Bhushan Steel (Q3 FY14)

Bhushan steel reported below par numbers during the quarter due to a jump in raw material costs and inferior product mix. Raw material costs jumped due to an increase in iron ore costs. A blast during the trial runs of the new blast furnace led to some volume loss for the company. The company reported a net loss of Rs0.6bn against a profit of Rs2.2bn in Q3 FY13 and Rs0.6mn in Q2 FY14.

Topline of Rs24bn was lower by 4.8% yoy due to lower sales volume, but was inline with our estimate. Blended realisations were lower by 0.1% qoq against our expectation of a 1.8% qoq increase. We believe this was due to inferior product mix. The share of Value Added Products (VAP) from the company's Khopoli plant declined from 40.9% in Q2 FY14 to 38.6% in Q3 FY14. Production of HRC delcined on a qoq basis due to the tight iron ore market. Sales volume during the quarter was lower by 11.9% yoy to 0.5mn tons.

Operating profit declined 23% yoy to Rs6bn due to lower volumes and an increase in raw material costs. We are surprised by the increase in costs during the quarter. EBIDTA/ton for the quarter stood at Rs12,114/ton lower than our estiamte on account of lower realisations and a jump in costs. Costs were higher than our estimate even though production of VAPs was lower on a qoq basis. Raw material costs and coversion costs jumped 8.5% and 38.2% qoq. Raw material costs per ton of saleable steel is expected to remain higher going ahead due to the tight iron ore market in the region. Most of the miners had announced price hikes during the quarter.

We remain negative on the company on account of the rising tightness in the iron ore market. Iron ore prices have moved northwards over the last one quarter and are expected to remain elevated in the near term. The commissioning of the new capacities would take some time due to the explosion at the boiler of the new blast furnace. The high leverage and pressure on margins would curtail the earnings growth for the company. Maintain SELL with a price target of Rs403.