Last Updated : 29 July 2010 at 18:35 IST

MSP Steel revenues to grow 73% till FY12: CRISIL

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MUMBAI (Commodity Online): Credits ratings agency, CRISIL Equities today assigned a 2/5 ranking to the MSP Steel & Power Ltd (BOM:532650) indicating moderate fundamentals of the company that is engaged in the manufacturing of sponge iron and steel long products.

However, the ratings agency has assigned a valuation grade of 3/5, indicating that the current market price of Rs 40 (as on July 28, 2010) is ‘aligned’ with the analysts’ one-year fair value of Rs 44.

The assigned fundamental grade reflects MSP’s established presence in the steel business since 1993. The rankings would boost MSP by way of expected growth in the steel industry triggered by higher economic activity in the country, especially in the construction and infrastructure sectors.

CRISIL Research expects domestic demand for steel to grow at a CAGR of 9-10% through FY10-14. The grade also takes into account MSP’s presence across the value chain of steel production, leading to higher margins due to lower cost of production.

The grade is constrained by the impact of weak debt service indicators. MSP plans to fund its massive capacity expansion through a mix of internal accruals and preference shares issued to promoters, and debt in the ratio of 1:2.

This is expected to worsen the gross debt-equity ratio to 3.0x by March 2011 from 2.4x as on March 2010, which will put pressure on MSP’s financial flexibility, the research firm indicated.

The grade is also influenced by the fact that the players in the steel business have a low bargaining power and are exposed to the cyclicality of the industry. Fluctuations in iron ore prices will affect MSP’s margins in the medium term. This may be negated once MSP’s captive iron ore mines become operational in 2014.

CRISIL Equities expects MSP’s revenues to grow at a two-year CAGR of 73% to Rs 11.8 bn in FY12. EBITDA margins are estimated to improve over the next two years to 18.4% with the commissioning of a pellet plant, an 18 MW captive power plant and a structural rolling mill.

The company’s EPS to almost triple to Rs 14.7 in FY12 from Rs 5.4 in FY10. With increased capacity and margins, we expect RoE of 29.3% in FY12 vs. 16.9% in FY10. Even though earnings look promising, execution risks remain due to high debt and cyclical nature of the industry.