Bhushan Steel's Q3FY11 revenue at Rs19.4bn grew 36% YoY due to 30% surge in sales volume to 467kt, mainly on sale of 94kt of HRC from under-trial Orissa phase-II (1.9mntpa HRC). Operating profit rose 38% YoY to Rs5.4bn with OPM expanding 36bps to 27.7% as Bhushan met ~50% of HRC requirement captively. PAT rose 23% YoY to Rs2.8bn as interest, depreciation cost remained low pending capitalisation of Orissa phase-II.

Performance update: The company produced 241kt of HRC (51% CU, 60% CU now) from under-trial Orissa phase-II, with an operating cost of ~USD490/t. Blended realisation at USD926/t increased 9% YoY on higher steel prices, even though share of value added products declined to 75% vs 86% in Q3FY10 on HRC sales of 94kt.

Expansion projects: Rs65bn Orissa phase III expansion (3.0mnt of billets and 2.5mnt of HRC) is scheduled for FY13. Further, the company has announced ~1.0mnt downstream expansion along with 197MW CPP for an additional capex of Rs30bn by FY13.

Bowen Energy: Bhushan has acquired 10% of Bowen Energy (Australian subsidiary) through the open offer, thereby increasing its stake to 70%.

High financial leverage with Rs140bn of debt, net D/E of 2.9x.

VALUATIONS AND RECOMMENDATION

We believe that although steel prices could rise further in FY12 on cost-push factors, high input cost would continue to exert pressure on profitability of non-integrated producers. Nevertheless, we expect Bhushan to benefit from higher contribution from Orissa, providing volume growth (29%) and margin expansion (by 260bps to 30.6%) in FY12E. Phase-III expansion and downstream projects remain future growth drivers. We change our FY11 and FY12 estimates for the company to factor in our revised steel outlook and higher sales volume assumption from increased sale of HRC.

At 5.9x FY12E EV/EBITDA, with added concern of high net D/E of 2.9x, we find the stock overvalued. Maintain 'SELL' with a revised target price of Rs350 (5.5x FY12E EV/EBITDA).