Steel Industry Demand Supply Last 5 Yrs & Company Plans

STEEL SECTOR
MF Global Sector Report

Will the party continue?
18 OCTOBER 2010
Analyst: Dhawal Doshi
Equity Research | India
DHAWAL DOSHI
[email protected]
SAPNA SHAH
[email protected]
18 October 2010 MF Global Steel Sector
Steel Sector
| Will the party continue?
Investment Rationale COMPANIES

» Steel stocks have outperformed the benchmark indices over the past 3
months with gaining visibility of increased margins per tonne of steel. JSW STEEL CMP Rs 1318
Steel price jump and declining raw material prices will help the margins Reco NEUTRAL
Target Price Rs 1398
increase in Q3FY11. The way ahead for the stocks would depend on
the companies’ ability to maintain or increase the margins. We expect
SAIL CMP Rs 220
the margins to be under pressure going forward with softening steel Reco NEUTRAL
prices and rising raw material costs. Target Price Rs 218
» Sequential growth in production from China & Europe would see an TATA STEEL CMP Rs 636
increase in the surplus for crude steel. Rising crude steel surplus will Reco NEUTRAL
Target Price Rs 691
halt the northward movement in the steel prices. Sequential fall in
production was the driving factor behind the jump in steel prices.
» China’s raw material import requirement plays a crucial role in

determining the raw material prices. We expect the raw material prices
to increase sequentially with China’s rising import requirement led by
the growth in the Chinese steel production.
» We prefer stocks with raw material integration and volume growth. Raw
material integration will help the companies secure one of the factors
determining the margins while volume growth would help the
companies partly negate the steel price fall. In the event of rising prices
the said companies would benefit more vis-à-vis peers.
Risks
» Higher than expected consumption growth: We base our
assumptions on the finished steel demand projections by World Steel
Association (WSA). WSA expects a 13% growth to 1272 mn tonnes in
finished steel consumption in 2010 and a 5% growth to 1340 mn tonnes
in finished steel consumption in 2011. Higher growth will drive the steel
prices higher.
» Calibrated production growth: A risk to our call would be continuity in

the production cuts or a calibrated production growth in line with the
demand growth. This would help the steel prices stay firm.
» Pass through of raw material costs: Steel companies’ ability to pass

on the increasing raw material costs would cushion the margins from the
Report priced as of 15 October 2010
increasing raw material costs.
2
mfglobal.com
18/10/2010 MF GLOBAL STEEL SECTOR | WILL THE PARTY CONTINUE?
CONTENTS
INVESTMENT ARGUMENTS
Will the Party continue? .......................................................................................................................... 4-5
Production – Will China and Europe surprise? ....................................................................................... 6-10
Raw Material costs – will they remain subdued? .................................................................................... 11-12
Risks ........................................................................................................................................................ 13
Comparatives .......................................................................................................................................... 14-15
Companies Section
JSW Steel ..................................................................................................................................................... 17-37
SAIL .............................................................................................................................................................. 38-58
Tata Steel ..................................................................................................................................................... 59-80
3
INVESTMENT ARGUMENTS
Will the Party continue?

Steel companies have significantly outperformed the benchmark indices over the past 3 months as against their
underperformance over the past 6 months. Visible signs of margin jump helped the companies outperform the
benchmark indices. Rising steel prices, on the back of improving demand scenario and production cutbacks from
China (60 mn tonnes on an annualized basis) and Europe (50 mn tonnes on an annualized basis), helped the
companies improve margins. Benefit of the falling raw material prices will also play a vital role in the margin
improvement in Q3FY11.
Sustainability of the outperformance is dependant on the companies’ ability to maintain or increase their
margins. We expect the margins to reduce with falling steel prices and increasing raw material costs.
RELATIVE PERFORMANCE – 3 MONTHS RELATIVE PERFORMANCE – 6 MONTHS
140 Tata Steel JSW Steel 130 Tata Steel JSW Steel
SAIL Sensex SAIL Sensex
120
130
110
120
100
110
90
100
80
90 70
Jul-10 Aug-10 Sep-10 Oct-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10
Source: MF Global India Research
With the improving demand environment, the performance is expected to remain robust until the production cuts from
China and Europe are not rolled back. Increase in Chinese production would not only ease the steel prices but also
increase the iron ore and coking imports thereby exerting an upward pressure on the raw material prices. Further the
jump in European production could have a straight bearing on the European steel prices.
We expect the surplus in crude steel to marginally increase over CY10 to CY11 with the European and Chinese
production coming back on stream. Increasing surplus would have a negative impact on the steel prices. While the
World HRC prices are still holding firm, prices in Europe have started softening after the jump in August and
September 2010 as seen in the chart below. Chinese steel majors are also keeping their prices flat for November and
December 2010. Our estimate for HRC prices is US$ 650 per tonne as against the current prevailing price of
around US$ 690 (World Steel HRC Tracker).
4
STEEL PRICES – WORLD HRC TRACKER
European HRC World HRC Price tracker

650 800
600 750
550 700
Euro / tonne
US$ / tonne
500 650
450 600
400 550
350 500
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
May-10
Jun-10
Jul-10
Oct-10
Sep-10
Apr-10
Aug-10
Source: Bloomberg, MF Global India Research
Demand supply balance: WSA expects the finished steel consumption to increase by 13% to 1272 mn tonnes in
2010 and by 5% to 1340 mn tonnes in 2011. We base our assumptions on the demand growth projected by WSA. We
expect the crude steel production to grow by 17% to 1396 mn tonnes and by 5% to 1467 mn tonnes in 2010 and 2011
respectively. This will lead to a marginal growth in the surplus of crude steel in 2010 and 2011.
CRUDE STEEL – DEMAND SUPPLY
MN TONNES CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10E CY11E
PRODUCTION 946.7 1038.6 1113.4 1227.8 1325.1 1301.8 1197.4 1395.5 1466.7
% GROWTH 7% 10% 7% 10% 8% -2% -8% 17% 5%
CONSUMPTION - CRUDE STEEL EQUIVALENT 968.6 1,057.8 1,131.0 1,232.7 1,320.3 1,299.3 1,203.3 1,364.3 1,429.0
% GROWTH 7% 9% 7% 9% 7% -2% -7% 13% 5%
Source: World Steel Association, MF Global India Research Estimates
CRUDE STEEL – SURPLUS / DEFICIT
45
38
31
30
15
5
3
mn tonnes
4 (6)
-
(15) (15) (5)

(18)
(19)
(30) (26) (22)
(29)
(45)
CY10E
CY11E
CY99
CY00
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
5
Production – Will China and Europe surprise?

Crude Steel production is likely to witness a sequential jump in 2011 as against a declining production m-o-m in 2010.
The drop in production is primarily led by the production cutbacks in China and Europe (110 mn tonnes on an
annualised basis, China – 60 mn tonnes and Europe – 50 mn tonnes).
MONTHLY STEEL PRODUCTION - WORLD
130
125 124.2
122.2
120 121.7 118.8
mn tonnes
115 113.4 112.9

113.4
114.8
110
106.5 108.2
108.8 107.0
105 107.1
100
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
May-10
Jun-10
Jul-10
Sep-09
Aug-09
Apr-10
Aug-10
Source: World Steel Association, MF Global India Research
Crude steel production is expected to increase by 17% in CY10 to 1395.4 mn tonnes and by 5% in CY11 to 1466.7
mn tonnes as against 8% fall in CY09. Crude steel has already seen a 23% y-o-y growth in Jan – Aug 2010 and is
likely to moderate with the declining production from China and Europe.
The production jump in 2010 is primarily driven by EU 27 and North America; however the 2 regions are still expected
to be below their peaks. Production is expected to grow by 23% and 36% in 2010 and 7% and 4% respectively in
2011 for EU 27 and North America. Production from China is expected to grow by 12% in 2010 accounting for around
47% of the global crude steel production.
6% and 7% growth in the Chinese and European Union’s production to 690 mn tonnes and 180 mn tonnes
respectively in 2011 will see the crude steel production growing by 5% to 1467 mn tonnes in 2011.
6
CRUDE STEEL – SUPPLY
CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10E CY11E

EUROPEAN UNION 27 183,891 193,493 187,454 199,535 209,653 198,036 137,511 168,880 180,180
% GROWTH 16% 5% -3% 6% 5% -6% -31% 23% 7%
OTHER EUROPE 25,437 28,476 30,416 27,946 30,164 31,287 28,756 32,517 34,457
% GROWTH -44% 12% 7% -8% 8% 4% -8% 13% 6%
C.I.S. 106,227 113,085 113,103 119,455 124,056 113,986 96,242 107,591 113,071
% GROWTH 6% 6% 0% 6% 4% -8% -16% 12% 5%
NORTH AMERICA 123,841 132,856 125,971 131,638 132,615 124,514 82,988 112,999 117,915
% GROWTH 1% 7% -5% 4% 1% -6% -33% 36% 4%
SOUTH AMERICA 43,025 45,875 45,335 45,297 48,252 47,409 38,095 44,159 44,952
% GROWTH 5% 7% -1% 0% 7% -2% -20% 16% 2%
AFRICA 16,172 16,501 17,466 18,399 18,391 16,729 14,684 16,783 17,484
% GROWTH 9% 2% 6% 5% 0% -9% -12% 14% 4%
MIDDLE EAST 12,868 13,674 14,646 14,766 15,841 16,036 16,660 18,862 19,853
% GROWTH 8% 6% 7% 1% 7% 1% 4% 13% 5%
CHINA 238,282 293,465 372,022 443,393 512,458 517,961 582,456 653,021 690,000
% GROWTH 20% 23% 27% 19% 16% 1% 12% 12% 6%
ASIA (EXCLUDING CHINA) 188,598 192,866 198,387 211,367 224,864 227,461 194,337 232,224 239,853
% GROWTH 4% 2% 3% 7% 6% 1% -15% 19% 3%
OCEANIA 8,400 8,302 8,648 8,691 8,781 8,423 6,014 8,430 8,928
% GROWTH 1% -1% 4% 0% 1% -4% -29% 40% 6%
TOTAL WORLD PRODUCTION 946,741 1,038,593 1,113,448 1,227,836 1,325,077 1,301,843 1,197,442 1,395,459 1,466,693
% GROWTH 7% 10% 7% 10% 8% -2% -8% 17% 5%
Source: World Steel Association, MF Global India Research Estimates
China: Chinese production is expected to grow by 12% in 2010 to 654 mn tonnes, as against a 17% growth ytd
August 2010. A sequential drop in the Chinese production since April 2010, due to various restrictions imposed, is
expected to restrict the production growth for 2010. We expect the production to grow to 690 mn tonnes in 2011, a
growth of 6% with the relaxation of the restrictions imposed.
MONTHLY STEEL PRODUCTION - CHINA
60
58.5
57
58.2
57.7 55.3
54.2
53.6 53.2
mn tonnes
54
53.4
51.9 53.3
51 51.9
49.4
48 48.8
45
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
May-10
Jun-10
Jul-10
Sep-09
Aug-09
Apr-10
Aug-10
7
Drop in the Chinese production was a result of the slew of measures undertaken to curb production in order to meet 5
year period energy reduction targets. China had a target of reducing its energy intensity by 20% over 2005 to 2010.
Some measures would see permanent closures in capacities while a majority of them are targeted towards meeting
the energy reduction targets. Some of the measures taken include:
1. Scrapping of export rebates with effect from July 2010,

2. Power supply rationing,
3. Ordering 2000 firms to shut old capacities in various industries including steel which are highly polluting, highly
energy-wasting or not meeting the safety norms,
4. Order to shut 18 steel mills in Wuan district for a month in September,
5. Shutting down mills with capacities below 1 mn tonnes of crude steel and 300000 tonnes of higher end steel and
raising production standards thereby pushing consolidation in the industry etc.
Majority of the above measures are temporary in nature and once relaxed would see the production increase
sequentially. We expect China to increase its monthly rate of production from 2011 but below the monthly
peak of April 2010 (58.5 mn tonnes). However in the event of China continuing with the said restrictions and
thereby limit the steel production, it will support the steel prices and will be a risk to our call.
China is expected to see some production coming back on stream from October 2010 as the mills resume production
after a week long national holiday. Also the steel mills in Wuan district are expected to commence production after the
month’s shut down period ended. The same has started impacting the steel price marginally in September 2010.
China’s largest listed steel maker Baoshan Iron & Steel has kept its November 2010 prices unchanged indicating
some supply side pressures. Wuhan Steel has followed suit in keeping the prices flat for November 2010 and Angang
Steel is also expected to follow suit. China Steel, Taiwan’s largest steel maker has announced flat prices for
December 2010 over October – November 2010 prices.
HRC PRICE - CHINA
4900
4700
4500
Yuan / tonne
4300
4100
3900
3700
3500
Mar-10
Mar-10
May-10
May-10
Jun-10
Jun-10
Jul-10
Jul-10
Oct-10
Sep-10
Sep-10
Apr-10
Apr-10
Aug-10
Aug-10
Aug-10
8
Europe: EU production is expected to grow by 23% in 2010 to 168.9 mn tonnes, as against a 38% growth ytd August
2010. A sequential drop in production since May 2010 will restrict the production growth for 2010. We expect the
production to grow to 180 mn tonnes in 2011, a growth of 7%.
MONTHLY STEEL PRODUCTION - EUROPE
20
19.2
18.1 18.2
18 17.0 18.1
16.5 16.0 16.6

mn tonnes
16 15.9
15.5
14.5
14 15.0
13.1
12
10
Oct-09
Feb-10
Mar-10
May-10
Nov-09
Dec-09
Jan-10
Jun-10
Jul-10
Sep-09
Aug-09
Apr-10
Aug-10
Production grew sharply from Jan 2010 in anticipation of demand revival thereby touching a peak of 19.2 mn tonnes in
May 2010 from a monthly rate of 13.1 mn tonnes a year ago. However a slower demand pick up as against
expectations lead to inventory pile ups and thereby leading to production cuts. Monthly production dropped from 19.2
mn tonnes in May 2010 to 15 mn tonnes in August 2010. Lower than expected demand is reflected from the falling
PMI as shown in the chart below.
EUROZONE MANUFACTURING PMI
58
56
54
52
50
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
May-10
Jun-10
Jul-10
Sep-10
Apr-10
Aug-10
European manufacturers have adjusted their production in line with the demand growth. We expect the production to
increase once the inventories have fallen down. However in case the pace of production growth outweighs the
demand growth, pricing might come under pressure. European steel prices have started softening in October as
against firm prices in August and September 2010. This is in line with our assumption of some softening in steel prices
with the production coming back on stream.
9
EUROPE STEEL PRICES
650
600
550
Euros / tonne
500
450
400
350
300
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
May-10
Jun-10
Jul-10
Oct-10
Sep-10
Apr-10
Aug-10
Increasing production from China and Europe will see increased surplus and keep the steel prices under
check.
10
Raw Material costs – will they remain subdued?

Raw material prices have played an important role in the sector’s outperformance over the last 3 months. Declining
raw material prices from the mid of Q2FY11 helped the stocks outperform in anticipation of lower raw material costs.
The raw material costs for Q3FY11 will be lower by around 5 – 15% for both iron ore as well as Coking Coal (quarterly
contracts for iron ore settled at a 10 – 13% discount to Q2FY11 prices and for coking coal at around 7% discount). But
are the raw material prices likely to sustain at lower levels and support margins is a question?
The answer to the above question is dependent on China’s steel production, the import requirement for the raw
materials and the ability of the steel companies to pass on the raw material costs. Increasing steel production in China
would see increased raw material imports and thereby higher raw material prices and vice versa. The margins for the
steel companies will be protected if they are able to pass on the increased costs.
Currently global steel prices have taken a pause in their upward movements and started giving up some of the gains
in the past few days. This will not impact the margins in Q3FY11 due to lower contracted prices for the raw materials.
However if the steel prices continue to remain subdued, players would see their margins declining in Q4FY11 due to
the currently rising spot raw material prices which will see the contract prices increase in Q4FY11.
Drop in the Chinese steel production since April 2010 saw a reduced requirement of the imported iron ore. The
imports were further impacted by the increasing domestic iron ore production in China. This phenomenon led to a
softening of the iron ore prices since May 2010 to August 2010. Lower iron ore prices during the said period led to a
fall in the contracted prices for iron ore for Q3FY11.
CHINA IRON ORE – PRODUCTION & IMPORTS
120
Production Imports
90
mn tonnes
60
30
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
May-10
Jun-10
Jul-10
Sep-09
Sep-10
Aug-09
Apr-10
Aug-10
However the iron ore prices have recently seen some pick up, as shown in the chart below, after the Chinese mills
restarted production for some of the shut capacities as discussed above. Increasing production from China as per
media reports on a sequential basis has led to higher iron ore imports thereby higher iron ore prices. China’s iron ore
imports have jumped in September to 52.6 mn tonnes as against 44.6 mn tonnes in August 2010 as shown in the
above chart.
11
CHINA IRON ORE PRICE – 63.5% FE CONTENT
210
190
170
$ / tonne
150
130
110
90
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
May-10
Jun-10
Jul-10
Oct-10
Sep-10
Apr-10
Aug-10
Any substantial increase in the steel production could see the import requirement for iron ore rising and thereby
putting further upward pressure on the iron ore prices. Coking coal prices have seen similar movements like iron ore
although of a lower magnitude on the downside. The prices softened during Q2FY11 thereby leading to lower contract
prices for Q3FY11, however have started moving up since September 2010.
CHINA COKING COAL PRICE
1600
1500
1400
Yuan / tonne
1300
1200
1100
1000
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
May-10
Jun-10
Jul-10
Oct-10
Sep-09
Sep-10
Apr-10
Aug-10
Increasing steel production from China will see the import requirement go up for the raw materials. This is
expected to exert an upward pressure on the raw material prices, hence impacting the margins.
12
Risks
Higher than expected consumption growth: We base our assumptions on the finished steel demand projections by
World Steel Association (WSA). WSA expects a 13% growth to 1272 mn tonnes in finished steel consumption in 2010
and a 5% growth to 1340 mn tonnes in finished steel consumption in 2011. Higher than the expected consumption
growth will drive the steel prices higher.
Calibrated production growth: A risk to our call would be continuity in the production cuts or a calibrated production
growth in line with the demand growth. This would keep the crude steel surplus under control and help the steel prices
stay firm.
Pass through of raw material costs: A strong operating environment would help the companies pass on the jump in
the raw material costs. Steel companies’ ability to pass on the increasing raw material costs would cushion the
margins from the increasing raw material prices.
13
Comparatives
VALUATIONS – GLOBAL COMPARISON
P/E (X) EV/EBIDTA (X)

CY10 CY11 CY10 CY11
ARCELOR MITTAL (BUY, PT: 30 (EUROS) – COVERED BY MF GLOBAL UK) 21.0 12.8 8.3 5.0
THYSSENKRUPP (BUY, PT: 44 $ – COVERED BY MF GLOBAL UK) 12.9 9.1 8.7 7.0
SALZGITTER (SELL, PT: 55 (EUROS) – COVERED BY MF GLOBAL UK) 443.9 13.0 12.6 7.4
SSAB (SELL, PT: 95 (SEK) – COVERED BY MF GLOBAL UK) 22.0 10.4 8.8 6.4
ONESTEEL (BUY, PT: 400C (AUD) – COVERED BY MF GLOBAL AUSTRALIA LTD) 16.8 8.4 7.9 5.2
BLUESCOPE (NEUTRAL, PT: 300C (AUD) – COVERED BY MF GLOBAL AUSTRALIA LTD) - 14.5 9.7 5.2
JFE HOLDINGS (SELL, PT: 2200 (YEN) – COVERED BY MF GLOBAL FXA SECURITIES) 13.7 13.3 7.2 7.4
BOASHAN STEEL 11.8 10.3 5.3 4.7
WUHAN STEEL 16.7 12.2 5.3 4.5
POSCO 8.4 8.1 5.1 4.4
NIPPON STEEL 10.5 8.5 3.3 3.0
SEVERSTAL 39.6 10.4 7.8 5.7
NUCOR STEEL 54.7 15.0 12.8 6.5
AVERAGE 51.7 11.2 7.9 5.6
JSW STEEL 15.5 10.0 8.5 5.9

SAIL 14.2 11.1 8.4 6.1
TATA STEEL 8.9 8.0 7.0 5.9
Source: Bloomberg, MF Global Research Estimates
PEER COMPARISON
JSW STEEL SAIL TATA STEEL

SALES, RS MN FY10 189,572 405,514 1,023,931
FY11 233,326 443,313 1,112,105
FY12 324,560 482,690 1,179,869
EBIDTA, RS MN FY10 40,707 90,798 80,427
FY11 51,348 104,919 153,339
FY12 74,484 142,866 180,821
PAT, RS MN FY10 15,976 67,312 -20,092
FY11 18,919 63,771 64,237
FY12 33,618 82,211 72,517
EPS, RS FY10 85.4 16.3 -22.7
FY11 84.8 15.4 71.2
FY12 131.4 19.9 79.3
P/E, X FY10 15.4 13.5 -28.1
FY11 15.5 14.2 8.9
FY12 10.0 11.1 8.0
P/BV, X FY10 2.7 2.7 2.4
FY11 1.8 2.4 1.9
FY12 1.5 2.0 1.6
EV/EBIDTA, X FY10 10.0 9.4 12.8
FY11 8.5 8.4 7.0
FY12 5.9 6.1 5.9
TARGET PRICE 1398 218 691
UPSIDE / (DOWNSIDE) 6.1% (0.8%) 8.7%
RATING NEUTRAL NEUTRAL NEUTRAL
Source: MF Global India Research Estimates
14
RELATIVE PRICE PERFORMANCE
RS, % CMP CLOSE 1M 3M 6M 1YEAR YTD

BSE SENSEX 20,125 3.2 12.4 14.1 17.0 15.2
NIFTY 6,063 3.4 12.7 15.0 18.7 16.6
JSW STEEL 1318 7.2 20.3 4.2 44.5 30.2
SAIL 220 8.0 10.0 -3.1 19.8 -8.4
TATA STEEL 636 5.4 24.4 -7.2 10.7 3.0
Source: Bloomberg
15
Companies Section
16
DHAWAL DOSHI
[email protected]
SAPNA SHAH
[email protected]
18 October 2010 MF Global Initiating Report
METALS | STEEL
JSW Steel JSTL IN: NEUTRAL
| Entering the Bigger League RS 1318
Investment Rationale TARGET RS 1398 (+6.1%)

» JSW Steel is the only steel player amongst the larger companies that is
expected to give volume growth in FY12, backed by its expansion plan SECTOR RATING
(3.2mn tonnes) that goes on stream by March 2011. The company is OW N UW
readying itself for the next leg of growth by commencing work on the
West Bengal steel project. STOCK RATING
BUY NEUTRAL SELL
» The company is making conscious efforts to secure raw material supply
and increase its integration levels. Increasing integration is expected to
> 15% -15% TO +15% < -15%
reduce volatility in profits.
» JSW has the lowest conversion costs amongst the steel players, which COMPANY DATA
helps it partially mitigate raw material cost pressures. The deal with JFE O/S SHARES : 201MN
Steel will further help the company reduce its cost through yield and MARKET CAP (RS) : 265BN
productivity improvements. MARKET CAP (USD) : 6.0BN
52 - WK HI/LO (RS) : 1400 / 652
» Equity infusion, through the stake sale to JFE and preferential allotment
AVG. DAILY VOL. (3MTH) : 1.5MN
to the promoters, has significantly de-leveraged the balance sheet. This FACE VALUE (RS) : 10
will help the company finance its two greenfield projects of 10mn tonnes
each. SHARE HOLDING PATTERN, %
Risks PROMOTERS : 45.0
» (1) Raw material price risk, (2) Volume risk, (3) US operations FII / NRI : 35.6
FI / MF : 6.5
profitability, and (4) Execution risk. NON-PROMOTER CORP. HOLDINGS : 4.7
Valuation PUBLIC & OTHERS : 7.6
» At the CMP of Rs 1318, the stock trades at a P/E of 10.0x FY12E EPS of
Rs 131.4 and an Ev/Ebidta of 5.9x FY12E. We arrive at a value of Rs PRICE PERFORMANCE, %
1398 for JSW Steel on SOTP basis. We initiate coverage on the stock 1MTH 3MTH 1YR
with a Neutral rating and a target price of Rs 1398. ABS 7.2 20.3 44.5
REL TO BSE 4.0 8.0 27.4
VALUATION SUMMARY PRICE VS. SENSEX

Y/E MAR, RS MN FY2008 FY2009 FY2010 FY2011E FY2012E
210
NET SALES 124,567 159,348 189,572 233,326 324,560
GROWTH, % 45.6 27.9 19.0 23.1 39.1 180
EBIDTA 34,780 29,818 40,707 51,348 74,484
EBIDTA MARGINS, % 27.9 18.7 21.5 22.0 22.9
150
NET PROFIT 15,326 10,697 15,976 18,919 33,618 120
NET PROFIT MARGIN, % 12.3 6.7 8.4 8.1 10.4
NET PROFIT (ADJUSTED) 15,326 10,697 15,976 18,919 33,618 90
EPS, RS 81.9 57.2 85.4 84.8 131.4
60
EPS GROWTH, % 3.0 (30.2) 49.3 (0.7) 54.9
PER, X 16.1 23.0 15.4 15.5 10.0 30
EV/EBIDTA, X 10.5 13.7 10.0 8.5 5.9
EV/NET SALES, X 2.9 2.6 2.2 1.9 1.3 0
PRICE/BOOK VALUE, X 3.2 3.2 2.7 1.8 1.5 Apr-08 Dec-08 Aug-09 Apr-10
ROIC, % 12.0 6.7 7.6 8.3 11.3
JSW Steel Rel. to BSE
ROE, % 23.7 13.7 18.8 14.9 17.2
Source: Company, MF Global India Research Estimates Source: Bloomberg, MF Global India Research
17
mfglobal.com
18/10/2010 MF GLOBAL INITIATING COVERAGE | JSW STEEL
INVESTMENT OVERVIEW
SUSTAINABLE COMPETITIVE ADVANTAGE STRONG VOLUME GROWTH WITH LOW CONVERSION COSTS VIS-À-VIS PEERS.
FINANCIAL STRUCTURE DEBT: EQUITY TO IMPROVE FROM 1.7X IN FY10 TO 0.5X BY FY12E.
SHAREHOLDER VALUE CREATION INCREASING INTEGRATION, COUPLED WITH VOLUME GROWTH, WOULD IMPROVE THE PERFORMANCE
OPERATIONALLY. STAKE SALE TO JFE STEEL HAS SIGNIFICANTLY IMPROVED THE BALANCE SHEET STRUCTURE,
THEREBY READYING IT FOR THE NEXT LEG OF GROWTH.
EARNINGS VISIBILITY CONSOLIDATED PROFITS EXPECTED TO GROW AT A 45% CAGR FROM RS 15976MN IN FY10 TO RS 33618MN BY
FY12.
VALUATION AT THE CMP OF RS 1318, THE STOCK TRADES AT A P/E OF 10.0X FY12E EPS OF RS 131.4 AND AN EV/EBIDTA OF
5.9X FY12E.
MF GLOBAL VS. CONSENSUS FY12 EPS OF RS 131.4 AS AGAINST CONSENSUS OF RS 124.
FUTURE EVENT TRIGGERS STEEL PRICE HIKE, IRON ORE ALLOCATION FOR HADDIMMPADE MINE, COMMENCEMENT OF COKING COAL
PRODUCTION.
EXPECTED PRICE MOMENTUM 6.1%
Rating and price target

At the CMP of Rs 1318, the stock trades at a P/E of 10.0x FY12E EPS of Rs 131.4 and an Ev/Ebidta of 5.9x FY12E.
We arrive at a value of Rs 1398 for JSW Steel on SOTP basis. We initiate coverage on the stock with a Neutral
rating and a target price of Rs 1398.
18
Key Risks
Raw material price risk: JSW Steel’s profitability is significantly exposed to international iron ore and coking coal
prices due to its low level of integration (See detailed section on Raw Material Integration). These account for around
45% of sales and 80% of total raw material costs. Any material jump in raw material prices, without a corresponding
jump in steel prices, could significantly impact profits. However, the company is working on various mines to
increase its integration levels. Once commissioned, these will significantly reduce volatility in the company profits
due to the raw material price swings.
Volume risk: The company has been consistent in terms of adding capacities and has seen a 37.3% CAGR in
capacity over FY03-FY10 to 7.8mn tonnes. The company is further expanding its capacity to 11mn tonnes by the
end of FY11 and will commence work on its two greenfield ventures of 10mn tonnes each. In the event of the
company being unable to utilise its capacities, profits are likely to be impacted.
US operations’ profitability: The financial crisis had taken a toll on the company’s US operations with the utilisation
levels falling down below 20%. The operations incurred significant losses during FY09 and FY10, impacting the
consolidated profits. The company reported a loss of US$ 37mn and US$ 70mn in FY09 and FY10, respectively.
With the economic recovery, the company’s US operations have seen increased utilisations and is expected to break
even at the PBDT level in FY11. In the event of a downturn, JSW Steel’s US operations could pose a significant risk
to the company’s profitability. JSW Steel is considering various options for its US operations, including a complete
sale.
Execution risk: JSW Steel has plans to increase its capacity from 7.8mn tonnes to 32mn tonnes. Delays in
commissioning the capacities could stretch the company’s balance sheet.
Assumptions
Y/E MAR FY2011E FY2012E

VOLUMES (MN TONNES) 6.3 8.9
STEEL PRICE (US $) 650 650
IRON ORE (RS / TONNE)
- SPOT 600 630
- NMDC 3250 3250
COKING COAL (US$ / TONNE) 225 230
19
INVESTMENT THESIS
JSW Steel’s capacity expansions have made it the 2nd largest steel manufacturer in India. Volume growth, coupled
with increasing integration levels, has positioned the company as one of the fastest growing steel companies in
India. Volume growth also reduces volatility in earnings led by the quarterly fluctuations in raw material prices (iron
ore and coking coal). Stake sale to JFE Steel Corporation, a subsidiary of JFE Holdings, and the promoter warrants
have not only improved the quality of the Balance Sheet, but has also placed it in a comfortable position for the next leg of
growth to 32mn tonnes from 7.8 mn tonnes currently.
Volume Growth
Regular investments in building capacities have made JSW Steel the 2nd largest steelmaker, after SAIL, in India,
apart from giving it consistent growth in volumes. The company has seen a 37.3% CAGR in its crude steel capacity
from 1.6mn tonnes in FY03 to 7.8mn tonnes in FY10. The capacity growth has helped the company report a 25.9%
CAGR in volumes from 1.8mn tonnes in FY05 to 5.7mn tonnes in FY10.
CRUDE STEEL CAPACITY AND SALEABLE STEEL VOLUMES
Capacity Volume Volume CAGR

10.0 30%
25%
8.0
20%
mn tonnes
6.0
15%
4.0
10%
2.0
5%
0.0 0%
FY05 FY06 FY07 FY08 FY09 FY10
Source: Company, MF Global India Research
The company is further expanding its capacity by 3.2mn tonnes at its Vijaynagar plant, taking the total capacity to
11mn tonnes by March 2011. This will also make its Vijaynagar unit the single largest steel-making location with a
capacity of 10mn tonnes. We expect a 24.8% CAGR in volumes from 5.7mn tonnes in FY10 to 8.9mn tonnes in
FY12. Along with the 3.2mn tonnes blast furnace, the company is also expanding other support capacities in order to
reduce cost and provide value addition.
CAPACITY EXPANSION DETAILS
CAPACITY (MN TONNES) CURRENT EXPANDED COMMISSIONING

CRUDE STEEL 7.8 11 MAR-11
SINTER 4.6 10.4 DEC-10
12.8 MAR-11
PELLET 4.2 8.4 APR-11
BENEFICIATION 10.2 14.4 OCT-10
20 JULY-11
HOT STRIP MILL 5.2 8.4 MAR-11
BLOOMING MILL 2.0 2.5 MAR-11
20
After commissioning its 3.2mn tonnes blast furnace, the company plans to de-bottleneck its existing plants, which will
increase capacity by 1mn-2mn tonnes. Apart from the de-bottlenecking, the company is also contemplating an
increase in the capacity at the Vijaynagar unit to 16mn tonnes. JSW has the required land for the same, however,
the required infrastructure and allocation of iron ore mines would play a vital role for capacity expansion. Plans for
de-bottlenecking and expansion have not yet been finalised.
JSW is also likely to enjoy the first mover advantage amongst the large steel companies with its expansion going on
stream prior to the others. The company will see its expansions go on stream by the end of FY11 as against H2FY12
for Tata Steel and post FY12 for SAIL and Jindal Steel & Power.
STEEL CAPACITY EXPANSIONS
COMPANY EXPANSION (MN TONNES) COMMISSIONING

JSW STEEL 3.2 MAR-11
TATA STEEL 3.2 OCT-11
SAIL 2 DEC-11
8.5 FY13 / FY14
JSPL 3 FY13
JSW also plans to add two integrated steel plants of 10mn tonnes each in West Bengal and Jharkhand, on a
greenfield basis, that will take the capacity to 32mn tonnes. The company has made some headway, in terms of the
Bengal project, and is expected to start work during the current financial year. Phase I of the Bengal project
(capacity: 3mn tonnes) would commence construction from October 2010 and is expected to commence operations
within three years from the start of work. The total project cost, including the development of mines, is Rs 150bn.
The capacity expansions have also led to huge operational leverage (fixed cost recovery) and economies of scale.
The company has been able to reduce its conversion cost per tonne by 29% over FY05 to FY10. The volume growth
with larger size plants will further enable the company enjoy some economies of scale. However, we have not
assumed the same in our estimates as reflected in the chart below.
CONVERSION COST PER TONNE (RS / TONNE)
9000
8500
8000
7500
7000
6500
6000
5500
5000
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Regular investments in building capacities has led to a 22.2% CAGR in revenues over FY05 to FY10, along
with a reduction in the conversion costs due to the operational leverage. We further expect a 28.2% CAGR in
sales on the back of a 24.8% CAGR in volumes. JSW will also benefit from the early mover advantage it has
in expanding its capacities.
21
Increasing integration levels—Key to sustained profitability

JSW Steel is working to increase its integration levels for its expanded capacity to have a sustainable profit growth.
The company is looking at the domestic as well as the overseas markets for securing its raw material supplies. JSW
has acquired iron ore mines in Chile and coking coal mines in USA, apart from the mines in India. The quantum of
captive iron ore is expected to more than double by FY12, whereas the company would see its first semi-hard coking
coal shipment from USA in the current year.
CAPTIVE RAW MATERIALS AND % INTEGRATION
Iron ore Coking Coal

5.0 % captive - iron ore % captive - Coking Coal 30%
25%
4.0
mn tonnes
20%
3.0
15%
2.0
10%
1.0
5%
0.0 0%
FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E
Existing mine: The company currently sources around 20% of its iron ore requirement from Vijaynagar Minerals
Pvt. Ltd. (VMPL), 40% owned by JSW Steel. VMPL has increased its volumes from a million tonnes in FY04 to
1.8mn tonnes in FY10, a CAGR of 9.2%. It is further expected to increase to around 2mn-2.5mn tonnes in FY11. The
company plans to increase the mining capacity to 4mn tones. However, it would restrict the volumes to the current-
year levels in order to extend the life of the mine. The current reserves of the mine stand at 36mn tonnes.
Other Indian iron ore mines: Apart from VMPL mines, the company is allocated five other iron ore mines. However,
of the five mines, only the Hadimmapade mines are expected to commence operations in the near future. The mine
has reserves of 60mn tonnes and is expected to have 2mn tonnes of output in the 1st year of operations, followed by
5mn tonnes in the next year. The company had already received forest clearances for the same. However, the
Supreme Court, in a ruling, has asked the Karnataka Government to de-allocate the mine given to JSW Steel along
with Kalyani Steel and re-allocate it again within a period of four months. Karnataka-based mining company, MSPL,
had contested the allocation of the mine by the state government. JSW will have to compete with other players to get
the mine allocation. In the event that JSW is not re-allocated the mine, it is expected to cost the company
significantly. We have not assumed any benefit from the said mine and would await more clarity before
assuming the same in our numbers.
JSW Steel has also been recommended the Donimalai mines in Karnataka, Kanjamalai mines and Kavuthmalai
mines in Tamil Nadu by the state governments. However, the Centre is yet to accord the final approval for the same.
In addition to the said mines, the company has also been allocated the Ankua mines in Jharkhand. The mines have
reserves of 400mn tonnes and will be used for the West Bengal project.
Chilean mines: JSW Steel has acquired a 70% stake in Chilean iron ore mines. The remaining stake is held by a
local partner. The mines are spread over an area of 26,000 hectares, of which around 1% of the area is being
explored. The total reserves in the area explored are 1500mn tonnes with a 25% Fe grade. After beneficiation, the
reserves would be 150mn tonnes with a 63.5% Fe grade. The company expects the production to start from
December 2010 with year 1 having 1mn tonnes of volumes and year 2 with 2mn tonnes of volumes. The said
volumes will be produced through the dry process beneficiation. The mining and the beneficiation will be outsourced
and is expected to have a FOB cost US$ 55 per tonne. 22
The company also plans to set up a wet process beneficiation plant that will help it increase the output to 5mn
tonnes a year (2mn tonnes through the dry process and 3mn tonnes through the wet process). The total capex to set
up the beneficiation is US$ 100mn, of which US$ 40mn has already been spent. The plant is expected to commence
operations by FY13. The in-house beneficiation is expected to reduce the FOB cost for the additional 3mn tonnes to
US$ 45 per tonne. The company intends to sell the iron ore produced from Chilean mines to enjoy the freight
arbitrage.
Coking coal mines, USA: The company has recently acquired coking coal mines in USA with reserves of 146mn
tonnes of Semi-Hard Coking coal. Of the total reserves, 45mn tonnes are in the area where the drilling activity has
undertaken. The mine also has a railway load out and a barge facility. One of the mines is already under operation,
whereas the company has asked for permits to operationalise the other mines. The mine is expected to start
production from December 2010 with first-year production of a million tonnes, a delay of 2 months on account of
delay in getting permits. The production is expected to ramp up by 1mn tonnes a year, until it reaches 3mn tonnes.
However, we have not assumed the full production in our estimates. The landed cost to the company is
expected to be US$ 150 per tonne in India.
Rohne coal block: JSW Steel has been allocated the Rohne coal block in Jharkhand with total reserves of 250mn
tonnes of coking coal. The company plans to commence land acquisition for the same. Total land requirement is
1250 hectares, a part of which is forest land. JSW Steel has a 69% stake in the block, while the rest is held by
Bhushan Power & Steel (24%) and Jai Balaji Industries (7%). The company expects to get clearances and start
production by the end of FY12. Full-year production will be 8mn tones, of which JSW’s share is 5.6mn tonnes. The
output from the mine is to be used for the Vijaynagar and the Jharkhand facility. Total capex for the mine is
estimated at Rs 500–Rs 600 crore, of which Rs 50 crore has been currently spent. However, the mine falls in the
NO GO area and this could delay approvals for the mine. Hence, we have not assumed any benefit from the
block. We will factor in the benefit once JSW gets the approvals for the mine.
Kulti/Sitarampur Mines: The said mines have been allotted to the West Bengal Mineral Development Corporation
(WBMDC), which, in turn, will supply the coking coal to the West Bengal Steel project. The supply of coal to the
project is likely on a cost plus basis. The two mines have total reserves of 420mn tonnes of coking coal. The
commissioning of the mines is expected to be along with the commissioning of phase 1 of the West Bengal project.
Increasing integration levels safeguard the company from volatility in the raw material prices, apart from a
significant jump in profitability.
23
JFE collaboration—Technology, cost savings and more in store

JSW Steel had entered into a strategic collaboration agreement with JFE Steel Corporation in November 2009 to
come together and leverage each others’ strengths for mutual benefit. The areas covered under the agreement
were:
1. Collaboration for automotive steel production which would include supplying the required technology,
2. Production of steel products other than automotive steel,
3. Energy reduction programmes,
4. Environmental programmes,
5. Quality and yield improvement programmes,
6. Performance audit of JSW facilities,
7. Benchmarking of techno-economic parameters,
8. Procurement of raw materials in and outside India,
9. Building up the integrated West Bengal Steel project, and
10. Mutual stock holding.
Taking ahead the collaboration agreement, the two companies have signed definitive agreements in various areas
mentioned above. JSW and JFE have announced a 14.99% stake sale by JSW Steel to JFE Steel Corporation,
along with a lot of other initiatives on the operational front. JFE will have an option to always retain its holding in the
company to 14.99% in the event of JSW Steel diluting its equity, going forward.
Deal structure: JFE Steel Corporation infused Rs 4800 crore in the form of a Fully Convertible Debentures (FCD)
into JSW Steel which is recently converted into equity shares at a price of Rs 1500 per share. Conversion at Rs
1500 per share will see an inflow of Rs 5700 crore into the company (4mn additional shares to be issued to JFE to
take its stake to 14.99% and 2mn additional shares to help retain the 14.99% stake, post the FCCB conversions) as
against an inflow of Rs 5100 crore had the conversion happened at Rs 1331 per share.
CAPITAL-RAISING FROM JFE
NO OF SHARES AMOUNT RAISED (RS CRS) @

(MN SHARES) RS 1500 RS 1331
32 4800
INITIALLY
36 4800
4 600
ADDL ISSUE TO GET 14.99% STAKE
- -
2 300
ON FCCB CONVERSION
2 300
5700 5100
Foreign collaboration agreement for automotive steel: The two companies have entered into an agreement for
licensing JFE’s automotive steel technology to JSW Steel. The company will manufacture various products for the
automotive market using the technology supplied by JFE. This will help JSW to increase its focus on the fast-growing
automotive market that currently accounts for around 10% of the company’s revenues. JFE will also supply the
substrate materials required for the manufacture of automotive steel till JSW does not absorb the technology to
manufacture the same. JFE will send in a team of engineers to the company’s Vijaynagar facility, which will be
followed by a trial trade, and then the regular substrate supply. The supply is expected to start early next year with
an annual volume of 100,000 tonnes. Both the companies are also expected to jointly market products to the
Japanese auto makers at a later stage.
24
General technical assistance agreement: JSW and JFE have also entered into a general technical assistance
agreement wherein, JFE will assist JSW with various operational parameters which will help reduce JSW’s cost of
production. This will help JSW bridge the gap between its production cost with that of JFE. JFE’s cost of
production is around US$ 430 per tonne as against around US$ 510 per tonne for JSW Steel. However, we do
not assume any benefits of the same in our numbers. The major areas shortlisted under the agreement are:
1. Energy reduction/Environment protection.
2. Improvement in production process and yield, and
3. Production capacity analysis and indices benchmarking.
JSW will pay a royalty of Rs 100 crore over a period of ten years to JFE for the automotive technology and
the technical assistance provided.
West Bengal Project: In addition to the above, JSW and JFE are currently negotiating a stake sale in the West
Bengal project. However, the talks are at a very nascent stage. The stake sale would help the company partly meet
the financing needs of the project. Availability of land for the project has been one of the major drivers for JFE to look
at the project.
Mutual Stock Holding: The 1st step towards the mutual stock holding was JFE Steel Corporation picking up a
14.99% stake in JSW Steel. JSW Steel will consider picking up a stake in JFE Steel over a period of 2 years. The
stake will be limited to 5% currently.
Collaboration with JFE will not only help JSW to cater to the automotive steel market, but will also allow it to
improve its quality and efficiency, resulting in reduction of production cost. The two companies are further
looking to partner themselves for various raw material and steel (West Bengal) projects that could
significantly benefit the company, going forward.
25
Cost focus and changing product mix—Improving margins

Apart from increasing its integration levels, JSW Steel also has a focus on improving its margins through a better
product mix, increasing productivity levels and focus on controlling/reducing costs. This also includes signing of the
General Technical Assistance Agreement with JFE. Further, the company is setting up captive power plants,
beneficiation plants, and increasing the Hot strip mill capacity along with the integrated 3.2nm tonnes Blast Furnace
expected to be commissioned by March 2011. However, we have not assumed any significant benefit on
account of the same in our estimates.
OPERATING PROFIT (US$/TONNE)
300
250
US$
200
150
100
FY05 FY06 FY07 FY08 FY09 FY10 Q1FY11 FY11E FY12E
Source: Company, MF Global India Research Estimates
Product mix: JSW is reducing the proportion of Semis in the overall sales, leading to a better margin. Semis as a
percentage of sales have reduced from 21.8% in FY10 to 9% in Q1FY11. The drop is on account of the
commissioning of 1.8mn tonnes Hot Strip Mill in March 2010. We expect that to increase marginally in FY12 to
10.3% on account of the commissioning of the 3.2mn Blast Furnace. However, the increase is only marginal due to a
simultaneous commissioning of a 3mn tonne Hot Strip Mill.
PRODUCT MIX
Flats Longs
60%
Semis Value added
51.9%
51.3%
50%
40.6% 43.1%
40%
32.2%
30% 34.9% 34.9% 29.1%
31.6% 30.7%
21.8%
20% 15.9% 18.9%
13.3%
8.6% 15.3%
10% 9.0%
8.5% 8.6%
0.0%
0%
FY07 FY08 FY09 FY10 Q1FY11
26
Cost control/Reduction: JSW Steel is undertaking various activities which would help it lower the operating costs
per tonne. The company has already set up a 10mn tonne beneficiation plant that will be scaled up to 20mn tonnes.
The beneficiation plants (2x500 tonnes per hour) are likely to be commissioned by October 2010 and April 2011.
Commissioning of the beneficiation plants allows the company to buy iron ore of the lower grade and beneficiate the
same to the higher Fe content. This is likely to lower its raw material costs. At full capacity, the plants are expected
to meet the iron ore requirements of the expanded steel capacity.
The company also significantly benefits from the ban on iron ore exports from Karnataka. JSW bought 58% Fe
content iron ore at distressed prices (Rs 1050-Rs 1100 per tonne). JSW buys 40% of its iron ore requirements from
the spot markets. Assuming the company buys the entire spot market requirement from the Karnataka miners, it is
likely to save around Rs 275 crore on a quarterly basis. This accounts for around 9% of the profits estimated for
FY11.
BENEFIT ON ACCOUNT OF THE BAN ON IRON ORE EXPORTS FROM KARNATAKA (ASSUMED ON QUARTERLY NUMBERS)
STEEL PRODUCTION (MN TONNES) 1.6

IRON ORE REQUIREMENT 2.7
SPOT MARKET PURCHASES (A) 1.1
MARKET PRICE (RS / TONNE) 4000
CURRENT COST INCL BENEFICIATION (RS / TONNE) 1500
SAVINGS PER TONNE (RS) (B) 2500
BENEFIT (RS CRS) (A) X (B) 272.0
The benefit is expected to continue as long as the ban is in place or the miners run out of their inventories and stop
producing. The miners have significantly reduced their production, but it is still good enough for JSW Steel to meet
its requirements. The company has been buying the ore since the start of August 2010 after the ban was introduced
in July 2010. As the timing and the quantum is difficult to estimate, we have not assumed the same in our
numbers.
JSW Steel is also setting up 2x300MW captive power plants at its Vijaynagar facility that will meet the power needs
of the existing capacity as well as the expansion underway. The plants are expected to be commissioned by March
2011 and will see a sharp increase in captive power generation in FY12. Outside power requirement as a
percentage of power consumed is expected to fall from 43.5% in FY10 to 19.8% in FY12 after the plants commence
operations.
BENEFIT ON ACCOUNT OF THE BAN ON IRON ORE EXPORTS FROM KARNATAKA (ASSUMED ON QUARTERLY NUMBERS)
50% Pow er purchased as a% of requirement Pow er as a % of sales 7%

Power & fuek as a % of sales
As a % of power consumed
7%
40%
6%
30%
6%
20%
5%
10%
5%
0% 4%
FY06 FY07 FY08 FY09 FY10 FY11E FY12E
27
JSW Steel has also been able to improve the employee productivity over the years, which has helped it contain the
employee cost over a period. Larger sized plants and better technologies have enabled the company improve the
productivity per employee.
EMPLOYEE PRODUCTIVITY
Output per Employee (tonnes) Employee Cost as a % of Sales

800 2.5%
750 2.4%
700
2.3%
650
2.2%
600
2.1%
550
2.0%
500
450 1.9%
400 1.8%
FY06 FY07 FY08 FY09 FY10
Higher productivity and the focus on costs have helped the company have one of the lowest conversion costs within
the industry.
CONVERSION COSTS PER TONNE—COMPARATIVE
250
200
150
US$
100
50
0
JSW Steel SAIL Tata Steel
Lower conversion costs amongst peers have given the company a competitive edge, despite lower integration levels.
This, along with better yields, has helped the company leapfrog to the 2nd rank from the 7th earlier in the ranking of
top-35 steel makers done by World Steel Dynamics. Expansions, location in high-growth markets and labour costs
were the other major reasons for the upgrade in the ranking. The company was next only to POSCO.
28
TOP-10 STEEL MAKERS BY WORLD STEEL DYNAMICS
COMPANY SCORE RANK

POSCO 7.53 1
JSW STEEL 7.3 2
NUCOR 7.25 3
SAIL 7.23 4
CSN 7.23 5
NLMK 7.16 6
TATA / CORUS 7.1 7
USIMINAS 7.09 8
SEVERSTAL 7.05 9
GERDAU 7.01 10
JSW is expected to benefit from the changing product mix as well as its focus on reducing costs through
various measures. The focus on cost control, thereby lower conversion costs, helps the company be
competitive enough, despite lower raw material integration levels vis-à-vis its peers.
29
Improving balance sheet - provides the next leg of growth

The JFE deal and the promoter warrants (when converted) have significantly helped the company reduce its
leverage. These two factors will cumulatively lead to a cash inflow of around Rs 7800 crore which will help the
company significantly de-leverage its balance sheet. The inflows will see the leverage reduce from 1.7x in FY10 to
0.5x by FY12.
FUND-RAISING
RS MN FY11E FY12E TOTAL

WARRANTS 5294 15881 21175
JFE STAKE SALE 54000 - 48000
ADDITIONAL SHARES ISSUED TO MAINTAIN 14.99% STAKE * 2662 2662
TOTAL AMOUNT RAISED 59294 18543 77837
* - On conversion of FCCBs
DEBT:EQUITY
2.5
2.0
1.5
1.0
0.5
0.0
The leaner balance sheet will help the company finance its next leg of growth i.e. West Bengal project and
Jharkhand project taking the total capacity to 32 nm tonnes. The company is also negotiating with JFE for a stake
sale in the West Bengal project which will further help the company ease its funding requirements.
Lower working capital requirements has also aided the company improve leverage alongwith the equity infusions.
The company’s net working capital days have gone into the negative territory since the past couple of years
relatively easing the working capital requirements. Net working capital days have reduced from 20 days in FY06 to a
negative 47 days in FY10.
30
WORKING CAPITAL DAYS
Inventory Debtor Creditor Net Working Capital

200 181
150 134
104
100 97 85
63
55 50 53
50 41 43 52
Days
15 10 11 10
14 11
0
19
9
-6
-50
-43 -47
-100
-87
-150
A stronger balance sheet will help the company finance its next leg of growth, apart from helping it sustain
the downturn in a commodity cycle.
31
Valuations
JSW Steel, India’s 2nd largest steel maker and largest in the private space, would see its volumes grow with the
commissioning of the 3.2 mn tonnes blast furnace at Vijaynagar. The company’s collaboration with JFE Steel
Corporation will help the company enter into the league of top global steel makers. The stake sale to JFE Steel
Corporation has not only de-leveraged the company but has also readied it for the next leg of capacity growth in
West Bengal and Jharkhand. Increasing raw material integration and a focus on cost control will see a sustained
profit growth for the company.
At the CMP of Rs 1318, the stock trades at a P/E of 15.5x FY11E EPS of Rs 84.8 and 10.0x FY12E EPS of Rs
131.4. The stock trades at an Ev/Ebidta of 8.5x FY11E and 5.9x FY12E. We arrive at a value of Rs 1398 for JSW
Steel on a SOTP basis comprising of its steel business and the investment held in JSW Energy. We initiate
coverage on the stock with a Neutral rating and a target price of Rs 1398, implying an upside of 6.1%.
VALUATION TABLE
RS MN BASIS FY12
STEEL BUSINESS EV/EBIDTA
EBIDTA 74484
MULTIPLE 6
ENTERPRISE VALUE 446906
LESS: NET DEBT 96655
MARKET CAP 350251
PER SHARE 1369
ADD:
INVESTMENTS IN JSW ENERGY CMP LESS 20% DISCOUNT 30
TARGET PRICE 1398
CMP 1318
% UPSIDE 6.1%
32
Absolute Rolling Valuation Band Charts
PE BAND PBV BAND
3000 Rs 3500
Rs
20x
2500 3000 3.2x
15x 2500
2000
2.4x
2000
1500
10x
1500 1.6x
1000
5x 1000
500 0.8x
500
0 0
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07
08
09
10
06
07
08
09
10
r-
r-
r-
r-
r-
r-
r-
r-
r-
r-
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
MCAP/SALES BAND EV/EBIDTA BAND
600000 Rs mn 1000000
Rs mn
1.6x 12x
500000
800000
400000 1.2x 9x
600000
300000
0.8x 6x
400000
200000
0.4x 200000 3x
100000
0 0
06
07
08
09
10
06
07
08
09
10
r-
r-
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r-
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r-
r-
r-
r-
r-
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
EV/SALES BAND
900000 Rs mn
800000 2.4x
700000
600000 1.8x
500000
400000 1.2x
300000
200000 0.6x
100000
0
06
07
08
09
10
r-
r-
r-
r-
r-
Ap
Ap
Ap
Ap
Ap
33
Value Drivers
SALES AND ASSET TURNOVER EBITDA AND EBITDA MARGIN
Net Sales, Rs mn (LHS) Asset Turnover, x (RHS) EBITDA, Rs mn (LHS)

90,000 EBITDA margin, % (RHS) 30
350,000 1.20
300,000 1.00 75,000 25
250,000
0.80 60,000 20
200,000
0.60 45,000 15
150,000
0.40 30,000 10
100,000
50,000 0.20 15,000 5
0 0.00 0 0
FY08 FY09 FY10 FY11E FY12E FY08 FY09 FY10 FY11E FY12E
NOPLAT AND OPFCF ECONOMIC PROFIT
NOPLAT, Rs mn OPFCF, Rs mn Avg invested capital, Rs mn (LHS)

60,000 WACC, % (RHS)
400,000 ROIC, % 14
40,000
12
20,000
300,000
10
0
8
-20,000
200,000
-40,000 6
-60,000 4
100,000
-80,000 2
-100,000
0 0
FY08 FY09 FY10 FY11E FY12E
34
Financials
INCOME STATEMENT

NET SALES 124,567 159,348 189,572 233,326 324,560
GROWTH, % 46 28 19 23 39
OTHER INCOME 0 0 0 0 0
TOTAL INCOME 124,567 159,348 189,572 233,326 324,560
OPERATING EXPENSES -89,786 -129,530 -148,865 -181,978 -250,076
EBITDA (CORE) 34,780 29,818 40,707 51,348 74,484
GROWTH, % 30.4 (14.3) 36.5 26.1 45.1
MARGIN, % 27.9 18.7 21.5 22.0 22.9
DEPRECIATION -7,419 -9,878 -12,987 -14,860 -19,024
EBIT 27,361 19,941 27,720 36,488 55,460
GROWTH, % 26.1 (27.1) 39.0 31.6 52.0
MARGIN, % 22.0 12.5 14.6 15.6 17.1
INTEREST PAID -5,730 -11,556 -11,080 -9,744 -7,785
OTHER NON-OPERATING INCOME 1,537 2,717 5,360 960 1,008
NON-RECURRING ITEMS 1,075 -7,948 0 0 0
PRE-TAX PROFIT 24,100 3,270 22,111 27,821 48,805
TAX PROVIDED -7,658 -726 -6,467 -9,250 -15,519
PROFIT AFTER TAX 16,442 2,544 15,643 18,571 33,286
NET PROFIT 16,400 2,749 15,976 18,919 33,618
MF NET PROFIT 15,326 10,697 15,976 18,919 33,618
GROWTH, % 17.5 (30.2) 49.3 18.4 77.7
NET PROFIT (ADJUSTED) 15,326 10,697 15,976 18,919 33,618
EXTRAORDINARY ITEMS: GAINS/(LOSSES) 1,075 -7,948 0 0 0
UNADJ. SHARES (M) 187 187 187 223 256
WTD AVG SHARES (M) 187 187 187 223 256
CASH FLOW

PRE-TAX PROFIT 24,100 3,270 22,111 27,821 48,805
DEPRECIATION 7,419 9,878 12,987 14,860 19,024
CHG IN WORKING CAPITAL 9,163 26,220 -7,734 -674 -2,467
TOTAL TAX PAID -5,265 -476 -2,388 -5,880 -13,497
OTHER OPERATING ACTIVITIES 2,505 -3,626 -1,358 -100 -122
CASH FLOW FROM OPERATING ACTIVITIES 37,922 35,265 23,618 36,027 51,743
CAPITAL EXPENDITURE -114,264 -80,623 -17,271 -70,281 -40,000
CHG IN INVESTMENTS -2,246 730 -2,316 37 -1,399
CHG IN MARKETABLE SECURITIES 0 0 0 0 0
OTHER INVESTING ACTIVITIES 0 0 0 0 0
CASH FLOW FROM INVESTING ACTIVITIES -116,653 -79,777 -19,476 -70,128 -41,277
FREE CASH FLOW -78,731 -44,512 4,141 -34,102 10,467
EQUITY RAISED/(REPAID) 1,774 0 0 54,007 36,597
DEBT RAISED/(REPAID) 79,513 44,140 -3,871 -12,070 -34,033
DIVIDEND (INCL. TAX) -3,114 -268 -2,120 -2,610 -2,994
OTHER FINANCING ACTIVITIES 0 0 0 0 0
CASH FLOW FROM FINANCING ACTIVITIES 80,051 44,890 -6,204 39,676 -100
NET CHG IN CASH 1,320 378 -2,063 5,575 10,367
35
BALANCE SHEET
AS AT 31ST MAR, RS MN FY2008 FY2009 FY2010 FY2011E FY2012E

CASH & BANK 4,715 5,093 3,030 8,605 18,973
MARKETABLE SECURITIES AT COST 0 0 0 0 0
DEBTORS 5,391 3,991 6,964 9,589 13,338
INVENTORY 21,817 29,246 28,667 38,355 53,352
LOANS & ADVANCES 9,086 12,428 16,038 16,840 23,576
OTHER CURRENT ASSETS 198 172 0 0 0
TOTAL CURRENT ASSETS 41,207 50,929 54,700 73,389 109,239
INVESTMENTS 4,696 3,966 6,282 6,245 7,644
GROSS FIXED ASSETS 188,883 231,720 276,912 296,912 421,755
LESS: DEPRECIATION -30,743 -40,798 -53,393 -68,253 -87,277
ADD: CAPITAL WIP 57,708 95,852 69,562 119,843 35,000
NET FIXED ASSETS 215,848 286,775 293,082 348,503 369,478
NON-CURRENT ASSETS 0 0 0 0 0
TOTAL ASSETS 261,751 341,670 354,063 428,137 486,361
CURRENT LIABILITIES 43,402 81,799 78,078 90,393 113,270

PROVISIONS 3,662 829 2,649 2,774 2,913
TOTAL CURRENT LIABILITIES 47,064 82,628 80,727 93,168 116,183
NON-CURRENT LIABILITIES 136,770 181,160 181,369 172,668 140,657
TOTAL LIABILITIES 183,834 263,788 262,096 265,836 256,840
PAID-UP CAPITAL 1,871 1,871 1,871 2,231 2,559

RESERVES & SURPLUS 74,129 73,280 87,911 157,884 224,775
SHAREHOLDERS’ EQUITY 77,917 77,882 91,968 162,301 229,521
TOTAL EQUITY & LIABILITIES 261,751 341,670 354,063 428,137 486,361
PER-SHARE DATA
FY2008 FY2009 FY2010 FY2011E FY2012E

MF EPS (INR) 81.9 57.2 85.4 84.8 131.4
GROWTH, % 3.0 (30.2) 49.3 (0.7) 54.9
BOOK NAV/SHARE (INR) 416.6 416.4 491.7 727.6 896.8
FDEPS (INR) 81.9 57.2 85.4 84.8 131.4
CEPS (INR) 115.9 152.5 154.8 151.4 205.7
CFPS (INR) 181.9 192.8 104.3 157.1 198.2
DPS (INR) 14.0 1.0 9.5 10.0 10.0
FINANCIAL STRUCTURE
FY2008 FY2009 FY2010 FY2011E FY2012E

TOTAL DEBT/EQUITY (%) 159.5 216.2 178.9 93.9 51.6
NET DEBT/EQUITY (%) 153.4 209.7 175.6 88.6 43.3
36
PROFITABILITY, PRODUCTIVITY, LIQUIDITY AND VALUATION RATIOS
FY2008 FY2009 FY2010 FY2011E FY2012E

RETURN ON ASSETS (%) 10.3 3.3 6.5 6.3 8.4
RETURN ON EQUITY (%) 23.7 13.7 18.8 14.9 17.2
RETURN ON INVESTED CAPITAL (%) 12.0 6.7 7.6 8.3 11.3
ROIC/COST OF CAPITAL (X) 1.3 0.7 0.8 0.9 1.3
ROIC - COST OF CAPITAL (%) 2.5 (2.9) (2.0) (0.9) 2.5
RETURN ON CAPITAL EMPLOYED (%) 12.4 4.2 8.5 8.1 10.8
COST OF CAPITAL (%) 9.5 9.7 9.6 9.2 8.8
ROCE - COST OF CAPITAL (%) 2.9 (5.5) (1.1) (1.1) 2.0
ASSET TURNOVER (X) 0.8 0.7 0.7 0.8 1.0

SALES/TOTAL ASSETS (X) 0.6 0.5 0.5 0.6 0.7
SALES/NET FA (X) 0.8 0.6 0.7 0.7 0.9
WORKING CAPITAL/SALES (X) (0.1) (0.2) (0.1) (0.1) (0.1)
FIXED CAPITAL/SALES (X) - - - - -
RECEIVABLE DAYS 15.8 9.1 13.4 15.0 15.0
INVENTORY DAYS 63.9 67.0 55.2 60.0 60.0
PAYABLE DAYS 176.4 230.5 191.4 181.3 165.3
CURRENT RATIO (X) 0.9 0.6 0.7 0.8 1.0
QUICK RATIO (X) 0.4 0.3 0.3 0.4 0.5
INTEREST COVER (X) 4.8 1.7 2.5 3.7 7.1
DIVIDEND COVER (X) 5.9 57.2 9.0 8.5 13.1
PER (X) 16.1 23.0 15.4 15.5 10.0

PEG (X) - Y-O-Y GROWTH 5.3 (0.8) 0.3 (22.6) 0.2
PRICE/BOOK (X) 3.2 3.2 2.7 1.8 1.5
YIELD (%) 1.1 0.1 0.7 0.8 0.8
EV/NET SALES (X) 2.9 2.6 2.2 1.9 1.3
EV/EBITDA (X) 10.5 13.7 10.0 8.5 5.9
EV/EBIT (X) 13.4 20.6 14.7 12.0 7.9
EV/NOPLAT (X) 13.5 14.1 11.9 10.4 7.4
EV/CE 1.7 1.6 1.5 1.3 1.2
EV/IC (X) 2.4 1.8 1.6 1.5 1.3
37
DHAWAL DOSHI
[email protected]
SAPNA SHAH
[email protected]
METALS | STEEL
SAIL SAIL IN: NEUTRAL
| Large becoming larger RS 220
Investment Rationale TARGET RS 218 (-0.8%)

» SAIL is nearly doubling its existing capacity by FY13 placing the company in
the league of top global steel producers. The company will become one of SECTOR RATING
OW N UW
the top 10 steel manufacturers globally from 16th position in 2009.
» Changing product mix will reflect higher value addition in SAIL’s product
STOCK RATING
basket. The expansion programme will eliminate semis from its product mix. BUY NEUTRAL SELL
SAIL’s focus on the Longs segment will benefit the company as most of the
competitors are expanding their capacities in the Flats segment. > 15% -15% TO +15% < -15%
» Productivity improvements and increasing efficiencies will see the production
COMPANY DATA
costs go down. Lower conversion costs along with raw material integration
O/S SHARES : 4130MN
will make the company competitive vis-à-vis peers. MARKET CAP (RS) : 910BN
» SAIL is expanding its raw material capacities (iron ore, coking coal and MARKET CAP (USD) : 20.6BN
52 - WK HI/LO (RS) : 259 / 155
limestone) to cater to the increased requirements post expansion. The
company is evaluating organic as well as inorganic options to increase the FACE VALUE (RS) : 10
integration levels.
» Strong balance sheet not only helps the company support the huge SHARE HOLDING PATTERN, %
PROMOTERS : 85.8
expansion plan but also helps it weather any economic downturns.
FII / NRI : 4.4
Risks FI / MF : 7.4
» 1. Raw Material price risk, 2. Execution risk. NON PROMOTER CORP. HOLDINGS : 0.5
PUBLIC & OTHERS : 1.9
Valuation
» At the CMP of Rs 220, the stock trades at 14.2x FY11E EPS of Rs 15.4 PRICE PERFORMANCE, %
and 11.1x FY12E EPS of Rs 19.9. It trades at an Ev/Ebidta of 8.4x 1MTH 3MTH 1YR
FY11E and 6.1x FY12E. We initiate coverage on the stock with a ABS 8.0 10.0 19.8
Neutral rating and a target price of Rs 218. REL TO BSE 4.8 -2.3 2.7

180
NET SALES 395,085 432,041 405,514 443,313 482,690
GROWTH, % 16.5 9.4 -6.1 9.3 8.9 150
EBIDTA 105,714 83,774 90,798 104,919 142,866
EBIDTA MARGINS, % 26.8 19.4 22.4 23.7 29.6 120
CORE EBIDTA 105,714 83,774 90,798 104,919 142,866
NET PROFIT 75,355 61,667 67,312 63,771 82,211 90
NET PROFIT MARGIN, % 19.1 14.3 16.6 14.4 17.0
60
EPS, RS 18.2 14.9 16.3 15.4 19.9
EPS GROWTH, % 21.2 (18.2) 9.2 (5.3) 28.9 30
PER, X 12.1 14.7 13.5 14.2 11.1
EV/EBIDTA, X 7.6 9.6 9.4 8.4 6.1 0
EV/NET SALES, X 2.0 1.9 2.1 2.0 1.8 Apr-08 Dec-08 Aug-09 Apr-10
PRICE/BOOK VALUE, X 4.0 3.2 2.7 2.4 2.0
SAIL Rel. to BSE
ROIC, % 32.0 19.5 16.7 15.1 17.3
ROE, % 37.5 24.1 21.9 17.8 19.7 Source: Bloomberg, MF Global India Research
38
mfglobal.com
18/10/2010 MF GLOBAL INITIATING COVERAGE | SAIL
INVESTMENT OVERVIEW
SUSTAINABLE COMPETITIVE ADVANTAGE 100% IRON ORE INTEGRATION HELPS THE COMPANY MAINTAIN A LOW COST OF PRODUCTION
FINANCIAL STRUCTURE DEBT EQUITY OF 0.5X IN FY10, EXPECTED TO INCREASE TO 0.6X BY FY12 DESPITE OF THE STRONG CAPEX
SHAREHOLDER VALUE CREATION COMMISSIONING OF THE HUGE EXPANSION PROGRAMME AND ACQUISITION OF COKING COAL MINES
EARNINGS VISIBILITY EPS EXPECTED TO IMPROVE FROM RS 14.9 IN FY10 TO RS 19.8 BY FY12
VALUATION AT THE CMP OF RS 220, THE STOCK TRADES AT 11.1X FY12E EPS OF RS 19.9 AND AN EV/EBIDTA OF 6.1X FY12E.
MF VS. CONSENSUS EPS OF RS 19.9 FOR FY12 AS AGAINST A CONSENSUS ESTIMATE OF RS 19.3
FUTURE EVENT TRIGGERS STEEL PRICE HIKE AND ACQUISITION OF A COKING COAL MINE
EXPECTED PRICE MOMENTUM (0.8%)
Rating and Price Target

At the CMP of Rs 221, the stock trades at 14.3x FY11E EPS of Rs 15.4 and 11.1x FY12E EPS of Rs 19.9. It trades
at an Ev/Ebidta of 8.5x FY11E and 6.1x FY12E. We initiate coverage on the stock with a Neutral rating and a
target price of Rs 218.
39
Key Risks
Raw Material price risk: SAIL’s dependence on the 3rd parties for its coking coal requirement exposes it to the
fluctuations in the coking coal prices. The company has been impacted by the jump in coking coal price during the
current year. SAIL is working towards securing the coking coal supplies. The company is developing the Tasra and
Sitnala blocks which will give around 4.75 mn tonnes ROM production and 2.45 mn tonnes of washed coal. However
the same is expected to commence operations after 3 – 4 years from now.
Execution risk: SAIL has embarked on Rs 807bn expansion programme to increase its steel and associated mining
capacities. It is expanding its crude steel capacity from 14.5 mn tonnes to 26.2 mn tonnes and the saleable steel
capacity from 12.6 mn tonnes to 23.1 mn tonnes. Delays in the expansion plans will significantly impact the
company’s operations and Balance sheet.
Assumptions

SALES VOLUMES (MN TONNES) 11.9 12.9
STEEL PRICE (US$ / TONNE) 650 650
IRON ORE COST (RS / TONNE) 833 875
COKING COAL COST (US$ / TONNE) 225 235
40
INVESTMENT THESIS
Capacity expansion – will place it as one of the top global steel manufacturing companies
SAIL has embarked upon a capacity expansion plan which will see the company become one of top 10 crude steel
producers globally from the 16th position currently. The company is expanding its hot metal capacity from 14.5 mn
tonnes to 26.2 mn tonnes, crude steel capacity from 14.5 mn tonnes to 24.6 mn tonnes and the saleable steel
capacity from 13.5 mn tonnes to 23.1 mn tonnes.
TOP CRUDE STEEL PRODUCERS GLOBALLY (2009)
90 77.5
75
60 Post Expansion
mn tonnes
45
31.3 31.1
26.5 25.8 24.6
30 20.5 20.5 20.1 16.7
15.3 15.2 15.1 14.2 14 13.7 13.5
15
0
POSCO
JFE
Tata Steel
US Steel
Nippon Steel
Jiangsu Shagang
Gerdau
Nucor
Evraz
Arcelor Mittal
Baosteel
Severstal
SAIL *
Shougang
Wuhan
SAIL
Ansteel

* - Expanded Crude Steel Capacity
Existing expansion plans: SAIL is expanding capacities on a brownfield basis and is expected to commission the
same in FY2013 except for IISCO which commissions by Nov 2011 and Salem which is commissioned in August
2010. IISCO commissioning is delayed by 3 – 4 months as against the earlier commissioning in June 2011.
CAPACITY EXPANSION
(MN TONNES) HOT STEEL SALEABLE STEEL COMMISSIONING

CURRENT EXPANDED CURRENT EXPANDED
MAIN STEEL PLANTS
BHILAI STEEL PLANT (BSP) 5.4 7.5 4.4 6.5 MAR-13
DURGAPUR STEEL PLANT (DSP) 2.2 3.5 1.9 2.8 DEC-12
ROURKELA STEEL PLANT (RSP) 2.3 4.5 2.0 4.0 DEC-12
BOKARO STEEL PLANT (BSL) 4.1 7.4 3.5 6.5 DEC-12
IISCO STEEL PLANT (ISL) 0.5 2.9 0.4 2.4 NOV-11
SPECIAL STEEL PLANTS

ALLOY STEEL PLANT (ASP) 0.0 0.0 0.2 0.4
SALEM STEEL PLANT (SSP) 0.0 0.0 0.2 0.3 COMMISSIONED
VISVESVARYA IRON & STEEL (VISL) 0.1 0.3 0.1 0.2
14.5 26.2 12.6 23.1
The total capex including the modernization, value addition, de-bottlenecking and raw material augmentation is
around Rs 807bn. Of the above the company has already spent Rs 208bn and placed orders for Rs 440bn. The
above capex is to be funded with debt equity of 1:1.
41
CAPEX
(RS BN) SPENT ORDERS PLACED TO BE ORDERED TOTAL

BSP 32.1 89.7 83.0 204.8
DSP 4.1 10.5 18.3 32.8
RSP 32.0 93.8 24.3 150.2
BSL 29.1 37.9 25.3 92.4
ISP 84.1 143.7 0.7 228.5
SSP 16.1 19.0 0.0 35.1
OTHERS 10.8 45.4 7.4 63.6
208.3 440.0 159.0 807.4
SAIL is also planning to develop its Jagdishpur unit in a phased manner after the acquisition of assets of Malvika
Steel in Feb 2009 for Rs 209crs. The company has planned a capacity of 150000 tonnes of TMT bars, 13000 tonnes
of Crash Barriers Steel and 10000 tonnes of Galvanised Corrugated Sheets. The company is also setting up a
475MW gas based power plant at the unit. The company will utilize around 300MW of the same and sell the balance
quantity.
Future plans: SAIL is evaluating reviving Fertiliser Corporation of India’s (FCI) Sindri unit in a JV with FCI. The unit
has 6000 acres of land and will house a 5 mn tonnes steel plant and 1.15 mn tonnes fertilizer plant. The total capex
planned for the unit is around Rs 300 – 350bn. SAIL has sent a proposal with regards to the revival. The
development will take a long time before it materially impacts the company.
SAIL has entered into a strategic alliance with POSCO to set up a 1.5 mn tonnes steel plant using POSCO’s
patented FINEX technology. The plant is expected to have an investment of around Rs 150bn and is proposed to be
set up at SAIL’s Bokaro facility. Feasibility studies for the same are currently on post which definitive agreements will
be signed. POSCO is likely to get a majority stake in the venture, however the % stake is still being negotiated. The
project when commissioned will use atleast 50% of the 40 mn tonnes iron ore fines stored at SAIL’s Gua mines. The
balance fines will be used for captive purposes after the beneficiation plant commences operations and for the
proposed iron ore nuggets venture with Kobe Steel. SAIL and POSCO have also signed a MOU for the feasibility
studies for commissioning a CRNO Steel.
SAIL is also in discussions with Japan’s Nippon Steel to collaborate for better technologies in Steel and related
areas.
The expansion programme will help the company position itself as one of the top 10 producers of crude
steel globally. Further the revenues are expected to almost double once the capacities are fully operational.
The company is also considering global tie ups to get access to new and better technologies apart from
reducing the learning curve.
42
Changing product mix – moving towards higher value addition

Commissioning of the expansion plans would also see a sharp improvement in the value addition done by the
company. The share of value added products will increase in the overall sales mix while that of Semis would reduce
to Nil. Semis as a % of sales stood at 18.9% in FY2010 and are currently at 11% in Q1FY2011.
SEMIS AS A % SALES
25%
19.9%
19.5% 18.9%
20%
17.2% 18.9%
18.1% 17.7%
15% 15.9%
10%
11.0%
5%
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Q1FY11
DSP sells the highest proportion of semis in its product basket at 65% followed by BSP at 23.4%. This has led to the
unit earning lower margins vis-à-vis others. DSP has earned average segmental margins of around 12% from FY04
to FY10 as against a 20% plus average margins for the other units like BSP, RSP and BSL over the same period.
UNITWISE SEMIS AS A % SALES – FY10
UNIT
BSP 23.4%
DSP 64.9%
RSP 1.0%
BSL 1.2%
ISP 20.5%
UNIT WISE PBIT MARGINS
40% BSP DSP RSP BSL

35%
30%
25%
20%
15%
10%
5%
0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10
43
The expansion programme will help the company improve its margins as semis are replaced by finished products.
SAIL is focusing on increasing its exposure towards the longs segment by replacing the semis with the longs. Also
the new product additions planned by the company are targeted more towards the longs segment. Focus on longs
segment will benefit the company as the demand for the same increases with the increasing infrastructure spends
and most of the other players targeting the new capacities in the Flats segment. Both Tata Steel and JSW Steel are
expanding its 2.9 mn tonnes and 3.2 mn tonnes expansion respectively in the flats segment.
PRODUCT MIX
Product m ix - Current Product m ix - Post Expansion
Semis
20%
Longs
46%
Flats
Flats
54%
56%
Longs
24%
Improving the product mix will see an improvement in the margin profile for the company. Focus on Long
products in the new product launches will benefit the company as most of the other expansion coming into
the Flat segment.
44
Productivity and efficiency improvements – help increasing margins

SAIL is focusing on productivity and process improvements to reduce its production costs. In addition to the annual
cost savings programmes of the company, the modernization cum expansion plan will see various process
improvements thereby reducing costs. SAIL achieved overall cost savings of Rs 1029crs in FY10 on account of the
initiatives like optimization of coal blend, reduction in the specific energy consumption, lower coke rate, higher blast
furnace productivity, lower power consumption, etc. The company expects such measures to continue to garner
further cost savings. We have not assumed any conversion cost reductions in our estimates as reflected from
the chart below.
CONVERSION COSTS
12000
11000
10000
Rs / tonne
9000
8000
7000
6000
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

Note: The conversion costs are calculated after excluding the impact on account salaries and wages revision due to the 6th Pay Commission
Employee cost and power costs are the areas in addition to the coke rate rationalization which the company plans to
reduce in order to control its conversion costs. Improvement in employee productivity and head count reduction will
help the company reduce the employee costs. Currently SAIL employs around 116000 people which the company is
planning to reduce to 100000 by end 2012. VRS and natural attrition will help the company reduce its headcount.
Employee productivity has improved from 214 tonnes per man per annum in FY08 to 229 tonnes per man per annum
as shown in the chart below.
EMPLOYEE PRODUCTIVITY
235
Tonnes per man per annum
230
229
225
226
220
215 214
215
210
205
FY08 FY09 FY10 Q1FY11
45
SAIL has also reduced its specific energy consumption helping it curtail the power costs. Specific energy
consumption has come down from 7.16 G Cal per tonne of crude steel in FY2007 to 6.72 G Cal per tonne of crude
steel in FY10. The company further plans to reduce the same to 5.5 G Cal per tonne of crude steel with the
implementation of the modernization cum expansion programme.
SPECIFIC ENERGY CONSUMPTION (G CAL / TONNE)
7.5 7.16
6.95
7.0 6.74 6.72
6.5
6.0
5.5
5.5
5.0
4.5
4.0
FY07 FY08 FY09 FY10 Target
The modernization programme will see increased production from the superior technology as against the old
technologies currently employed by SAIL. Crude Steel production from the Twin Hearth Furnace route (majorly in
BSP and ISP) will be curtailed significantly by increasing the production from the BOF process. Similarly the saleable
steel production will be reduced through the Ingot Casting route (all units except RSP) by increasing the production
from Continuous Casting route. This will lead to a significant reduction in the energy costs for the company.
PROCESS MIX
CURRENT POST EXPANSION

TWIN HEARTH PROCESS 23% 0%
INGOT CASTING 33% 0%
SAIL has also reduced the coke rate over the years by optimizing the coal blend for the blast furnaces. Coke rate
has reduced from 541 kgs per tonne of hot metal in FY2007 to 517 kgs per tonne of hot metal in FY2010. The
company expects the same to come down to 450 kgs per tonne of hot metal once the expansion plans are
implemented.
46
COKE RATE
600
541 533
550 521 517
500
Kg / tonne
450
450
400
350
300
FY07 FY08 FY09 FY10 Target
In addition to the above, the company has also planned various technological changes which will see an
improvement in the company’s margin profile. The changes planned vary from raw materials to process and to
finished products segments. A summary of the changes planned are given below:
PROCESS MIX
CURRENT POST EXPANSION

BOF STEEL MAKING 77% 100%
CONTINUOUS CASTING 67% 100%
PELLETISATION PLANT NO YES
COKE DRY QUENCHING NO YES
TOP PRESSURE RECOVERY TURBINE NO YES
AUXILIARY FUEL INJECTION IN BF PARTIAL COVERAGE FULL COVERAGE
DE-SULPHURISATION OF HOT METAL PARTLY 100%
THIN SLAB CASTING - COMPACT STRIP MILL NO YES
BEAM BLANK CASTING NO YES
COUPLED PICKLING & TANDEM MILL NO YES
BENEFICIATION PLANT PARTIAL COVERAGE FULL COVERAGE
The above initiatives once operationalised will see a margin accretion for SAIL. However the same will be
commissioned along with the company’s capacity expansion plans, majority of which will come in FY2013. Hence we
have not assumed any benefit from the same.
SAIL is taking various initiatives to reduce its high conversion costs. The same will make SAIL more
competitive vis-à-vis its competitors due to complete iron ore integration.
47
Raw material integration – expanding to meet the incremental requirements

SAIL’s 100% iron ore integration gives it a competitive edge vis-à-vis its peers despite of its higher conversion costs.
However the company is dependent on 3rd parties for its coking coal requirements except for small existing mines at
Chasnalla, Jitpur and Ramnagore with a production of 0.5 mn tonnes. Iron ore integration has helped the company
be better off vis-à-vis JSW Steel in terms of the raw material costs however is higher than Tata Steel India
operations due to no coking coal integration.
RAW MATERIAL COST PER TONNE
600
SAIL JSW Steel Tata Steel
500
US$ per tonne
400
300
200
100
0
SAIL plans to increase its coking coal integration and is considering various organic as well as inorganic means to
do the same. The company is also expanding its iron ore mining capacity to meet the increased requirements of the
expanded steel capacities. SAIL has earmarked Rs 100bn for the capex plan which will see the capacities expand
for iron ore as well as coking coal. The capex is a part of the overall capex programme of Rs 807bn
Iron ore: SAIL’s current iron ore requirement of 23 mn tonnes is currently met from its 7 mines in Jharkhand and
Orissa. The installed capacity of the mines is 19 mn tonnes however the current production is higher than the rated
capacity.
IRON ORE MINES
MINES STATE RATED CAPACITY (IN MT)

MEGHAHATUBURU JHARKHAND 4.3
KIRIBURU JHARKHAND 4.3
BOLANI ORISSA 4.2
GUA JHARKHAND 2.4
BARSUA ORISSA 2.0
KALTA ORISSA 1.1
MANOHARPUR (CHIRIA) JHARKHAND 0.7
19.0
Capacities for Meghahatuburu, Kiriburu, Bolani, Gua and Barsua mines are being expanded to take the total mining
capacity to 43 mn tonnes which will cater to the iron ore requirements post expansion. The mines will be expanded
alongwith the corresponding steel capacities. In addition to the existing mines, SAIL is also developing the Chiria and
Rowghat mines which will help the company meet the requirement for future expansions.
The Rowghat mines will have an initial capacity of 12 mn tonnes however will take atleast 5 years to develop the
same. Overall cost of developing the mine is Rs 35bn and will cater to the requirements at BSP. Total reserves at
the Rowghat mines stand at 650 mn tonnes. Chiria mines will be developed over 5 – 6 years and phase I will have a
48
capacity of 7 mn tonnes. Chiria mines currently have reserves of 1 bn tonnes with 62% Fe content. SAIL will be
alloted additional reserves of 1 bn tonnes in the Chiria mines based on the utilisation plan for the proposed 12 mn
tonnes greenfield project at Jharkhand. The said mines will help the company meet its iron ore requirement of 100
mn tonnes for the expanded steel capacity of 60 mn tonnes by 2020. The capex requirement for the Chiria mines is
not yet finalised.
Iron ore value addition projects: SAIL is taking various steps to better utilise the iron ore fines produced from its
various mines. SAIL is increasing its beneficiation capacities, setting up pelletisation plants and has also signed a
MOU with Kobe Steel to set up an iron nugget plant, apart from the steel plant with POSCO using the FINEX
technology which directly uses the iron ore fines.
Post expansion, the company will be able to beneficiate the entire quantum of fines generated as against a partial
beneficiation currently. The company also plans to beneficiate 50% of the 40 mn tonnes iron ore fines stocked up for
captive purposes & for the iron ore nugget plant proposed with Kobe Steel. SAIL is setting up a 4 mn tonnes
pelletisation plant at its Gua mines and is also proposing smaller size pellet plants at the existing units. The smaller
plants will have a capacity of around 0.5 to 1 mn tonnes.
SAIL has signed a MOU with Kobe Steel for setting up iron nugget plant using Kobe Steel’s patented ITmK3
technology. Feasibility studies for the same are currently on. The 2 companies are likely to sign a JV agreement by
the year end for setting up an iron nugget plant with a capacity of 500000 tonnes at a cost of around Rs 50bn. The
plant will use low grade iron ore to produce high Fe content iron nuggets. The nuggets would have Fe content of
around 92%. The same will be used in electric arc furnaces and will be utilised for ASP.
Coking Coal: SAIL currently has total coking coal reserves of 250 mn tonnes of medium grade coking coal, one
operational mine and 2 under development mines. The operational mines at Chasnalla and Jitpur have production
capacity of 0.5 mn tonnes and total reserves of around 50 mn tonnes (Chasnala – 40 mn tonnes and Jitpur – 16 mn
tonnes). The company plans to expand the same however nothing is yet crystallised. The company also has thermal
coal reserves of 150 mn tonnes at its Ramnagore mine.
SAIL is also developing the Tasra coal block (100 mn tonnes reserves) and Sitanala coal block (108 mn tonnes
reserves) which are expected to commence operations over the next 3 – 4 years. Tasra coal block will produce 4 mn
tonnes ROM coal which will give a washed coal production of 2 mn tonnes. The block has currently started
production of 10000 tonnes per month. The balance production is likely to commence in the next 3 years. SAIL is in
the process of appointing a contractor which will do the rehabilitation and resettlement along with the operation of the
mine. Sitanala block is expected to have a production capacity of 0.75 mn tonnes ROM coal thereby giving 0.4 mn
tonnes of washed coal. It is likely to commence operations within 4 years from now. Once operational, SAIL will have
10% of its coking coal requirement of the expanded capacity from the 2 mines. Capex for developing the said blocks
is around Rs 1500crs.
SAIL has entered into different JVs with Tata Steel and other government PSUs to acquire coking coal assets in
India and abroad. While the venture with Tata Steel, S & T Mining, will look to bid for abandoned coal blocks of Coal
India, the venture with other government PSUs, International Coal Ventures Ltd (ICVL), will look to acquire coking
coal assets in the overseas markets. ICVL is currently scouting for coal assets and coal companies in Australia,
USA, Indonesia, South Africa and Mozambique.
Other materials: SAIL also has captive mines for limestone and dolomite which partly meet the company’s flux
requirements. The company has 2 limestone mines, 1 each in Jharkhand and Madhya Pradesh, having a rated
capacity of 1.9 mn tonnes and 1 dolomite mine in Jharkhand having a rated capacity of 0.3 mn tonnes.
49
LIMESTONE & DOLOMITE MINES
MINES STATE RATED CAPACITY (IN MT)

KUTESHWAR (LIMESTONE) MADHYA PRADESH 1.1
BHAWANATHPUR (LIMESTONE) JHARKHAND 0.8
TOTAL 1.9
TULSIDAMAR (DOLOMITE) JHARKHAND 0.3
SAIL has signed a MOU with NMDC to jointly develop the Limestone mine at Arki in Himachal Pradesh. The mine
will have a production capacity of 3 mn tonnes. Post commencement of the mines, SAIL will have a captive source
for its entire limestone requirements. Feasibility studies for the same are currently on.
Increasing coking coal integration and expansion of the iron ore mines makes the company more
competitive vis-à-vis its global peers. It also reduces the volatility in earnings on account of the raw material
price swings.
50
Strong balance sheet – helps fund the growth

SAIL’s strong balance sheet has seen the company through the financial crisis and also supports the huge capex
programme to almost double its steel making capacity by FY2013. The company plans to fund the expansion
programme (Rs 807bn) through debt equity of 1:1. Despite of the strong expansion plans the debt equity for the
company is expected to be below 1x. The debt equity will further reduce after the company’s FPO. SAIL plans to
dilute 10% of its equity capital in 2 tranches. The fund raising will not only see the debt equity reduce significantly but
also help finance SAIL’s next leg of expansion to 60 mn tonnes by 2020.
DEBT EQUITY
2.0
1.7
1.5
1.0
0.6 0.5 0.5 0.6

0.5
0.3 0.3
0.2
0.1
0.0
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E
Strong operating cash flow has helped the company keep maintain a lower debt equity ratio. Higher profitability due
to iron ore integration and a negative working capital cycle have helped the company generate strong operating cash
flows over the years. Operating cash flows will further see a jump once the expansions go on stream.
OPERATING CASH FLOW PER SHARE
35
30
25
18.8
20 17.1
15 12.0 12.5
11.5
10.3
10 6.2
5
Good working capital management has helped the company maintain a negative working capital cycle over the
years, providing a good source of funding for the company. However the inventory days has seen a jump on account
of the increasing raw material prices. This has been offset on account of increased creditors for capital expenditure.
51
WORKING CAPITAL CYCLE
Inventory Debtors Creditors Net Working Capital

100
80
60
40
Days
20
0
-20
-40
-60
Negative working capital and a low debt equity has helped the company earn strong return ratios. However the same
has been on a decline due to the increasing cash on the books. Cash per share has increased from Rs 5 per share
in FY04 to Rs 54 in FY10. We expect the cash per share to increase to Rs 70 by FY12 despite of the ongoing capex.
RETURN RATIOS
50% ROE ROCE Cash per share 80
70
40%
60
30% 50
40
20% 30
20
10%
10
0% 0
FY06 FY07 FY08 FY09 FY10 FY11E FY12E
A strong balance sheet has helped the company weather the economic downturns. It also supports the huge
expansion plans which will place the company in the global league.
52
Valuations
SAIL is poised to be one of the top 10 crude steel producers globally with the commissioning of its expansion cum
modernization programme. However majority of the benefits would be realized from FY2013 onwards except for the
commissioning of ISP plant in Q3FY12. The company is expected to have flat volumes till FY12. The programme
would also see the margins increasing with improving product mix & productivity and superior technology. 100% iron
ore integration on the expanded capacity safeguards the margins from the volatility in the quarterly iron ore prices.
At the CMP of Rs 220, the stock trades at 14.2x FY11E EPS of Rs 15.4 and 11.1x FY12E EPS of Rs 19.9. It trades
at an Ev/Ebidta of 8.4x FY11E and 6.1x FY12E. We initiate coverage on the stock with a Neutral rating and a
target price of Rs 218.
VALUATION TABLE
RS MN FY12
EBIDTA 142866
MULTIPLE 6
LESS: NET DEBT -43956
MARKET CAP 901152
TARGET PRICE 218
CMP 220
% UPSIDE / DOWNSIDE -0.8%
53
PE BAND PBV BAND
300 Rs 500 Rs
14x
4x
400
10x 3x
200
300
2x
6x 200
100
1x
100
2x
0
0
03
04
05
06
07
08
09
10
03
04
05
06
07
08
09
10
r-
r-
r-
r-
r-
r-
r-
r-
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
r-
r-
r-
r-
r-
r-
r-
r-
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
2,000,000 Rs mn 1,400,000 Rs mn
3.5x 1,200,000 8x
1,600,000
1,000,000
6x
1,200,000 10x
800,000
600,000 4x
800,000 6x
400,000
2x
400,000
2x 200,000
0 0
03
04
05
06
07
08
09
10
03
04
05
06
07
08
09
10
r-
r-
r-
r-
r-
r-
r-
r-
r-
r-
r-
r-
r-
r-
r-
r-
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
EV/SALES BAND
1,600,000 Rs mn
1,200,000 2.4x
10x
800,000
6x
400,000
2x
0
03
04
05
06
07
08
09
10
r-
r-
r-
r-
r-
r-
r-
r-
Ap
Ap
Ap
Ap
Ap
Ap
Ap
Ap
54
Value Drivers

180,000 EBITDA margin, % (RHS) 35
600,000 2.50
150,000 30
500,000
2.00
25
400,000 120,000
1.50 20
300,000 90,000
15
1.00
200,000 60,000
10
0.50 30,000
100,000 5
0 0.00 0 0
100,000 NOPLAT, Rs mn OPFCF, Rs mn Avg invested capital, Rs mn (LHS)

500,000 WACC, % (RHS) 35
80,000 ROIC, %
450,000
60,000 30
400,000
40,000
350,000 25
20,000 300,000
20
0 250,000
15
-20,000 200,000
150,000 10
-40,000
100,000
-60,000 5
50,000
-80,000
0 0
55
Financials
INCOME STATEMENT

NET SALES 395,085 432,041 405,514 443,313 482,690
GROWTH, % 16 9 -6 9 9
TOTAL INCOME 395,085 432,041 405,514 443,313 482,690
OPERATING EXPENSES -289,371 -348,267 -314,715 -338,394 -339,824
EBITDA (CORE) 105,714 83,774 90,798 104,919 142,866
GROWTH, % 17.7 (20.8) 8.4 15.6 36.2
MARGIN, % 26.8 19.4 22.4 23.7 29.6
DEPRECIATION -12,355 -12,878 -13,372 -15,543 -21,249
EBIT 93,359 70,896 77,426 89,376 121,618
GROWTH, % 20.1 (24.1) 9.2 15.4 36.1
MARGIN, % 23.6 16.4 19.1 20.2 25.2
INTEREST PAID -2,509 -2,594 -4,020 -6,153 -8,129
OTHER NON-OPERATING INCOME 23,825 25,649 27,682 13,841 11,073
NON-RECURRING ITEMS 13 38 232 0 0
PRE-TAX PROFIT 114,687 93,989 101,320 97,063 124,562
TAX PROVIDED -39,320 -32,285 -33,777 -33,293 -42,351
PROFIT AFTER TAX 75,368 61,704 67,544 63,771 82,211
NET PROFIT 75,368 61,704 67,544 63,771 82,211
MF NET PROFIT 75,355 61,667 67,312 63,771 82,211
GROWTH, % 21.2 (18.2) 9.2 (5.3) 28.9
NET PROFIT (ADJUSTED) 75,355 61,667 67,312 63,771 82,211
EXTRAORDINARY ITEMS: GAINS/(LOSSES) 0 0 0 0 0
UNADJ. SHARES (M) 4,130 4,130 4,130 4,130 4,130
WTD AVG SHARES (M) 4,130 4,130 4,130 4,130 4,130
CASH FLOW

PRE-TAX PROFIT 114,687 93,989 101,320 97,063 124,562
DEPRECIATION 12,355 12,878 13,372 15,543 21,249
CHG IN WORKING CAPITAL 4,979 876 -2,245 19,786 39,025
TOTAL TAX PAID -37,760 -34,639 -32,960 -32,322 -41,105
OTHER OPERATING ACTIVITIES 705 2,289 46 0 0
CASH FLOW FROM OPERATING ACTIVITIES 94,966 75,393 79,535 100,070 143,730
CAPITAL EXPENDITURE -24,001 -61,820 -111,236 -120,000 -110,000
CHG IN INVESTMENTS -244 -1,145 -161 -87 -13
CASH FLOW FROM INVESTING ACTIVITIES -24,245 -62,965 -111,397 -120,087 -110,013
FREE CASH FLOW 70,721 12,428 -31,862 -20,017 33,717
EQUITY RAISED/(REPAID) 0 0 0 0 0
DEBT RAISED/(REPAID) -11,353 45,176 89,484 40,000 45,000
DIVIDEND (INCL. TAX) -17,872 -12,552 -15,906 -14,498 -14,498
CASH FLOW FROM FINANCING ACTIVITIES -29,224 32,624 73,579 25,502 30,502
NET CHG IN CASH 41,496 45,052 41,717 5,486 64,219
56
BALANCE SHEET

CASH & BANK 137,594 182,647 224,364 229,849 294,068
DEBTORS 30,481 30,278 34,939 36,437 33,061
INVENTORY 68,572 101,612 90,275 85,019 79,346
LOANS & ADVANCES 23,798 22,072 33,431 31,032 28,961
OTHER CURRENT ASSETS 2,731 10,150 7,803 8,584 9,442
INVESTMENTS 5,382 6,527 6,688 6,775 6,789
GROSS FIXED ASSETS 309,227 328,524 353,962 379,102 607,102
ADD: CAPITAL WIP 23,896 65,497 150,261 245,121 127,121
NET FIXED ASSETS 139,609 188,551 286,414 390,871 479,622
TOTAL ASSETS 408,167 541,836 683,914 788,567 931,290

PROVISIONS 67,978 94,506 62,117 68,328 75,161
PAID-UP CAPITAL 41,304 41,304 41,304 41,304 41,304

TOTAL EQUITY & LIABILITIES 408,167 541,836 683,914 788,567 931,290
PER-SHARE DATA
FY2008 FY2009 FY2010 FY2011E FY2012E

MF EPS (INR) 18.2 14.9 16.3 15.4 19.9
GROWTH, % 21.2 (18.2) 9.2 (5.3) 28.9
FDEPS (INR) 18.2 14.9 16.3 15.4 19.9
CEPS (INR) 21.2 18.0 19.5 19.2 25.0
CFPS (INR) 17.1 11.5 12.5 20.9 32.1
DPS (INR) 3.7 2.6 3.3 3.0 3.0
FINANCIAL STRUCTURE
FY2008 FY2009 FY2010 FY2011E FY2012E

NET DEBT/EQUITY (%) (46.6) (38.0) (17.8) (6.5) (9.8)
57
FY2008 FY2009 FY2010 FY2011E FY2012E

RETURN ON ASSETS (%) 20.7 13.3 11.4 9.2 10.2
RETURN ON EQUITY (%) 37.5 24.1 21.9 17.8 19.7
RETURN ON INVESTED CAPITAL (%) 32.0 19.5 16.7 15.1 17.3
ROIC/COST OF CAPITAL (X) 26.1 8.8 4.8 4.1 4.6
ROIC - COST OF CAPITAL (%) 30.8 17.3 13.2 11.4 13.6
RETURN ON CAPITAL EMPLOYED (%) 24.6 15.7 13.5 10.9 12.0
COST OF CAPITAL (%) 1.2 2.2 3.5 3.7 3.8
ROCE - COST OF CAPITAL (%) 23.3 13.4 10.0 7.2 8.2
ASSET TURNOVER (X) 2.1 1.8 1.3 1.1 1.0

SALES/NET FA (X) 3.0 2.6 1.7 1.3 1.1
WORKING CAPITAL/SALES (X) 0.2 0.2 0.1 0.1 0.0
FIXED CAPITAL/SALES (X) - - - - -
RECEIVABLE DAYS 28.2 25.6 31.4 30.0 25.0
INVENTORY DAYS 63.4 85.8 81.3 70.0 60.0
PAYABLE DAYS 37.7 43.0 72.3 78.6 99.4
CURRENT RATIO (X) 4.1 4.5 3.6 3.3 3.2
QUICK RATIO (X) 3.0 3.2 2.7 2.6 2.6
INTEREST COVER (X) 37.2 27.3 19.3 14.5 15.0
DIVIDEND COVER (X) 4.9 5.7 4.9 5.1 6.6
PER (X) 12.1 14.7 13.5 14.2 11.1

PEG (X) - Y-O-Y GROWTH 0.6 (0.8) 1.5 (2.7) 0.4
PRICE/BOOK (X) 4.0 3.2 2.7 2.4 2.0
YIELD (%) 1.7 1.2 1.5 1.4 1.4
EV/NET SALES (X) 2.0 1.9 2.1 2.0 1.8
EV/EBITDA (X) 7.6 9.6 9.4 8.4 6.1
EV/EBIT (X) 8.6 11.3 11.0 9.9 7.1
EV/NOPLAT (X) 12.1 15.6 14.9 12.3 8.6
EV/CE 2.3 1.7 1.5 1.3 1.1
EV/IC (X) 4.2 3.4 2.7 2.3 1.9
58
DHAWAL DOSHI
[email protected]
SAPNA SHAH
[email protected]
METALS | STEEL
Tata Steel TATA IN: NEUTRAL
| A play on macro factors RS 636
Investment Rationale TARGET RS 691 (+8.7%)

» Tata Steel is a play on global growth and is a beneficiary of the economic
recovery. The company has placed and diversified its business model in SECTOR RATING
OW N UW
order to absorb any setbacks in a specific region or segments
» Tata Steel’s European business has seen a significant turnaround due to STOCK RATING
various initiatives like “Weathering the Storm” and “Fit for the Future” BUY NEUTRAL SELL
launched by the company. The unit is also a big beneficiary of the reducing
raw material prices and increasing steel prices in Q3FY11. > 15% -15% TO +15% < -15%
» Tata Steel has picked up stakes in various companies and projects to secure
COMPANY DATA
the raw material supplies for the company. This enables the company to O/S SHARES : 902MN
have a more sustainable business in a volatile raw material pricing MARKET CAP (RS) : 574BN
environment. MARKET CAP (USD) : 13BN
52 - WK HI/LO (RS) : 737 / 434
» Tata Steel’s domestic business is on a strong footing due to the raw material
integration and this is a stabilising factor for the volatile European FACE VALUE (RS) : 10
operations.
Risks SHARE HOLDING PATTERN, %
PROMOTERS : 32.5
» (1) Global economic recovery risk, (2) Raw material price risk, (3) Currency FII / NRI : 17.0
risk, and (4) Execution risk. FI / MF : 26.2
Valuation NON-PROMOTER CORP. HOLDINGS : 3.4
PUBLIC & OTHERS : 20.9
» At the CMP of Rs 636, the stock trades at a P/E of 8.9x FY11E EPS of
Rs 71.2 and 8.0x FY12E EPS of Rs 79.3. It trades at an Ev / Ebidta of PRICE PERFORMANCE, %
7.0x FY11E and 5.9x FY12E. We initiate coverage on the stock with a 1MTH 3MTH 1YR
Neutral rating and a target price of Rs 691, an upside of 8.7%. ABS 5.4 24.4 10.7
REL TO BSE 2.2 12.0 -6.4

160
NET SALES 1,315,359 1,473,293 1,023,931 1,112,105 1,179,869
GROWTH, % 421.7 12.0 -30.5 8.6 6.1 140
EBIDTA 179,931 181,277 80,427 153,339 180,821 120
EBIDTA MARGINS, % 13.7 12.3 7.9 13.8 15.3
100
NET PROFIT 62,255 49,509 -20,092 64,237 72,517
NET PROFIT MARGIN, % 4.7 3.4 -2.0 5.8 6.1 80
NET PROFIT (ADJUSTED) 62,255 49,509 -20,092 64,237 72,517
60
EPS, RS 85.3 67.8 (22.7) 71.2 79.3
EPS GROWTH, % 52.2 (20.5) (133.4) (414.2) 11.4 40
PER, X 7.5 9.4 (28.1) 8.9 8.0 20
EV/EBIDTA, X 5.6 5.8 12.8 7.0 5.9
EV/NET SALES, X 0.8 0.7 1.0 1.0 0.9 0
PRICE/BOOK VALUE, X 1.6 2.1 2.4 1.9 1.6 Apr-08 Oct-08 Apr-09 Oct-09
ROIC, % 19.5 11.4 (56.3) 9.5 10.3 Tata Steel Rel. to BSE
ROE, % 28.1 19.1 (8.6) 23.8 21.7
59
mfglobal.com
18/10/2010 MF GLOBAL INITIATING COVERAGE | TATA STEEL
INVESTMENT OVERVIEW
SUSTAINABLE COMPETITIVE ADVANTAGE GLOBAL PRESENCE AND A TURNAROUND OF THE EUROPEAN OPERATIONS.
FINANCIAL STRUCTURE DEBT:EQUITY IS EXPECTED TO REDUCE FROM 2.3X IN FY10 TO 1.4X IN FY12.
SHAREHOLDER VALUE CREATION SUSTAINABILE PROFITS FROM THE EUROPEAN OPERATIONS AND LIQUIDATION OF GROUP INVESTMENTS TO
IMPROVE THE BALANCE SHEET STRUCTURE.
EARNINGS VISIBILITY CONSOLIDATED PROFITS EXPECTED TO JUMP FROM A LOSS OF RS 20092MN IN FY10 TO A PROFIT OF RS 71546MN
BY FY12.
VALUATION AT THE CMP OF RS 636, THE STOCK TRADES AT A P/E OF 8.0X FY12E EPS OF RS 79.3 AND AN EV / EBIDTA OF 5.9X
FY12E.
MF GLOBAL VS. CONSENSUS FY12 EPS OF RS 79.3 AS AGAINST CONSENSUS OF RS 78.3
FUTURE EVENT TRIGGERS STEEL PRICE HIKES, ACQUISITION OF COAL MINES, FALLING RAW MATERIAL PRICES
EXPECTED PRICE MOMENTUM 8.7%
Rating and price target

At the CMP of Rs 636, the stock trades at a P/E of 8.9x FY11E EPS of Rs 71.2 and 8.0x FY12E EPS of Rs 79.3. It
trades at an Ev / Ebidta of 7.0x FY11E and 5.9x FY12E. We initiate coverage on the stock with a Neutral rating
and a target price of Rs 691, an upside of 8.7%.
60
Key Risks
Global economic recovery risk: Tata Steel derives around 2/3rd of its volumes from the global markets. Any dip in
the economic recovery could significantly impact the global operations of Tata Steel and bring the strong current
momentum to a halt. The company is expanding its capacities in India from 6.8mn tonnes to 10mn tones, which will
reduce its exposure to the global markets to 50%. However, the expansion is not expected to make any significant
impact to the company’s operations in FY12.
Raw material price risk: Tata Steel’s European operations are fully exposed to the fluctuations in iron ore and coking
coal prices. Any sharp movements in price could significantly affect Tata Steel’s profitability. The company’s
profitability is expected to be impacted in Q2FY11 on account of the higher raw material prices, but softening prices in
Q3FY11 should cushion the profits. Tata Steel is taking various measures to address this issue and has picked up
stakes in various raw material projects (Riversdale and New Millennium Mining projects) and is further evaluating
other assets. However, the benefits from these measures will be seen only FY13 onwards.
Currency risk: Tata Steel has operations across the globe, exposing it to various currencies. Any significant
movement in the currency markets could have a positive or a negative impact on the company’s currencies. A sharp
appreciation in dollar against the other currencies during Q1FY11 led to a loss of £ 20mn.
Execution risk: Tata Steel has huge expansion plans for its domestic business. The company is expanding on a
brownfield basis (2.9mn tonnes expansion), in addition to the greenfield projects in Orissa and Chhattisgarh. Any
delay in execution of these projects could stretch its balance sheet.
Assumptions

VOLUMES (MN TONNES)
- STANDALONE 5.7 6.3
- CORUS 15.0 15.9
REALISATION (US$ / TONNE) 650 650
CORUS – EBIDTA PER TONNE 48 73
61
INVESTMENT THESIS
Robust business model—De-risked region and sector risk
Tata Steel has evolved its business model to proxy the trend in the global growth. The correlation is strongly evident,
as reflected in the chart below, after the company acquired the European steel maker, Corus, to make it the 6th largest
steel maker globally. Recent run-up in the price reflects the correlation with global growth after the fears of a double-
dip recession started fading away.
CO-RELATION WITH THE GLOBAL ECONOMY
Consolidated Profit Grow th * Net sales grow th *

Global GDP Grow th EU GDP Grow th
500% 12%
10%
400%
8%
Global GDP growth

300%
Corus acquisition 6%
200% 4%
100% 2%
0%
0%
-2%
-100%
-4%
-200% -6%
2003 2004 2005 2006 2007 2008 2009
Source: Company, IMF, MF Global India Research

* - 2003 indicates FY2004 and onwards
Tata Steel has a well-diversified regional exposure, which helps it mitigate the risk of a downturn in a specific region.
Europe accounts for around 50% of its revenues, followed by India, which has a 24% share in the revenues. Although
the company has a large exposure to European markets, it is restricted to less than 5% in the weaker PIGS markets.
UK accounts for 18% of the revenues, followed by Netherlands accounting for 5.1% share in the revenues.
REGION-WISE EXPOSURE
Australia Thailand Others

Vietnam 0.3% UK
3.5% 8.8%
China 0.3% 17.6%
1.4%
Singapore Netherlands
1.9% 5.1%
India
23.7%
Australia Other EU members

0.3% Africa 26.2%
2.0%
Central / South Rest of North USA Rest of Europe
America 2% America 0% 3.4% 3.3%
62
In addition to the regional diversification, Tata Steel also has diverse end consumer exposure for its European arm,
thereby reducing the risk of a downturn in a particular segment. The company’s European unit’s maximum exposure is
towards the construction segment at 16% of its revenues, followed by the Auto sector, which accounts for around 11%
of the revenues in FY10.
END CONSUMER EXPOSURE – CORUS
SECTOR % OF REVENUE
CONSTRUCTION 16%
AUTOMOTIVE 11%
PACKAGING 10%
SEMI-FINISHED 5%
RAIL 3%
MATERIALS HANDLING 4%
ENERGY & POWER 4%
GENERAL INDUSTRY 19%
INDEPENDENT STOCKHOLDERS 25%
OTHERS 3%
TOTAL 100%
The demand from most of the sectors, except construction, has been improving. The construction segment
has recently shown some uptick (as shown in the chart below), however, it needs to be seen whether this
uptick can be sustained, going forward.
EUROPEAN CONSTRUCTION INDEX
-5
-10
-15
-20
-25
-30
-35
-40
Jan-08
Mar-08
May-08
Jul-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-08
Sep-09
Sep-10
Our European Construction Analyst is not optimistic about the demand from the construction segment and expects it
to be weak in H2CY10. The view is also supported by EuroConstruct downgrade of the demand outlook from the
sector in 2010; however 2011 is expected to see some improvement. (See charts below)
63
EUROCONSTRUCT CONSTRUCTION OUTPUT FORECAST - 2010
15 Nov 09E EuroConstruct

10 June 10E EuroConstruct
5
0
-5
-10
-15
-20
LARGEST UPGRADE LARGEST DOWNGRADE
-25
-30
Denmark
United Kingdom
Eastern Europe
The Netherlands
Germany
Portugal
Euroconstruct Countries
Czech Republic
Finland
Poland
Belgium
Slovakia
France
Ireland
Hungary
Italy
Spain
Austria
Norway
Switzerland
Sweden
Western Europe
Source: EuroConstruct, MF Global India Research
EUROCONSTRUCT CONSTRUCTION OUTPUT FORECAST - 2011
20 Nov 09E EuroConstruct

LARGEST UPGRADE Jun 10E EuroConstruct LARGEST DOWNGRADE
15
10
-5
-10
Finland
Italy
Belgium
Denmark
The Netherlands
Switzerland
Germany
Western Europe
Euroconstruct Countries
Norway
Hungary
Austria
Sweden
Czech Republic
United Kingdom
Portugal
France
Slovakia
Eastern Europe
Poland
Spain
Source: EuroConstruct, MF Global India Research
The demand from the automobiles segment has been strong during the year with the total global auto production
growing by 37.2% yoy during H1CY10. European auto has seen a yoy growth of 21.3% during H1CY10. Going
forward, our European Auto Analyst expects demand from the segment to slow down on a sequential basis in
H2CY10 on account of the discontinuance of the incentives schemes by various nations. However, this situation is
expected to improve in CY2011.
64
AUTO GROWTH
60% World auto European Auto
40%
20%
YoY growth
0%
-20%
-40%
-60%
Q1-09
Q2-09
Q3-09
Q4-09
Q1-10
Q2-10
Q3-10
Q4-10
Q1-11
Q2-11
Q3-11
Q4-11
Global recovery has helped the company improve its utilisation levels on a sequential basis. The capacity utilisations
on a quarterly basis have improved from 53% in Q1FY10 to 80% in Q4FY10 and is at 90% currently in Q1FY11.
TATA STEEL’S EUROPE QUARTERLY VOLUMES
7.0
6.4
6.0
5.6
* - After shutdow n of
mn tonnes
5.0 Teeside facility
4.3 4.0
4.0 3.9 3.7
3.6 3.7
3.1
3.0
2.0
Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 * Q4FY10 * Q1FY11 *
We expect Tata Steel Europe’s capacity utilisation to improve to 85% (excluding the Teeside Cast Products (TCP)
facility) in FY11 and FY12 from 68% in FY10. The utilisations levels in FY12 will be impacted on account of the repairs
and refurbishment work to be undertaken at the Port Talbot facility. The work on the facility is expected to start in
FY11 and will be concluded by mid CY12. The drop in production will be met by the slab supply from the TCP facility
(negotiations currently on). Production loss is expected to be around 0.8mn tonnes. After completion of the work, the
plant’s capacity will increase marginally by 0.4mn tonnes.
65
TATA STEEL’S EUROPE’S VOLUMES
Deliveries Capacity Utilisation

25 100%
95.8%
22 22.8 85.0% 90%

85.4%
19.0
mn tonnes
19 80%
67.9%
16 74.5% 70%
15.9
15.0
13 14.2 60%
10 50%
Tata Steel’s business model is well placed and structured to benefit from the global economic recovery.
Further, the regional and the end-consumer diversification will help the company absorb any minor setbacks
in the respective regions.
66
European margins—Improving by the day

Tata Steel Europe has seen its margins improve from Q3FY10 (as shown in the chart below) after the operations were
impacted on account of the financial crisis. The company had launched two programmes, that is, “Weathering the
Storm” and “Fit for the Future” to help the company reduce overheads and improve productivity. The cost reduction
measures, coupled with a sequential decline in raw material costs (iron ore and coking coal), for Q3FY11 will see the
margin improvement trend continue for the company. Strong steel prices will further add to margin improvement.
The company launched the two programmes to counter the impact of the downturn and the losses from TCP on
account of long-term offtakers unilaterally terminating contracts. “Weathering the Storm” was directed towards
immediate cost savings whereas “Fit for the Future” was directed towards long-term competitiveness. These two
programmes have given the company cost savings of around US$ 1.5bn till date and contributed to headcount
reductions of 5800 people. The cost savings achieved is far in excess of the target of US$ 1.2bn.
Tata Steel partially mothballed the TCP facility after incurring an EBIT loss of US$ 222mn during H1FY10 due to low
offtake and high raw material costs. The same has resulted in job losses for 1410 employees, out of a total of 2500
employees. Tata Steel is now in negotiations with Thailand-based Sahviriya Steel Industries (SSI) to sell its
mothballed TCP facility for around US$ 500mn. The deal is expected to be concluded before the end of FY2011. The
two companies are also negotiating on supply of coke and slabs from TCP to the Port Talbot facility and utilisation of
the Red Car Terminal at TCP for logistics.
In addition to the above, the company has launched initiatives like “Customer First” and supply chain management to
further improve operational performance. The initiatives are likely to reduce working capital requirements for the
company and also improve customer service. The programmes have been currently launched for the Longs product
division.
TATA STEEL EUROPE – EBIDTA PER TONNE
250
200
150
100
US$
50
-50
-100
-150
Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11
Q2FY11 is expected to see a contraction in margins on account of the higher contracted raw material costs (coking
coal: US$ 225/tonne and iron ore: US$ 145/tonne) and lower steel prices in July and August. However, the situation is
expected to change in Q3FY11 with steel prices firming up and the contract for raw materials being entered at lower
rates. Coking coal prices and iron ore contracted prices have seen a 5% - 15% correction sequentially in Q3FY11. As
against this, steel prices have started firming up since September 2010, thereby benefitting the non-integrated players
in Q3FY11. However, we have not assumed a significant margin improvement in our estimates. We have an
assumption of US$ 48 per tonne and US$ 73 per tonne as operating profit per tonne for FY2011 and FY2012,
respectively.
67
STEEL PRICES
European HRC World HRC Price tracker

650 800
600 750
550 700
Euro / tonne
US$ / tonne
500 650
450 600
400 550
350 500
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
May-10
Jun-10
Jul-10
Sep-09
Sep-10
Apr-10
Aug-10
Lower steel production from China and Europe has been a major reason for the firm steel prices. China has seen a
production decline of around 60mn tonnes on an annual run rate. It has declined 8% to 53.2mn tonnes in Aug 2010
from its recent high of 58.5mn tonnes in April 2010. However, the production cuts in Europe have been far more
significant with an annual run rate of 50mn tonnes. It has declined 21.8% from 19.2mn tonnes in May 2010 to 15mn
tonnes in Aug 2010.
MONTHLY STEEL PRODUCTION (MN TONNES)
Europe China
20 60
57
16
54
12
51
8
48
4 45
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
May-10
Jun-10
Jul-10
Sep-09
Aug-09
Apr-10
Aug-10
Various restrictions imposed by China, coupled with the scrapping of export rebates, has led to a sequential fall in
production. The various restrictions are temporary in nature to help China meet its energy efficiency targets by Dec
2010. In the event of China relaxing its restrictions post December, steel production could see a jump and act as a
dampner on steel prices.
Tata Steel has undertaken various initiatives to sustain its profitability in a downturn. Further, a favourable
operating scenario would see the margins jump, providing a significant operating leverage to the company.
68
Securing raw material supplies for Corus—Key for sustainable growth

Tata Steel’s European operations are more vulnerable to any downturn as against its peers in Europe due to lack of
raw material integration. The company currently sources its entire requirement of iron ore and coking coal from third
parties. This has exposed the company to the risk of fluctuations in raw material prices, apart from a lower profitability
vis-à-vis peers. Lower profitability as against peers is clearly reflected in the chart below where the companies have
the same trend in terms of profitability but Tata Steel Europe earning lower margins.
EUROPEAN STEEL PLAYER MARGINS
300 Ebidta per tonne

Corus Arcelor Mittal
250
200
150
US$
100
50
-50
Tata Steel has taken various initiatives to address the concern of lower margins by picking up stakes in companies
and projects (mentioned below) to secure its iron ore and coking coal supplies. While stake purchases in mining
companies gives the company an indirect hedge against exposure to raw material price fluctuations, a stake purchase
in a project helps the company secure a direct source for raw material supply. Further, the company is scouting
around for other assets in India and abroad on a standalone basis or in a JV with other players to cater to its raw
material requirements.
Iron Ore
New Millennium Capital Corp: Tata Steel has a 27.4% stake in Canada-based New Millennium Capital Corp (NML).
The company has one of the largest undeveloped iron ore deposits in the emerging Millennium Iron range. The range
comprises of two projects, that is, Labmag and Kemag. NML holds a 100% stake in the Kemag project and 80% stake
in the Labmag project. The remaining 20% stake is held by Naskapi Nation of Kawawachikamach. Apart from these,
the company also has a Direct Shipping Ore (DSO) project in which Tata Steel has recently acquired an 80% stake.
Tata Steel also has the right of first refusal to pick up controlling stakes in the Labmag and Kemag project.
LabMag contains 3.5billion tonnes of Proven and Probable reserves with 29.6% Fe grade, 1.0billion tonnes of
Measured and Indicated resources with 29.5% Fe grade and 1.2billion tonnes of Inferred resources with 29.3% Fe
grade; KéMag contains 2.1billion tonnes of Proven and Probable reserves with 31.3% Fe grade, 0.3billion tonnes of
Measured and Indicated resources with 31.3% Fe grade and 1.0billion tonnes of Inferred resources with 31.3% Fe
grade. Pre-feasibility studies for both the projects have been concluded and an annual production of 15mn tonnes of
pellets and 7mn tonnes of concentrate is planned. Existing reserves and resources would see the life of the projects
touch 100 years.
Direct Shipping Ore project: Tata Steel has picked up an 80% stake in NML’s DSO project for around Canadian$
300mn in addition to the reimbursement of 80% of the total costs incurred on the project till date. The company also
has 100% offtake rights in the project. DSO has proved and probable reserves of ~63.5mn tonnes and 11.8mn tonnes
69
of resources. Production is expected to commence from 2012 with an annual production of 4mn tonnes of dry iron ore.
NML has kept a benchmark IRR of 29% before taxes and expects a payback within three years from the date of
commercial production.
Ivory Coast: Tata Steel also has exploration licences for Mt Gao deposits in the Ivory Coast. Exploratory and
feasibility studies are currently on. The project will take a long time for development and is not likely to give any
material benefit in the near future.
Coking Coal
Riversdale Mining: Tata Steel has acquired a 24.21% stake in Australia-based Riversdale Mining Ltd (Sell, PT: 8.53
(AUD$) – covered by MF Global Australia) which has coal assets in South Africa and Mozambique and coal reserves and
resources of 11.9bn tonnes. Riversdale has only one operating mine in South Africa in which it has a 74% stake. The mine
has a production capacity of 0.7mn tonnes of Anthracite coal with total reserves of 11mn tonnes and resources of 50mn
tonnes. The second mine in South Africa is currently in the exploration stage. Mozambique has two tenements (Benga &
Zambeze) with total reserves and resources of 8bn tonnes. Benga is currently under development and is a 65:35 JV with
Tata Steel. Zambeze deposit is currently in the exploration stage. Riversdale has signed an MoU with Wuhan Steel of China
to sell a 40% stake in the Zambeze project for a total consideration of US$ 800mn.
Tata Steel is gradually increasing its stake in the company and has recently increased its stake by 3% to 24.21%. The total
cost of acquiring the 24.21% stake is around AUD$ 400mn. Tata Steel can acquire 3% stake every 6 months through the
creeping acquisition route. Tata Steel is currently the largest shareholder in the company. Other major shareholders include
CSN from Brazil with a 15.6% stake and Passport Capital with 13.8% stake.
Benga Project: Tata Steel has acquired a 35% stake in the Benga project with 40% offtake rights. Benga tenements have
proved and probable reserves of 502mn tonnes and Measured, Indicated and Inferred resources of 4.032bn tonnes.
Production from the mines is expected to be 20mn tonnes Run of the Mine (ROM) coal in three phases. Phase I will see
5.3mn tonnes ROM of production. After washing, it would have 1.7mn tonnes of hard coking coal and 0.3mn tonnes of
thermal coking coal. Phase II will see the production doubling to 10.6mn tonnes ROM and phase III will further double the
production to 20mn tonnes ROM. Phase 1 of the expansion is likely to be completed by FY2013, however, the complete
expansion will depend upon the infrastructure facilities being built and the allocations received from the same. Following is
the excerpt from the Riversdale report by our Australian Metals analyst that mentions the infrastructure to transport coal:
70
INFRASTRUCTURE SUMMARY
There are essentially three infrastructure options being considered. In the near term (1-3 years) Riversdale’s route to
market relies upon the refurbishment of the Sena railway line to Beira Port. One port terminal is currently being refurbished
and allocations have been granted for 2011, with Riversdale having received 32% of 5mtpa (100% basis). A second terminal
will also be built and further rail upgrades will be needed, with the potential for a further 18mtpa. Riversdale is seeking 50%
allocation. All being well by this point (2014) there could be 11mt (100% basis) available for export. Barging down the River
is also being pursued in conjunction with this. To enable the Zambeze Project barging is a necessity and longer term, the
Nacala Port would need to be built and allocations received.
Our view: In our model we assume that Riversdale achieves 35% allocation of the second terminal at Beira. We therefore
assume saleable tons from Benga are 7.9mt from 2014 (versus guidance of 10mt), of which Riversdale’s share (65% basis)
is 5.2mt. We currently do not assume barging goes ahead due to the environmental and social headwinds. We also do not
assume Riversdale ships through the Nacala Port, given it is 5-10 years away and Vale may make it difficult for third parties.
OPTION 1: Rail To Beira Port. The rail haul distance is 575km. Initial stages - The Sena railway is in the final stages of a
full rehabilitation and is due to open to general traffic in 2010, although required signalling and alignment work will delay the
export of coal until 2011. This can handle 6mtpa. The refurbished port terminal 1 (berth number 8) should be able to handle
5mtpa from this time. Mozambique's publicly owned ports and rail company, CFM, on 2nd July signed a memorandum of
understanding with Vale and Riversdale on the use of the existing coal terminal in the port of Beira. 68% will go to Vale and
32% to Riversdale on take or pay contracts. The rail cost is around $30/t to the port, and there are around $5/t loading costs.
This makes it quite an expensive option. A second terminal is being planned at Beira for operation from 2013, which may
take capacity up to 18mtpa. The only major downside to the Beira port is that it is shallow water, and hence it is uncertain
whether it will be able to handle panamax ships. The smaller handymax ships limited in terms of distance and are more
expensive on a per ton basis. Allocation for terminal 2 has not yet been agreed. Riversdale are trying to secure 50%, up
from the 32% they achieved for terminal 1. We assume 35% because there are a number of other players are already
looking for a bite at the cherry by this time.
OPTION 2: Barging down Zambeze River. The barging distance is over 400km. Riversdale is keen to pursue the barging
option and has spent two and half years investigation it. There are four major headwinds that need to be addressed (1)
environmental permits (2) social permits (3) loading onto a ship (4) allocations. Whilst we believe the Government is willing
to promote the barging option, the community is divided. The biggest issue may come with the dredging the upper part of the
River, despite Riversdale expecting to put the ‘few’ million tons displaced back into the River. There could also be erosion of
the river bank. A lot of people live on the river and depend on it for their living. There are marine life and animal habitat
(crocs, hippos!) to consider. The transfer of coal to ships at sea could be a challenge, there some examples of this done in
Indonesia, and there would need to be provisions made for the safe keeping of the barges during adverse weather
conditions offshore. Building the dam for the power station is also a consideration as it may reduce the sediment produced
when the Zambeze floods, which is used for fertiliser for farming.
OPTION 3: Rail To Nacala Port. The rail haul distance is 900-1000km. This encompasses 800km of existing railway line
from the coast of Mozambique into Malawi and the natural deep water Port of Nacala. In October 2009, an agreement was
signed between the Mozambican government, the consortium that operates the Nacala port and railway (Northern
Development Corridor (“CDN”)), and Vale to upgrade the port and railway line infrastructure to handle coal exports from the
Tete province. The objective of the project is to link the town of Moatize to the Nacala railway through Malawi, potentially
requiring an additional 100-200km of new railway. The project will also require upgrading of the existing Nacala-Malawi
railway line and a new multi-user coal terminal at the Port of Nacala. The project is expected to have an initial carrying
capacity of 20 mtpa, although it is believed that this can be further expanded. The construction of this railway line is forecast
to be completed and operational during 2015. The estimated project cost to reach 20mtpa is US$1.6 billion, and no
agreements on financing or allocations have yet been made public. This capex seems quite low in context of other rail and
port expansions. We think there is risk to this number increasing.
71
The infrastructure-related problems are likely to have a bearing on the company in the long term. However, if
Riversdale is able to manage infrastructure issues, there will be significant upsides to the company. We have valued
Tata Steel’s stake in the Benga project, however, we have valued Tata Steel’s stake in Riversdale at market value
less holding company discount.
Securing raw material supplies will not only make the company competitive against its peers, but will also
reduce its volatility and the vulnerability on account of the external environment.
72
Domestic business—On a strong footing

Tata Steel’s domestic operations form the backbone of the company, as it generates more than half of the profits on
consolidated levels (as shown in the chart below). Low cost of operations on account of its raw material integration
has helped the company sail through the financial crisis in 2008. Tata Steel meets 100% of its iron ore requirement
and 50% of the coking coal requirement through its captive mines. The company has one of the highest levels of
coking coal integration in the industry.
STANDALONE PROFITABILITY AS A % OF CONSOLIDATED
120%
111.3%
100%
80% 72.2%
64.6%
60%
50.4%
40% 45.7%
20%
0%
Strong domestic profitability has helped it maintain a dominant share in the company’s profitability, despite its less
than 30% share in the volumes. We expect the share of domestic operations in the total profitability to reduce, going
forward, due to the improving performance of its European unit. The high level of integration captures the entire
movement in the steel prices into its profits as shown in the chart below.
DOMESTIC PROFITABILITY
1000 Realisation Operating profit
900
800
700
US$ / tonne
600
500
400
300
200
Tata Steel is expanding its domestic steel-making from 6.8mn tonnes to 9.7mn tonnes at Jamshedpur, expected to be
commissioned in Q3FY12. Profitability is expected to see a significant jump due to the low cost of operations,
however, the benefit will be visible from FY13 onwards. The expansion would also involve setting up two coke oven
73
batteries of 0.7mn tonnes each, pellet plant of 6mn tonnes and 2.4mn tonnes thin slab casting and rolling mill. The
company will be able to use extra fine iron ore after beneficiation on account of commissioning the pellet plant.
Tata Steel is also working on two greenfield projects in Orissa and Chhattisgarh with a capacity of 6mn tonnes and
5mn tones, respectively. The Orissa project will be set up in two phases of 3mn tonnes each. 3400 acres for the
project is already acquired by the government, however, the company has made ex-gratia payments for 1070 acres.
Of the total 1195 families requiring rehabilitation, the company has already shifted 802 families. The company expects
to commission Phase I by FY2015. The company could also join hands with NMDC for the Chhattisgarh project.
Tata Steel has also signed an MoU with Nippon Steel, Japan’s largest steel maker for setting up a continuous
annealing and processing line at Jamshedpur with a capacity of 0.6mn tonnes. The facility will manufacture cold-rolled
flat products for the automotive sector. Tata Steel is likely to hold 51% in the JV with Nippon Steel holding the
remaining 49%. There are also some media reports that state that the two companies are also considering setting up
a blast furnace.
Tata Steel, in a 50:50 JV with L&T, has recently commissioned the Dhamra port, a deep draught port on a Build, Own,
Operate, Share and Transfer (BOOST) basis from the Government of Orissa. Phase I of 27mn tonnes has recently
been commissioned. The company is likely to see significant savings in the logistics cost due to the commissioning of
the port. We have valued Tata Steel’s investment in the Dhamra port on a P/Bv basis.
Tata Steel’s domestic business is on a strong footing due to raw material integration and is a stabilising
factor for the risky European business.
74
Valuations
Tata Steel has outperformed the benchmark indices and its peers over the past 3 months led by the improvement in
the European unit’s margins and fading fears of a double dip recession. The company’s European operations still
remains susceptible to the fluctuations in the steel and raw material prices as the raw material projects will start
yielding material results from FY2013 onwards. The recent softening of steel prices in Europe and firming up of the
raw material prices could put a halt to the company’s outperformance going forward.
Profitability from the domestic operations is expected to remain steady with the margins moving inline with the steel
prices with not much contribution from its 2.9 mn tonne brownfield expansion in Jamshedpur. The expansion will
commence operations in Q3FY12 and will have a material contribution from FY2013 onwards.
At the CMP of Rs 651, the stock trades at a P/E of 9.1x FY11E EPS of Rs 71.2 and 8.2x FY12E EPS of Rs 79.3. It
trades at an Ev / Ebidta of 7.1x FY11E and 6.0x FY12E. We arrive at a value of Rs 700 for Tata Steel on a SOTP
basis comprising of its steel business and the investments held. We initiate coverage on the stock with a Neutral
rating and a target price of Rs 691, implying an upside of 6.3%.
VALUATION TABLE
RS MN BASIS FY12E
STEEL BUSINESS EV / EBIDTA
EBIDTA 180821
MULTIPLE 6
LESS: NET DEBT 490790
MARKET CAP 594139
PER SHARE 650
ADD:
INVESTMENTS CMP LESS 20% DISCOUNT 7
STAKE IN RIVERSDALE CMP LESS 20% DISCOUNT 25
STAKE IN NEW MILLENNIUM MINING CORP CMP LESS 20% DISCOUNT 2
STAKE IN THE DHAMRA PORT CO P/BV ON AMOUNT INVESTED 8
TARGET PRICE 691
CURRENT PRICE 636
% UPSIDE 8.7%
75
PE BAND PBV BAND
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1200 3.5x
14x
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800 10x 2.5x
600
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8x
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76
Value Drivers

EBITDA margin, % (RHS)
1,600,000 3.00 210,000 18
1,400,000 16
2.50 180,000
1,200,000 14
150,000
2.00 12
1,000,000
120,000 10
800,000 1.50
90,000 8
600,000
1.00 6
60,000
400,000 4
0.50 30,000
200,000 2
0 0.00 0 0
300,000 NOPLAT, Rs mn OPFCF, Rs mn Avg invested capital, Rs mn (LHS)

WACC, % (RHS)
200,000 1,000,000 ROIC, % 40
100,000
20
0 800,000
-100,000 0
600,000
-200,000
-20
-300,000
400,000
-400,000 -40
-500,000 200,000
-60
-600,000
-700,000 0 -80
77
Financials
INCOME STATEMENT

NET SALES 1,315,359 1,473,293 1,023,931 1,112,105 1,179,869
GROWTH, % 422 12 -31 9 6
TOTAL INCOME 1,315,359 1,473,293 1,023,931 1,112,105 1,179,869
OPERATING EXPENSES -1,135,428 -1,292,016 -943,505 -958,766 -999,047
EBITDA (CORE) 179,931 181,277 80,427 153,339 180,821
GROWTH, % 182.5 0.7 (55.6) 90.7 17.9
MARGIN, % 13.7 12.3 7.9 13.8 15.3
DEPRECIATION -41,370 -42,654 -44,917 -47,948 -51,805
EBIT 138,562 138,623 35,509 105,392 129,017
GROWTH, % 158.6 0.0 (74.4) 196.8 22.4
MARGIN, % 10.5 9.4 3.5 9.5 10.9
INTEREST PAID -41,838 -32,902 -30,221 -26,640 -28,939
OTHER NON-OPERATING INCOME 5,742 2,657 11,859 10,462 2,872
NON-RECURRING ITEMS 61,244 0 0 0 0
PRE-TAX PROFIT 165,392 68,040 1,579 90,737 104,624
TAX PROVIDED -40,493 -18,940 -21,518 -26,317 -31,915
PROFIT AFTER TAX 124,899 49,100 -19,940 64,420 72,709
NET PROFIT 123,500 49,509 -20,092 64,237 72,517
MF NET PROFIT 62,255 49,509 -20,092 64,237 72,517
GROWTH, % 91.6 (20.5) (140.6) (419.7) 12.9
NET PROFIT (ADJUSTED) 62,255 49,509 (20,092) 64,237 72,517
EXTRAORDINARY ITEMS: GAINS/(LOSSES) 61,244 -40,945 -16,837 0 0
UNADJ. SHARES (M) 730 730 887 902 914
WTD AVG SHARES (M) 730 730 887 902 914
CASH FLOW

PRE-TAX PROFIT 165,392 68,040 1,579 90,737 104,624
DEPRECIATION 41,370 42,654 44,917 47,948 51,805
CHG IN WORKING CAPITAL -243,894 68,744 102,956 -88,281 -46,558
TOTAL TAX PAID -23,808 -26,390 -22,072 -23,920 -28,183
OTHER OPERATING ACTIVITIES 41,349 -67,860 -97,548 13,019 11,413
CASH FLOW FROM OPERATING ACTIVITIES -19,592 85,187 29,832 39,503 93,101
CAPITAL EXPENDITURE -84,197 -84,335 17,806 -67,500 -78,750
CHG IN INVESTMENTS -333,895 -30,437 9,933 -5,731 -1,856
CASH FLOW FROM INVESTING ACTIVITIES -418,093 -114,771 27,739 -73,231 -80,606
FREE CASH FLOW -437,684 -29,584 57,571 -33,728 12,495
EQUITY RAISED/(REPAID) 42,829 0 80,754 8,930 7,128
DEBT RAISED/(REPAID) 339,927 63,079 -122,728 -12,758 -9,282
DIVIDEND (INCL. TAX) -13,978 -14,950 -9,094 -10,558 -12,838
CASH FLOW FROM FINANCING ACTIVITIES 371,121 48,751 -51,177 -13,945 -14,528
NET CHG IN CASH -66,564 19,167 6,394 -47,673 -2,033
78
BALANCE SHEET

CASH & BANK 42,316 61,484 67,878 20,206 18,173
DEBTORS 186,963 130,316 116,240 152,343 161,626
INVENTORY 230,643 216,684 186,866 228,515 258,601
LOANS & ADVANCES 154,655 129,987 67,615 74,376 81,814
OTHER CURRENT ASSETS 90 68 79 79 79
INVESTMENTS 33,674 64,111 54,178 59,908 61,764
GROSS FIXED ASSETS 1,231,755 1,148,236 1,118,308 1,119,166 1,224,679
ADD: CAPITAL WIP 0 89,304 93,194 145,294 105,444
NET FIXED ASSETS 600,131 606,708 603,377 608,387 622,245
TOTAL ASSETS 1,248,575 1,210,120 1,097,381 1,144,963 1,205,451

PROVISIONS 75,376 81,831 75,578 78,046 80,743
PAID-UP CAPITAL 7,301 7,301 8,867 9,024 9,144

TOTAL EQUITY & LIABILITIES 1,248,575 1,210,120 1,097,381 1,144,963 1,205,451
PER-SHARE DATA
FY2008 FY2009 FY2010 FY2011E FY2012E

MF EPS (INR) 85.3 67.8 (22.7) 71.2 79.3
GROWTH, % 52.2 (20.5) (133.4) (414.2) 11.4
FDEPS (INR) 85.3 67.8 (22.7) 71.2 79.3
CEPS (INR) 58.0 126.2 28.0 124.3 136.0
CFPS (INR) (93.6) 261.2 147.8 16.1 84.4
DPS (INR) 16.3 17.5 8.5 10.0 12.0
FINANCIAL STRUCTURE
FY2008 FY2009 FY2010 FY2011E FY2012E

NET DEBT/EQUITY (%) 186.7 262.6 193.8 165.7 133.9
79
FY2008 FY2009 FY2010 FY2011E FY2012E

RETURN ON ASSETS (%) 17.4 5.7 (0.1) 7.3 7.8
RETURN ON EQUITY (%) 28.1 19.1 (8.6) 23.8 21.7
RETURN ON INVESTED CAPITAL (%) 19.5 11.4 (56.3) 9.5 10.3
ROIC/COST OF CAPITAL (X) 2.0 1.2 (5.8) 1.0 1.1
ROIC - COST OF CAPITAL (%) 9.8 1.5 (66.0) (0.1) 0.9
RETURN ON CAPITAL EMPLOYED (%) 21.3 7.1 (0.1) 9.1 9.6
COST OF CAPITAL (%) 9.6 9.8 9.7 9.5 9.4
ROCE - COST OF CAPITAL (%) 11.7 (2.7) (9.8) (0.4) 0.2
ASSET TURNOVER (X) 2.4 1.7 1.3 1.4 1.4

SALES/NET FA (X) 3.5 2.4 1.7 1.8 1.9
WORKING CAPITAL/SALES (X) 0.2 0.2 0.1 0.2 0.2
FIXED CAPITAL/SALES (X) 0.9 0.8 1.1 1.0 1.0
RECEIVABLE DAYS 51.9 32.3 41.4 50.0 50.0
INVENTORY DAYS 64.0 53.7 66.6 75.0 80.0
PAYABLE DAYS 84.8 65.2 90.5 86.7 82.3
CURRENT RATIO (X) 2.3 2.3 1.9 2.1 2.3
QUICK RATIO (X) 1.5 1.4 1.1 1.1 1.2
INTEREST COVER (X) 3.3 4.2 1.2 4.0 4.5
DIVIDEND COVER (X)
PER (X) 7.5 9.4 (28.1) 8.9 8.0

PEG (X) - Y-O-Y GROWTH N/A N/A N/A N/A N/A
PRICE/BOOK (X) 1.6 2.1 2.4 1.9 1.6
YIELD (%)
EV/NET SALES (X) 0.8 0.7 1.0 1.0 0.9
EV/EBITDA (X) 5.6 5.8 12.8 7.0 5.9
EV/EBIT (X) 7.3 7.6 28.9 10.2 8.3
EV/NOPLAT (X) 7.3 6.5 17.4 8.4 7.2
EV/CE 1.0 1.1 1.2 1.2 1.1
EV/IC (X) 1.9 1.2 1.3 1.4 1.2
80
VINEET BHATNAGAR MANAGING DIRECTOR 91-22-2300 2999 [email protected]

SAJID KHALID HEAD – INSTITUTIONAL EQUITIES 91-22-6667 9972 [email protected]
JIGNESH SHAH HEAD – EQUITY DERIVATIVES 91-22-6667 9735 [email protected]
Equity Research
AMBRISH MISHRA VP - AUTOMOBILES, AUTO COMPONENT 91-22-6667 9758 [email protected]
MANISH AGARWALLA VP - BANKING 91-22-6667 9962 [email protected]
ABHISHEK RANGANATHAN, CFA RETAIL, REAL ESTATE 91-22-6667 9952 [email protected]
ALOK DALAL PHARMACEUTICALS 91-22-6667 9950 [email protected]
ANJALI VERMA ECONOMIST 91-22-6667 9969 [email protected]
DHAWAL DOSHI METALS, POWER 91-22-6667 9769 [email protected]
DIPESH SOHANI REAL ESTATE 91-22-6667 9756 [email protected]
GAURI ANAND OIL & GAS, FERTILISER 91-22-6667 9943 [email protected]
KAPIL BAGARIA MIDCAP, SUGAR 91-22-6667 9965 [email protected]
NAVEEN KULKARNI, FRM TELECOM, FMCG, MEDIA 91-22-6667 9947 [email protected]
VIHANG NAIK IT SERVICES 91-22-6667 9768 [email protected]
ENNETTE FERNANDES RESEARCH ASSOCIATE 91-22-6667 9764 [email protected]
JISHAR THOOMBATH RESEARCH ASSOCIATE 91-22-6667 9986 [email protected]
NEHA GARG RESEARCH ASSOCIATE 91-22-6667 9992 [email protected]
SAPNA SHAH RESEARCH ASSOCIATE 91-22-6667 9996 [email protected]
SAURABH RATHI RESEARCH ASSOCIATE 91-22-6667 9951 [email protected]
SHUBHANGI AGRAWAL RESEARCH ASSOCIATE 91-22-6667 9964 [email protected]
VARUN VIJAYAN RESEARCH ASSOCIATE 91-22-6667 9974 [email protected]
GANESH DEORUKHKAR PRODUCTION 91-22-6667 9966 [email protected]
ROSHNI KALLOOR RESEARCH COMPLIANCE OFFICER 91-22-6667 9762 [email protected]
Technical & Quant Research

NEPPOLIAN PILLAI CHIEF TECHNICAL STRATEGIST 91-22-6667 9989 [email protected]
SHIKHA KHURANA QUANT ANALYST 91-22-6667 9948 [email protected]
Institutional Cash Equity Sales

SUDHIR PADIYAR VP - EQUITY SALES (ASIAPAC) 91-22-6667 9991 [email protected]
KARTIK BROKER EQUITY SALES 91-22-6667 9934 [email protected]
KINSHUK TIWARI EQUITY SALES 91-22-6667 9946 [email protected]
NASIR MOHAMED EQUITY SALES (UAE) 91-22-6667 9973 [email protected]
SHEETAL GANDHI EQUITY SALES (US) 91-22-6667 9944 [email protected]
PAYAL PANCHAL ASSOCIATE SALES (DMA) 91-22-6667 9949 [email protected]
ROSIE FERNS SR. EXEC. – EQUITIES SALES SUPPORT 91-22-6667 9971 [email protected]
Institutional Cash Equity Sales Trading

SUNIL KAMATH VP - SALES TRADER 91-22-6667 9747 [email protected]
CHETAN SAVLA SALES TRADER 91-22-6667 9749 [email protected]
RAJESH ASHAR SALES TRADER 91-22-6667 9746 [email protected]
Institutional Cash Equity Dealing

CHETAN BABARIA DEALER 91-22-6667 9945 [email protected]
MAYUR SHAH DEALER 91-22-6677 9945 [email protected]
81
Rating Rationale
BUY and SELL recommendations are used to draw attention to stocks, which we believe are under-priced or over-priced by circa 15%, that is, price differential of +/- 15% between our
price target and the market price. Stocks which do not achieve this price differential are NEUTRAL. Price targets are established in the context of a flat market.
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estimates, rating, target price of the other equity research groups of MF Global Sify Securities India Pvt. Ltd.
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Steel Industry Demand Supply Last 5 Yrs & Company Plans

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Steel Industry Demand Supply Last 5 Yrs & Company Plans

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STEEL SECTOR

MF Global Sector Report

18 October 2010 MF Global Steel Sector

Investment Rationale COMPANIES

» China’s raw material import requirement plays a crucial role in

» Calibrated production growth: A risk to our call would be continuity in

» Pass through of raw material costs: Steel companies’ ability to pass

18/10/2010 MF GLOBAL STEEL SECTOR | WILL THE PARTY CONTINUE?

Will the Party continue? .......................................................................................................................... 4-5

Production – Will China and Europe surprise? ....................................................................................... 6-10

Raw Material costs – will they remain subdued? .................................................................................... 11-12

Comparatives .......................................................................................................................................... 14-15

JSW Steel ..................................................................................................................................................... 17-37

SAIL .............................................................................................................................................................. 38-58

Tata Steel ..................................................................................................................................................... 59-80

18/10/2010 MF GLOBAL STEEL SECTOR | WILL THE PARTY CONTINUE?

Will the Party continue?

RELATIVE PERFORMANCE – 3 MONTHS RELATIVE PERFORMANCE – 6 MONTHS

Source: MF Global India Research

18/10/2010 MF GLOBAL STEEL SECTOR | WILL THE PARTY CONTINUE?

STEEL PRICES – WORLD HRC TRACKER

European HRC World HRC Price tracker

CRUDE STEEL – DEMAND SUPPLY

CRUDE STEEL – SURPLUS / DEFICIT

(15) (15) (5)

Source: MF Global India Research

18/10/2010 MF GLOBAL STEEL SECTOR | WILL THE PARTY CONTINUE?

Production – Will China and Europe surprise?

MONTHLY STEEL PRODUCTION - WORLD

115 113.4 112.9

18/10/2010 MF GLOBAL STEEL SECTOR | WILL THE PARTY CONTINUE?

CRUDE STEEL – SUPPLY

CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10E CY11E

MONTHLY STEEL PRODUCTION - CHINA

Source: World Steel Association, MF Global India Research

18/10/2010 MF GLOBAL STEEL SECTOR | WILL THE PARTY CONTINUE?

1. Scrapping of export rebates with effect from July 2010,

HRC PRICE - CHINA

Source: Bloomberg, MF Global India Research

18/10/2010 MF GLOBAL STEEL SECTOR | WILL THE PARTY CONTINUE?

MONTHLY STEEL PRODUCTION - EUROPE

16.5 16.0 16.6

EUROZONE MANUFACTURING PMI

Source: Bloomberg, MF Global India Research

18/10/2010 MF GLOBAL STEEL SECTOR | WILL THE PARTY CONTINUE?

EUROPE STEEL PRICES

18/10/2010 MF GLOBAL STEEL SECTOR | WILL THE PARTY CONTINUE?

Raw Material costs – will they remain subdued?

CHINA IRON ORE – PRODUCTION & IMPORTS

Source: Bloomberg, MF Global India Research

18/10/2010 MF GLOBAL STEEL SECTOR | WILL THE PARTY CONTINUE?

CHINA IRON ORE PRICE – 63.5% FE CONTENT

CHINA COKING COAL PRICE

Source: Bloomberg, MF Global India Research

18/10/2010 MF GLOBAL STEEL SECTOR | WILL THE PARTY CONTINUE?

18/10/2010 MF GLOBAL STEEL SECTOR | WILL THE PARTY CONTINUE?

VALUATIONS – GLOBAL COMPARISON

P/E (X) EV/EBIDTA (X)

JSW STEEL 15.5 10.0 8.5 5.9

JSW STEEL SAIL TATA STEEL

18/10/2010 MF GLOBAL STEEL SECTOR | WILL THE PARTY CONTINUE?

RELATIVE PRICE PERFORMANCE

RS, % CMP CLOSE 1M 3M 6M 1YEAR YTD