>BHUSHAN STEEL (MOTILAL OSWAL)

■ HSM close to commissioning; blast furnace 6-8 months away: Bhushan Steel is close to commissioning a 1.9mtpa HSM. Cold trials of the mill have begun. However, the commissioning of a 1.2mtpa blast furnace and coke oven has been delayed by a further 6-8 months. The slab caster and steel melt shop will be initially fed by steel scrap and sponge iron. The company increased its sponge iron capacity by 50% to 1mtpa in 1HFY10 after it commissioned two kilns. The company will further enhance its sponge iron capacity by 340,000tpa by March 2010; and after it completes building its blast furnace and coke oven in 6-8 months its sponge iron/hot metal capacity will rise to 2.5mtpa, paving the way for crude steel capacity of 2.2mtpa.

■ Foray into ERW pipe business – forward integration: With a capex of Rs12b, Bhushan Steel is setting up a 500,000tpa large diameter (4” to 25”) ERW pipe mill. The project is expected to be complete by October 2011. It will increase captive consumption of HRC and reduce the surplus available for commercial sale.

■ Raw material integration to rise significantly in 3-4 years: Bhushan Steel has got an allotment of one iron ore mine, two thermal coal blocks and one coking coal block in Orissa and West Bengal. It has also acquired majority stake in Bowen Energy, which has several coking coal tenements in Australia. Consequently, raw material integration is likely to improve significantly.

■ Capex intensity will keep debt high; cash flows to improve: Total debt increased from Rs81b in March 2009 to Rs95b in September 2009. Phase III expansions to increase the HRC capacity to 5mtpa by the end of FY13, captive mining and other forward integration projects will require capex of Rs25b a year. Therefore, absolute debt levels are likely to rise, though debt/equity ratio will decline from 3.3x in March 2009 to 2x by March 2012 because of increased internal cash flows.

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