundamentals are moderate relative to other listed securities in India. Expansion in pellet and steel to drive growth over FY13 and FY14
MSP has expanded its pellet capacity from 0.3 mn MTPA to 0.9 mn MTPA; the initial capacity catered to 80-85% of MSP’s iron ore requirement. The excess capacity will allow MSP to sell pellets in the market, which is expected to boost both top and bottom lines over the next two years. Players with pellet capacity at present earn 25-35% EBITDA margin. Going forward, we expect margins in pellet to normalise with the expected increase in supply. MSP is expected to generate Rs 2,223 mn and Rs 1,889 mn sales in FY13 and FY14 from sale of pellets. Further, MSP is expanding its steel capacity to 0.27 mn MTPA by FY13-end. This would integrate its operations as MSP has excess sponge capacity; it will also increase the share of value-added products in sales. But key segments, steel and sponge, under pressure; overall profitability to remain low
The profitability of MSP’s key segments – sponge and steel – has deteriorated in the past one and a half years due to increasing raw material prices and the producers’ inability to pass on price hike completely. We expect profitability in these segments to remain under pressure in FY13 as we expect raw material prices to stay firm and demand to remain sluggish. However, profitability is expected to improve slightly in FY14 once raw material prices cool off; PAT margin estimated to remain low at 4-6% vs 9-10% it enjoyed during FY07 to FY11. Tight working capital deteriorates debt servicing capability
MSP’s interest coverage ratio is expected to remain low, in the range of 1.5x-2.0x, over FY13-FY14. The balance sheet is highly leveraged (debt: equity ratio is 3x as of FY12) due to debt-funded capex and tight working capital. Adjusted PAT to grow at 72% CAGR over the next two years
Driven by capacity expansion in pellet and steel, MSP’s adjusted PAT is expected to grow to Rs 773 mn in FY14. EBITDA margin is also expected to improve from FY12 levels but higher capital cost will arrest the expansion in PAT margins. RoE is estimated to improve to 19% in FY14. MSP is expected to report EPS of Rs 7.0 in FY13 and Rs 11.3 in FY14. Valuations: Current market price has upside
We continue to value MSP by assigning an EV/EBITDA multiple of 5x FY14E EBITDA. We factor in the stress in the working capital and lower our fair value estimate from Rs 49 per share to Rs 39 per share. At the current market price of Rs 33, our valuation grade is 4/5. To read the full report click on the attachment Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose. © CRISIL Limited . All Rights Reserved. Published under permission from CRISIL"

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