Slight delay in growth projects - Not a major concern Monnet's Q4FY11 revenues at Rs4.5bn and EBITDA at Rs1.3bn were flat YoY as improved steel performance was offset by lower power tariff (Rs3.1 in Q4FY11 vs. Rs4.3 in Q4FY10 & Rs3.4 in Q3FY11). OPM declined by 43bps to 29%. Net profit grew 6% YoY to Rs766mn on account of higher other income.

Segmental performance: Steel segment revenue grew 11.7% YoY on account of higher blended realisations (up 21% YoY) despite a 11% YoY decline in volumes at 171kt. Power sales of 235mn units were higher 6% YoY; however with 27% fall in tariff's to Rs3.1/kwh, power segment revenues declined 21% to Rs872mn.

Iron ore cost drags steel margin: Despite increased DRI prices (up 10% QoQ to Rs19.6/kg), steel margin declined by 200bps QoQ on higher iron ore cost (Rs6,500/t in Q4 vs Rs4,600/t in Q3).

Steel project delayed by a qtr: 1.4mn tpa integrated steel project is delayed by a qtr and now expected by Q4FY13.

Monnet Power commissioning delayed too: Owing to a delay in receiving environmental clearance, 1050MW power project of 87.5% subsidiary Monnet Power is delayed by a qtr.

Focus on resource integration: Acquired Indonesian coal mine for USD24mn. Received environmental clearance for Mandakini & Utkal B2 coal blocks; forest clearance awaited.

OUTLOOK

With 1.4mntpa expansion by FY13, Monnet is on the path of transforming from primarily sponge iron maker to an integrated steel producer. We expect Monnet's steel EBITDA to grow at 60% CAGR over FY11-13E on volume growth (34% CAGR) and EBITDA/t expansion from Rs4,600 in FY11 to Rs6,500 in FY13E. Foray in merchant power in subsidiary Monnet Power (1,050MW project by FY14E, with access to captive coal) is additional growth trigger.

VALUATIONS AND RECOMMENDATION

We have revised FY12E for MISP to factor in the delay in expansion project and higher steel and RM prices and introduce FY13 estimates . Since FY12E financials do not reflect the benefits of projects commissioned in FY12E, we revise our target EV/EBITDA multiple to 6x (4.5x earlier) and value MISP standalone at Rs325. We value 87.5% stake in Monnet Power Rs287/sh (based on stake sale to Blackstone), 23% disc to DCF-based fair value of Rs372. Maintain ‘BUY’ with a SOTP-based TP of Rs612.