Financial
Management
Assignment (Phase 2)
Relative Valuation
Team Members- Mohit Oberoi
2016D22
Nishtha Halwai
2016D25
Parminder Kaur
2016D26
Nikhil Kumar
2016D24
Nandhkishore V
2016D23
Steel Industry Overview
The iron and steel industry is a basis for the development of a number of
industries in the global economy: the defence industry, transportation and heavy
engineering, energy and construction (including aeronautical and shipping
construction). Moreover, the iron and steel industry is closely related to the
chemical and light industry. This shows that, the iron and steel industry has the
potential to contribute to the competitiveness of national producers and to the
growth of the national economy.
India is the worlds third-largest producer of crude steel (up from eighth in 2003)
and is expected to become the second-largest producer by 2016. The growth in
the Indian steel sector has been driven by domestic availability of raw materials
such as iron ore and cost-effective labour. Consequently, the steel sector has
been a major contributor to Indias manufacturing output.
Bhushan Steel Overview
Bhushan Steel Limited is the largest manufacturer of auto-grade steel in
[Link] Steel, with a large amount of debt in proportion to its equity (3.5
times more), is a highly leveraged company. The company's consolidated debt
stands at 31,839 crore, having risen 18 per cent from a year ago. The Company
is spending Rs.260 billion to expand its capacity to 12 million tonnes annually,
from the present installed capacity of around one million tonnes.
The company that was founded in 1987 has a gross sales from Rs.5 billion in
2001 to Rs.40 billion in 2007. It earned net profits of Rs.3.13 billion in 2007 and
exported goods worth Rs.12.57 billion. Its exports include steel for both the
automotive and white goods industry and the list of countries to which it exports
includes several developed countries.
Bhushan Steel Products
Hot Rolled Coils
Cold Rolled
Galvanized
BhushanGalume
Colour Coated Coils
Colour Coated Tiles
Tubes of OEM Grades
H & T Steel Strips
High Tensile Steel Strap
API Pipes
Alloy Billets
Sponge Iron
Recent Strategy Changes
The board of Bhushan Steel Ltd has given its approval for hiving off the
company's plants located at Sahibabad in Uttar Pradesh and Khopoli in
Maharashtra through a slump sale. The companys board has also given an inprinciple approval for demerger of the company's Odisha plant into two parts.
The move is being seen as the initial preparatory step towards restructuring of
Bhushan Steel, which has piled up a standalone debt of over Rs 40,800 crore and
has been reporting losses in the past few quarters. For the third quarter ended
December 2015, Bhushan Steel reported a net loss of Rs 697.15 crore on total
income of Rs 2539 crore up from a loss of Rs 454 loss in Q3 FY15 on an income
of Rs 2462 crore. In case of its integrated steel unit which is located at Odisha's
Dhenkanal and has a capacity of around 3 million tonne, the board has given its
nod for division of the plant into two parts.
Peers Selection
Company
Mkt Cap
(INR)
P/E
Ratio
EV/EBIT
DA
EV/Sales
Bhushan Steel Ltd
Jindal Stainless Ltd
Monnet ISPAT & Energy
Ltd
Lion Industries Corp Bhd
Shree Global Tradefin ltd
Steel Industry
9.46B
8.91B
N.A
N.A
20.72
12.66
3.8
1.34
4.48B
4.54B
2.87B
N.A
N.A
N.A
13.28(E)
N.A
6.74
N.A
26
6.41
0.18
3.31
1.1
We have selected four peers of our company as per the market capitalisation i.e.
Jindal Stainless Ltd, Monnet ISPAT & Energy Ltd, Lion Industries Corp Bhd and
Shree Global Tradefin Ltd and all these are listed on BSE and NSE. However, we
will be performing relative valuation of our firm w.r.t steel industry
figures.
Since we are not getting P/E ratio of any company, therefore we will be taking
other two multiples i.e. EV/EBITDA and EV/Sales to calculate the intrinsic value of
the stock of our firm. The reason behind P/E ratio and EV/EBITDA being N.A is
that all these companies have negative earning; even the EBITDA is negative for
Monnet ISPAT & Energy Ltd and Shree Global Tradefin Ltd.
Company
Bhushan Steel Ltd
Sales
1182546
.62
Jindal Stainless Ltd
745848
EBIT
357384.
64
EBITDA
210819.
94
69062
29486.6
8
Monnet ISPAT &
190178. 159362.
Energy Ltd
13
16
Lion Industries Corp
Bhd
25140
658
Shree Global Tradefin
13348.6
ltd
3
-498.67 -349.70
Note: All the figures are in Rs. Lakhs
D&A
Cost
109974.
44
Interest
Cost
458230.14
Getting 2015
data
35910.4
3
93965.04
Getting 2015
data
50277
148.47
Relative Valuation
Company
EBITDA
Bhushan Steel Ltd
210819.94
Sales
1182546
.62
Industry
Steel Industry
EV/EBITD
A
26
EV/Sale
s
1.1
Enterprise Value of Bhushan Steel Ltd
Remarks
By EV/EBITDA:
=>EV/EBITDA of Industry*EBITDA of company = 26 * 210819.94 = 5481318.44
(In Rs. Lakhs)
By EV/Sales:
=>EV/Sales of Industry*Sales of company = 1.1 * 1182546.62 = 1300801.282
(In Rs. Lakhs)
As we are getting two different values of EV of our company, therefore, we will
be taking enterprise value of Bhushan Steel Ltd calculated via EV/EBITDA
because EBITDA is a better measure than sales as EBITDA takes care of all
operating expenses and cost of goods sold.
Total
Debt
Cash and cash
equivalent
Company
Bhushan Steel
Ltd
4235553
16390
Note: All the figures are in Rs. Lakhs
Minority
Interest
Outstanding
Shares
3300.6
2265.14746
Enterprise Value (EV) = Market Value of Equity + Market Value of Debt + Minority
Interest Cash and cash equivalent
5481318.44 = M.V of Equity + 4235553 + 3300.6 16390
M.V of Equity = 5481318.44 4235553 - 3300.6 + 16390
M.V of Equity = 1258854.84
Intrinsic value of equity per share = M.V of Equity/No. of outstanding
shares
Intrinsic value of equity per share = 1258854.84/2265.14746
Intrinsic value of equity per share = 555.75
We have taken market value of equity as the average of stock prices of Bhushan
Steel Ltd from 30.09.2015 to 30.09.2016 on a daily basis.
Market Value of equity (MV) per share = 40.2996
Comparing the Valuation
Company
Bhushan Steel
Ltd
Intrinsic Value of equity
per share
Market Value of equity
per share
555.75
40.2996
Comment
After comparing the intrinsic value and market value of equity of Bhushan Steel
Ltd; we can easily say that the firm is highly undervalued. Therefore, we would
recommend BUY for this firm.
References
o
o
o
Annual Report 2015-16 of Bhushan Steel Ltd and its peers
Bloomberg terminal
For historical stock prices[Link]
expandable=7&scripcode=500055&flag=sp&Submit