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July 16th, 2010

Stock Data

Sector Steel

Face Value(Rs) Rs.10.00

52 wk. High/Low (Rs.) Rs.74.95/28.70

Volume (2 wk. Avg.) 69000

BSE Code 504823

Market Cap(Rs in Mn) 2298.17

Financials (Rs in Mn) FY09 FY10 FY11E FY12E

Net Sales 10734.1 10878.8 12837.0 14377.4

EBIDTA 322.8 803.2 1045.9 1172.9

PAT -188.3 46.72 190.19 250.24

EPS -5.80 1.44 5.86 7.70

P/E -5.21 49.19 12.08 9.18

MAHINDRA UGINE STEEL CO.LTD BUY F

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SYNOPSIS We initiated the coverage of Mahindra Ugine Steel Co, Ltd and set a target price of Rs.85.00 for medium to long term gains.

Mahindra Ugine Steel Company Limited (MUSCO), under SYSTECH sector and belonging to the Mahindra Group.

The Company is engaged in manufacturing of alloy & special steel through Electric Arc Furnace (EAF) route & caters to the automotive, engineering, bearing & other industries.

HSBC Global Investment has sold over 3% stake in Mahindra Ugine Steel Company for Rs 2 crore in open market transactions.

Mahindra Ugine Steel Company, part of the Mahindra Group, has received its board's nod for the capex plan of Rs 36.65 crore. As per the approval, the company will spend about Rs 36.65 crore for setting up of new manufacturing unit of its Stamping Division in Pantnagar near Rudrapur, Uttarakhand.

MUSCO is also in the business of Stampings (Pressed Sheet Metal & Components) and is the leading player in this segment in India.

MUSCO Stampings operates from three plants, Kanhe (near Pune), Nashik and Rudrapur. MUSCO is part of Mahindra Group and is subsidiary of Mahindra and Mahindra Limited.

Net Sales of the company is expected to grow at a CAGR of 10% over 2009 to 2012E respectively.

1 Year Comparative Graph

Mahindra Ugine Steel

Ltd BSE SENSEX

V.S.R. Sastry

Equity Research Desk

vsrsastry@firstcallindiaequity.com

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

drsastry@firstcallindia.com

C.M.P: Target Price: Rs.70.75 Rs.85.00

Share Holding Pattern

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Peer Group Comparison

Name of the company CMP(Rs.)

Market Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/BV(x) Dividend (%)

Mahindra Ugine 70.75 2298.17 1.44 49.19 1.35 10.00

SAIL 198.30 81905.84 16.34 12.14 2.36 26.00

Ruchi Strips 15.35 59.71 0.70 21.93 2.11 0.00

Nava Bharat Vent 407.30 3110.33 65.30 6.24 2.66 400.00

Investment Highlights

Q4 FY10 Results Update

Mahindra Ugine Steel Co.Ltd disclosed results for the quarter ended March 2010.

Net sales for the quarter moved up 15% to Rs.3179.62 million as compared to

Rs.2775.54 million during the corresponding previous quarter. During the quarter,

PAT is increased Rs.52.16 million as compared to Rs.20.69 million in previous

quarter. The Basic EPS of the company stood at Rs.1.61 for the quarter ended

March 2010.

Quarterly Results – Standalone (Rs in mn)

As At Mar-10 Dec-09 %Change

Net sales 3179.62 2775.54 15%

PAT 52.16 20.69 152%

Basic EPS 1.61 0.64 152%

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Basic EPS of the company stood at Rs.1.61

Dividend Declaration

Mahindra Ugine Steel Company Ltd has informed that the proposed dividend of

Re. 1/- per equity share of Rs. 10/- each, as recommended by the Board of

Directors, if declared, by the members of the Company at the Annual General

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Meeting scheduled to be held on July 27, 2010, will be paid on or after July 30,

2010, to those members of the Company who are entitled to receive the same as

on date of book closure.

Mahindra Ugine gets board’s nod for capex plan

Mahindra Ugine Steel Company, part of the Mahindra Group, has received its

board's nod for the capex plan of Rs 36.65 crore. As per the approval, the

company will spend about Rs 36.65 crore for setting up of new manufacturing

unit of its Stamping Division in Pantnagar near Rudrapur, Uttarakhand.

The new unit will help the company to meet the demand for stamping components

from automotive business situated in and around Pantnagar and Rudrapur like

Tata Motors, Mahindra & Mahindra Auto Sector and Mahindra & Mahindra Farm

Equipment Sector, etc.

Break Up of Expenditure

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Company Profile

Mahindra Ugine Steel Company Limited (MUSCO), under SYSTECH sector and

belonging to the Mahindra Group, is a pioneer & well known manufacturer of alloy

steel in the country. The company was incorporated on December 19, 1962. It

commenced its operations in 1964 with a licenced capacity of 24,000 tons per annum

(tpa) capacity. The company is engaged in the manufacture of alloy & special steel

through Electric Arc Furnace (EAF) route & caters to the automotive,

engineering,bearing & other industries .All these segments are witnessing significant

growth.The company services an impressive list of customers including, Bharat

Forge, SKF, Cummins, Timken & TISCO which bears testimony to its leadership.

In 1981, MUSCO raised its capacity to 75,000 tpa. Further in 1990, the Perin

process, which was being used, was replaced by the Ladle Metallurgy Technology.

The current capacity of the plant is 1,80,000 tpa. MUSCO is a subsidiary of

Mahindra & Mahindra Limited, the group boasts of 92 companies & seven sectors

namely, Auto, Farm Equipment, Trade & Finance, Infrastructure, I.T, Mahindra

Integrated Ltd. & Systech. MUSCO has ushered in the new era of SAP by becoming

the 1st manufacturing company in India to have implemented SAPERP 2005(ECC

6.0) which is the latest version of ERP application.The 'GO-LIVE' was a grand success

on 2nd April'07 & the switchover from 4.6C to ECC 6.0 version was the smoothest

with business process continuity maintained flawlessly.

Product range of the company includes

Bottom Poured Ingots

3 T – Square, 6 T – Square, 6 T – Polygonal, 9T – Polygonal, 13 T - Polygonal

Concast Blooms

140 x 140 mm CC Blooms, 160 x 145 mm CC Blooms, 200 x 180 mm CC Blooms,

250 x 200 mm CC Blooms

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Forge Products

Round 140 to 400 mm Dia in 5 mm increments, Square 140 to 355 mm Square in 5

mm increments, Rectangular Slabs Width - 140 to 355 mm Thickness - 140 to 355

mm.

Hot Rolled Products- Round Bars

Round Cornered

Square Bars- Bulged Profile, Regular Profile, Fixed Profile, Rectangle (Slabs),

Hexagon Bars, Wire Rods (Coils).

Bright Bars

Peeled Rounds, Peeled & Reeled Rounds, Turned Rounds, Centerless Ground Bars,

Drawn Wire.

Steel Products-

Alloy, Tool and Die Steels (AISI H11, AISI H13, AISI O1, etc.

Plastic Mould Steels (P20, DIN 1.2311, P20+Ni i.e. DIN 1.2738, etc.)

Engineering Alloy Constructional Steels (En24, En19, AISI 4340, AISI 4140

etc.)

Ball Bearing Steels (SAE 52100, DIN 100Cr6, DIN 100CrMn6, JIS SUJ3,

20MC5, AISI 3310, AISI 4319, AISI 8219, etc.).

Air Craft Quality Steels (GOST 30 KHGSA, To Various Aerospace Material

Specifications i.e. AMS)

Offshore Oil Field Steels (17-4 PH i.e. AISI 630, AISI 4130, AISI 420, AISI

410, Custom 455, etc.)

Austenitic / Ferritic / Martensitic / Duplex / Precipitation Hardening

Stainless Steels (AISI 304/L, AISI 316/L, SAE 51410 / AISI 410, AISI 420,

DIN X20Cr13, 17-4PH, etc.)

Case Carburising Steels (DIN 17CrNiMo6, AISI 8620, DIN 20MnCr5, DIN

20CrNi4, En353, En354, etc.)

Nitriding Steels (En41B, etc.)

Boron Steels (15B21, 10B36, Custom 1E 0635, Custom 1E 0669, Custom

1E 1239, etc.)

Automotive Valve Steels (En52, etc.)

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Operations

Steel Business

The company is engaged in the manufacture of alloy & special steel through Electric

Arc Furnace (EAF) route & caters to the automotive,engineering,bearing & other

industries. All these segments are witnessing significant growth. The Company

services an impressive list of customers including, Bharat Forge, SKF, Commins

Timken & TISCO which bears testimony to its leadership.

The Company is in the process of creating cost & quality leadership.The operating

results will show that company has benefited from focusing on a strategic

framework.The Steel that is produced is of world quality,import substitutive & the

company has been qualified by leading bearing manufacturers as an international

source of supply.Quality has been achieved consistently. The company's operation

continue to show consistent improvement

Stamping Business

As a result of the remarkable growth in the automotive industry, the stamping division

at Kanhe has increased its throughput significantly & is expected to further improve

upon the capacity utilization. Like many other businesses, the stamping industry too

has been a victim of over investment in small sub-optimal units which have

traditionally been incapable of producing a quality product.The Kanhe stamping

division has been able to move up the value chain & with group support,developed the

capabilities to produce sub assemblies for Mahindra & Mahindra(M&M),Tata Motors &

Ashok Leyland

The recent joint venture announced between M & M & Renault is expected to create

greater opportunities for the stamping business.Further, business opportunities are

also arising on account of M & M foray into a joint venture with International Trucks

for the manufacture of Lite & Heavy Commercial vechiles.These business activities

together with the consolidation of stamping business consequent to merger of Pranay

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Sheetmetal Stampings Limited (Pranay) into the company is expected to add value to

the business

Clients

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Financials Results

12 Months Ended Profit & Loss Account (Standalone) Value(Rs.in million) FY09A FY10A FY11E FY12E

12m 12m 12m 12m

Description

Net Sales 10734.17 10878.83 12837.02 14377.46

Other Income 17.64 14.58 18.95 22.74

Total Income 10751.81 10893.41 12855.97 14400.21

Expenditure -10428.97 -10090.16 -11810.06 -13227.26

Operating Profit 322.84 803.25 1045.92 1172.94

Interest -360.56 -408.27 -424.6 -441.58

Gross Profit -37.72 394.98 621.31 731.36

Depreciation -247.37 -308.71 -324.15 -340.35

Profit before Tax -285.09 86.27 297.17 391.00

Tax 96.79 -39.55 -106.98 -140.76

Profit after Tax -188.3 46.72 190.19 250.24

Equity Capital 324.83 324.83 324.83 324.83

Reserves 1365.56 1374.26 1564.45 1814.69

Face Value(Rs) 10.00 10.00 10.00 10.00

EPS -5.80 1.44 5.86 7.70

*A=Actual, *E=Estimated

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Quarterly Ended Profit & Loss Account (Standalone) Value(Rs.in million) 30-Sep-09 31-Dec-09 31-Mar-10 30-Jun-10

3m(A) 3m(A) 3m(A) 3m(E)

Description

Net Sales 2674.01 2775.54 3179.62 3497.58

Other Income 2.83 2.40 4.47 4.92

Total Income 2676.84 2777.94 3184.09 3502.50

Expenditure -2466.23 -2564.27 -2913 -3217.78

Operating Profit 210.61 213.67 271.09 284.72

Interest -100.34 -102.26 -101.46 -103.49

Gross Profit 110.27 111.41 169.63 181.23

Depreciation -80.05 -80.03 -75.09 -78.84

Profit before Tax 30.22 31.38 94.54 102.39

Tax -10.73 -10.69 -42.38 -36.86

Profit after Tax 19.49 20.69 52.16 65.53

Equity Capital 324.83 324.83 324.83 324.83

Face Value(Rs) 10.00 10.00 10.00 10.00

EPS 0.6 0.64 1.61 2.02

*A=Actual, *E=Estimated

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Key Ratios

Particulars FY09 FY10 FY11E FY12E

EPS (Rs.) -5.80 1.44 5.86 7.70

EBITDA Margin (%) 3.01% 7.38% 8.15% 8.16%

PAT Margin (%) -1.75% 0.43% 1.48% 1.74%

P/E Ratio (x) -5.21 49.19 12.08 9.18

ROE (%) -11.14% 2.75% 10.07% 11.70%

ROCE (%) 1.49% 9.17% 12.12% 12.75%

EV/EBITDA (x) 3.04 2.86 2.20 1.96

Debt-Equity Ratio 1.99 2.17 2.15 2.05

Book Value (Rs.) 52.04 52.31 58.16 65.87

P/BV 0.58 1.35 1.22 1.07

Charts:

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Outlook and Conclusion

At the current market price of Rs.70.75, the stock is trading at 12.08 x FY11E

and 9.18 x FY12E respectively.

Price to Book Value of the stock is expected to be at 1.22 x and 1.07 x respectively for FY11E and FY12E.

Earning per share (EPS) of the company for the earnings for FY11E and FY12E is seen at Rs.5.86 and Rs.7.70 respectively.

Net Sales of the company is expected to grow at a CAGR of 10% over 2009 to 2012E respectively.

HSBC Global Investment has sold over 3% stake in Mahindra Ugine Steel Company for Rs 2 crore in open market transactions.

Mahindra Ugine Steel Company, part of the Mahindra Group, has received its board's nod for the capex plan of Rs 36.65 crore. As per the approval, the company will spend about Rs 36.65 crore for setting up of new manufacturing unit of its Stamping Division in Pantnagar near Rudrapur, Uttarakhand.

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On the basis of EV/EBITDA, the stock trades at 2.20 x for FY11E and 1.96 x for

FY12E.

We expect that the company will keep its growth story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target price of Rs.85.00 for Medium to Long term investment.

Industry Overview

Sector structure/Market size

The steel industry in India has been moving from strength to strength and according

to the Annual Report 2009-10 by the Ministry of Steel, India has emerged as the fifth

largest producer of steel in the world and is likely to become the second largest

producer of crude steel by 2015-16.

Recently, Steel Minister, Mr Virbhadra Singh said that India will become the world's

second-largest steel producer by 2012, more than doubling its capacity to 124 million

tonnes (MT) as part of the push being given to assist overall infrastructure

development.

Production

Steel production rose 4.2 per cent to reach 60 MT in 2009-2010, according to the

Ministry of Steel.

The National Steel Policy 2005 had projected an annual steel consumption growth of 7

per cent based on GDP growth rate of 7-7.5 per cent and production of 110 MT of

crude steel by 2019-2020. Nonetheless, with the current rate of ongoing greenfield and

brownfield projects, the Ministry of Steel has projected that these growth trends are

likely to be exceeded and it is envisaged that in the next five years demand will grow at

higher annual average growth rate of over 10 per cent as compared to around 7 per

cent growth achieved between 1991-92 and 2005-06.

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Moreover, according to the ministry, the crude steel production capacity in the country

by 2011-12 will be nearly 124 MT.

According to the Ministry of Steel, 222 memorandum of understanding (MoUs) have

been signed with various states for planned capacity of around 276 MT. Major

investment plans are in Orissa, Jharkhand, Chattisgarh, West Bengal, Karnataka,

Gujarat and Maharashtra.

According to the Annual Report 2009-10 by the Ministry of Steel, domestic crude steel

production grew at a compounded annual growth rate of 8.6 per cent during 2004-05

and 2008-09.

Consumption

India's steel consumption rose 8 per cent in the year ended March 2010, over the

same period a year ago on account of improved demand from sectors like automobile,

infrastructure and housing. The country’s steel consumption increased to 56.3 MT in

the 12 months to March 2010 from 52.3 MT in the previous year, as per the Ministry

of Steel.

Investments

A host of steel companies have lined up major investment proposals. Furthermore,

with an expanding consumer market, the Indian steel industry is likely to receive huge

domestic and foreign investments.

The domestic steel sector has attracted a staggering investment of about US$ 238

billion, according to the Minister of State for Steel, Mr A. Sai Prathap.

This consists of nearly 222 MoUs signed between the investors and various state

governments mostly in the states of Orissa, Jharkhand, Chhattisgarh and West

Bengal.

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• SAIL is planning to set up a 12-million tonne plant in Jharkhand.

• In December, India’s largest engineering conglomerate Larsen & Toubro (L&T)

and state-owned Nuclear Power Corporation of India Limited (NPCIL) formed a

US$ 373.2 million joint venture for specialised steel and forging products.

• Stainless steel manufacturer and exporter, Varun Industries, is setting up a

US$ 171.8 million stainless steel-cum-alloy steel plant at Rohat, Jodhpur.

• Tata Steel has entered into a joint venture with Japan’s Nippon Steel for

production and sales of automotive cold-rolled flat products at Jamshedpur.

The JV is expected to invest US$ 400 million to set up an automobile venture in

India.

• Steel major, JSW Steel has earmarked a capex of US$ 1.6 billion for 2010-11

and plans to increase capacity of its Bellary plant in Karnataka from 7 MT to 10

MT by end of 2010-11.

Government Initiative

As per the Press Information Bureau, during 2009, the government took a number of

fiscal and administrative steps to contain steel prices. Central value added tax

(CENVAT) on steel items was reduced from 14 per cent to 10 per cent with effect from

February 2009.

Moreover, in the Union Budget 2010-11, the government has allocated US$ 37.4

billion to the infrastructure sector and has increased the allocation for road transport

by 13 per cent to US$ 4.3 billion which will further promote the steel industry.

________________ ____ _________________________ Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other

sources believed to be reliable but do not represent that it is accurate or complete and it

should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s

affiliates shall not be in any way responsible for any loss or damage that may arise to any

person from any inadvertent error in the information contained in this report. This document

is provide for assistance only and is not intended to be and must not alone be taken as the

basis for an investment decision.

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