ELECTROSTEEL STEELS: Chinese equipment & engineering enable savings in capital cost; Motilal oswal,

ELECTROSTEEL STEELS: Chinese equipment & engineering enable savings in capital cost

Phase-wise trial runs on at 2.5mtpa ISP; watch for plant efficiency on full-scale operations

-      We visited the 2.5mtpa integrated steel plant (ISP) that Electrosteel Steels (ELSS) is setting up at Siyalijori village, near Bokaro in Jharkhand.

-      It is India's first steel plant based almost entirely on Chinese equipment and engineering, enabling savings of 20-25% on capital cost. The total project capex is INR96b, of which INR87b has already been incurred. Most facilities are complete and trial runs are being carried out.

-      Parent, Electrosteel Castings (ELSC) will supply 30% of the coking coal and 100% of the iron ore requirement on cost plus 20% for 20 years. This will help ELSS to save on raw material cost, too. ELSC has begun partial production at the coking coal mine and is awaiting stage-II forest clearance for the iron ore mine.

-      ELSS targets 1.5m tons of saleable steel production in FY14 and expects EBITDA margin of 35% on full-scale operations. As at end-FY12, D/E was 3.2x. The stock trades at 0.9x FY12 BV. Not Rated.

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India's first steel plant based entirely on Chinese equipment and engineering

Electrosteel Steels (ELSS) is setting up a 2.5mtpa integrated steel plant (ISP) at Siyalijori village, 22km from Bokaro, Jharkhand on an area of 2,185 acres. The plant's product mix would be - long/pig products: 85% and DI pipes: 15%. About 90% of the construction work is complete and phase-wise trial runs have begun. This is India's first steel plant based almost entirely on Chinese equipment and engineering. It is constructed by China First Metallurgical Construction Corporation (CFMCC) and Ershisanye Construction Group. Shandong Metallurgical Design Institute (SMDI) has been entrusted with design and engineering. About 90kt of equipment and 78kt of structures have been imported from China. About 3,500 Chinese workers were involved in the construction phase.

Plant efficiency on full-scale operations - a critical parameter to watch

Using Chinese equipment and engineering has enabled ELSS to save considerable cost. The entire 2.5mtpa capacity was planned with a capex of INR96b, 20-25% lower than usual. However, the experience of other steel manufacturers with Chinese equipment has not been very favorable so far. Plant efficiency on full-scale operations will be a critical parameter to watch.

90% capex incurred; targeting 1.5mtpa saleable steel in FY14

Of the capex of INR96b, ~90% (INR87b) has already been incurred. INR64b is debt-funded, of which USD95b is foreign currency debt, and INR23b is equity-funded. The average cost of debt is 11.75%; repayment began in December 2011. Gross debt is likely to increase to INR74b by the end of FY13.

  

Most facilities are undergoing trial run and ELSS plans to start full-fledged production by FY14. It is targeting 0.2m tons of saleable steel in FY13 and 1.5m tons in FY14. It has an offtake agreement with Stemcor. Under this agreement, Stemcor will arrange for the sale of the DI pipe and pig iron that ELSS is unable to sell on its own for the next three years at market price. Any export by the company without the involvement of Stemcor will result in a USD3/ton penalty.

Play on cheaper raw material

ELSS is targeting 35% operating margin on account of lower raw material cost. Parent, Electrosteel Castings (ESCL) will supply 30% of its coking coal and 100% of its iron ore requirement at cost plus 20% basis for 20 years. ELSS expects landed cost of iron ore to be INR1,500/ton and landed cost of coking coal to be INR3,700/ton, allowing it to save considerably on raw material cost. Water for the project will be procured from River Damodar, 8km from the plant site.

ESCL increased stake by 4.5% in August; net D/E at 3x, P/B at 0.9x; Not Rated

-      Parent, ESCL increased its stake in ELSS through a preferential allotment of INR152m shares at INR10/share in August 2012, much above the market price at that time (average of INR5.3/share), raising its stake from 34.8% to 39.33%.

-      ELSS is aggressive play on raw material cost saving due to supply of iron ore and coking coal from ESCL. As at end-FY12 D/E was 3.2x. ELSS trades at 0.9x FY12 BV. Not Rated.