Kalyani Steel. Q3FY16 Result Review. Operationally firming up ; maintain BUY BUY. Sector: IRON & STEEL/INTERM PRODUCTS

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1 $Com panyname$ Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Q3FY16 Result Review (Wholly owned subsidiary of Bank of Baroda) BUY Kalyani Steels Ltd. Operationally firming up ; maintain BUY Kalyani Steels Ltd., (KSL) reported 3QFY16 result with a strong EBITDA margin of 22.1% an expansion of 781/374bps YoY/QoQ respectively. This expansion in EBITDA margin seen mainly due to fall in the commodity prices and clearance of high cost inventories in earlier quarters. However, revenue has seen a degrowth of 12.8%/18.8% YoY/QoQ respectively to Rs 2.58bn mainly due to the lower pace of industrial output and restricted growth in automobile sector. Revenue remained dismal: The company is into the manufacturing of industrial grade steel, forging quality steel, rolled bars etc. KSL reported Revenue of Rs 2.58bn, de-growth of 12.8%/18.8% YoY/QoQ mainly due to dismal growth in automobile sector and industrial equipment sector. However, we expect, with the India s GDP to grow more the 7% over few years with the manufacturing sector being into the focus, KSL can grow at a CAGR of 10% over FY15-18e. EBITDA margin stood at 22.1% for 3QFY16: EBITDA stood at Rs 572mn vs Rs 424mn in 3QFY15. EBITDA margins stood at 22.1% vs 14.3%/18.4% YoY/QoQ respectively led by commodity crash. Going forward we expect KSL to enjoy high margins at least for few quarters mainly due to clearing of high cost inventory. This will help the company to show strong operational efficiency. On a conservative basis we expect EBITDA margin to be at 16% over FY15-18e. Bright future ahead: KSL enjoys strong parentage of the Kalyani group. The company supplies ~35% of its total revenue to group companies. Bharat forge, the flagship company of the group, with the focus into automobile, defence, energy, oil & gas, aerospace, rail & marine and other infrastructure related businesses will create new opportunities for KSL going forward. Sector: IRON & STEEL/INTERM PRODUCTS Price Price Target Rs. 134 Rs. 311 Bloomberg Code KS IN Share Holding (%) KLSL.NS Promoters 60.6 FII 1.1 DIIs 1.75 Stock Data Nifty 6,987 Sensex 23, week high/low 192/105 Maket Cap (Rs. bn) 5.9 Face Value Rs. 5 Price performance (%) 1M 3M 6M 1Y Absolute Relative to Sensex Relative Performance st March, 2016 Up/Down (%) 133% Reuters Code As on 31th December 2015 Valuation: The stock currently trades at 5.6x/5.1x/4.3x of FY16e/FY17e/FY18e EPS. We maintain our BUY recommendation with a price target of Rs 311 (10x on FY18e EPS discounting for volatility of business). Source:-Bloomberg BSE Sensex Kalyani Steel Exhibit 1: Financial summary (Rs mn) Y/E March FY13 FY14 FY15 FY16e FY17e FY18e Net sales 8,091 11,160 12,266 12,766 14,137 16,336 Growth (%) (17.2) Operating margin (%) PAT ,035 1,156 1,359 Adjusted PAT ,035 1,156 1,359 EPS (Rs) Growth (%) P/E(x) ROE (%) ROCE (%) Debt/equity (x) P/Bv (x) Vaishali Parkar Kumar vaishali.parkar@bobcaps.in Rishabh Mehta rishabh.mehta@bobcaps.in

2 Exhibit 2: Quarterly Financials (Rs Mn) 3QFY16 3QFY15 YoY (%) 2QFY16 QoQ (%) Net Sales Raw material consumed Staff cost Manufacturing & Other Expenses EBITDA Depreciation EBIT Interest Other Income PBT Less: Taxation Less: Minority Interest Recurring PAT Exceptional items Reported PAT 2,585 2, , , , , , Equity research 2

3 Financials Income Statement Net sales 8,091 11,160 12,266 12,766 14,137 16,336 growth (%) (17.2) COGS 4,566 5,586 5,851 5,382 5,960 6,887 Staff Cost R&D Cost SG&A Cost 2,380 3,710 4,080 4,579 5,071 5,860 EBITDA 766 1,286 1,671 2,039 2,258 2,609 growth (%) Depreciation EBIT ,361 1,682 1,866 2,176 Other income Interest paid Extraordinary items PBT ,240 1,541 1,720 2,023 Tax Minority interest PAT ,035 1,156 1,359 Non-recurring items Adjusted PAT ,035 1,156 1,359 growth (%) Balance Sheet Cash & Bank balances Other Current assets 3,693 5,453 5,369 5,665 6,216 7,100 Investments Net fixed assets 3,515 3,491 4,559 4,982 5,440 6,007 Goodwill Other non-current assets Total assets 8,360 10,345 10,842 12,119 13,283 14,805 Current liabilities 2,908 4,077 3,736 3,994 4,249 4,662 Borrowings 1,518 1,851 1,820 2,071 2,121 2,221 Other non-current liabilities Total liabilities 4,814 6,366 6,083 6,591 6,897 7,409 Share capital Reserves & surplus 3,327 3,760 4,541 5,310 6,168 7,177 Shareholders' funds 3,546 3,979 4,759 5,528 6,387 7,396 Total liabilities 8,360 10,345 10,842 12,119 13,283 14,805 Equity research 3

4 Cash Flow Statement Profit after tax ,035 1,156 1,359 Depreciation Chg in working capital 898 (940) 575 (38) (296) (472) Total tax paid Cash flow from operations 1, ,844 1,354 1,252 1,320 Capital expenditure (1,234) (310) (1,394) (780) (850) (1,000) Change in investments (457) Cash flow from investments (1,034) (135) (1,851) (780) (850) (1,000) Free cash flow 399 (97) (7) Issue of shares Net inc/dec in debt (409) 333 (31) Dividend (incl. tax) (266) (298) (350) Other financing activities (91) (158) (81) Cash flow from financing (500) 175 (112) (16) (248) (250) Inc/(Dec) in Cash & Bank bal. (100) 78 (119) Ratio analysis Y/E Mar FY13 F14 F15 F16e F17e F18e Per share data (Rs) EPS CEPS DPS BV Profitability ratios (%) Gross margins Operating margins Net margins Valuation ratios (x) PE P/BV EV/EBITDA EV/Sales RoE RoCE RoIC Equity research 4

5 Sales and Dealing Team Purvesh Shelatkar Senior Vice President & Head Equity Anil Pawar Senior Manager Dealing Sachin Sambare Manager Dealing /33 Ashwin Patil Executive Dealing Research Team Sectors Vishal Dalmia Research Analyst Capital Goods, Metals Vaishali Parkar Kumar Analyst Agri, Auto, Defence Padmaja Ambekar Analyst Auto Ancillary, Infra, Midcap Akanksha Tripathi Analyst Footwear, FMCG, Hospitality Rishabh Mehta Analyst FMCG, Textiles, Infra, Chemicals, Metals Hareesha Kakkera Associate Pharma, Bio technology Disclaimer UTI Tower, 3rd Floor, South Wing, Bandra-Kurla Complex, Bandra (E), Mumbai India. BUY. We expect the stock to deliver >15% absolute returns. HOLD. We expect the stock to deliver 5-15% absolute returns. SELL. We expect the stock to deliver <5% absolute returns. Not Rated (NR). We have no investment opinion on the stock. 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