We visited Monnet's (MIEL) Raigarh plant and saw their existing operations and upcoming expansion projects. We also visited the company's underground coal mine at Milupara and saw underground mining operation first hand.

Key Takeaways:

Milupara Coal mine: MIEL's underground coal mine at Milupara, ~80kms from the company's Raigarh plant, is spread over an area of 830hectares and has an extractable reserve of 86mnt. The company is using Board and Pillar method for underground mining and expects the output to increase to 1.4mn tpa by FY12 from current 1.0mn tpa. The cost of mining (incl. royalty) is Rs1,050/t. Additionally, the company's opencast mine at Gare Pelma IV block could contribute 2mn tpa post commencement (in nascent stage now, land acquisitions and environmental clearance pending).

Raigarh operations: MIEL has ~800 acres of land in Raigarh, where they have 0.5mn tpa sponge iron capacity (350tpd x 4 +
100tpd x 2) and 90MW power plant (35MW WHRB, 55MW coal). Further, the company is incurring a capex of Rs25bn to increase capacity to 1.5mn tpa by FY12, with forward integration into finished steel. We found that the expansion projects are on schedule to be completed by FY12 (see pg 6 for further details).

Other operations (not covered in the visit): Apart from Raigarh, MIEL has integrated steel plant in Raipur (0.3mn tpa DRI- structurals, 58.4ktpa Ferro alloys and 60MW CPP). Further, the company is setting up a 1,050MW IPP in
87.5% subsidiary Monnet Power in Angul, Orissa at a capex of Rs50.5bn. The project is scheduled for commission by FY13 (see pg 6 for further details).

VALUATIONS AND RECOMMENDATION

Despite poor steel outlook in the near-term, we expect MIEL's steel business to benefit from doubling of volume and expansion in EBITDA/t due to increased value addition. We upgrade the stock to `BUY' with a SOTP-based TP of Rs622 (Rs313 for standalone business and Rs309 for Monnet Power, based on 12.5% stake sale to Blackstone, 18% disc to DCF-based value of Rs376).