Kalyani Steels Ltd. (KSL)

$CompanyN ame$ Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 (Wholly owned subsidiary of Bank of Baroda) Initiating coverage BUY Kalyani Steels Ltd. (KSL) Partner in Indian growth story; initiate with BUY Kalyani Steels Ltd., is a part of the Kalyani Group (annual turnover of the group ~USD 3bn). The company is in the manufacturing of specialized forging and engineering quality carbon and alloy steels using the blast furnace route. KSL is a preferred supplier for engineering, automotive, seamless tube and primary aluminium industry. We expect, KSL to achieve its revenue/earnings growth at a CAGR of ~1/23% over FY15-18e respectively led by 1) expected 3.5/4 time value term growth in auto motive industry over next ten years, 2) positive expectation of India s GDP growth, 3) huge opportunities from Railways, and Defence, 4) Meltdown in global commodity prices and life low Baltic Dry Index, 5) strong parentage (~35%of total revenue comes from group companies; where, Bharat forge has huge plans of doubling its revenue to Rs 7bn by FY18. ) We initiate coverage on KSL with a BUY rating and a price target of Rs.311 (8% upside) Crash in commodity augurs well for KSL: The global commodity index has crashed over 65% from FY8-15 mainly due to meltdown in Chinese economy. This fall in commodity prices has augured well for commodity consuming industry. KSL is into the value added steel processing business where it has benefited from the turmoil in commodity prices. The EBITDA margin of the company grew from 4.4% in FY12 to 13.6% in FY15. The company posted 18.7% EBITDA margins in 1HFY16. We believe that, being a commodity player its EBITDA margins are highly skewed towards the volatility in the commodity prices. By looking at the volatile nature of the raw material we, on conservative side expect EBITDA margins to remain at 16% over FY16-18e. Expanding India s GDP: According to the various agencies and RBI, India s GDP can grow at 7%+ over the next few years, (main growth drivers would be the domestic consumption industries). The Gov. of India is also taking various steps like make in India, 98 smart city projects, huge spending in Railways, infrastructure and Defence, which will fuel India s economic growth. Also, according to the SIAM s Automotive Mission Plan 216-26, the Indian Automotive Industry to grow 3.5-4 times in value form to ~Rs16,16-18,885bn by 226. KSL, with specialization in forging and industrial steel manufacturing will get enormous opportunity being a part of this growth. KSL s revenue has grown at a CAGR of ~8% over FY12-FY15. Going forward, we expect KSL s revenue to grow at a CAGR of ~1% over FY15-18e. Valuation: We believe, KSL will be benefited from the overall industrial development, expanding Indian GDP, commodity crash and operational efficiency. The stock is trading at 7.3/6.5/5.6x of FY16/17/18e, we assign 1x (discounting for volatility of business) to FY18e EPS of Rs 31.1 and arrive to the target price of Rs. 311 with a potential upside of 8%. Price Price Target Up/Down (%) Rs. 173 Rs. 311 Bloomberg Code KS IN Share Holding (%) Source:-Bloomberg KLSL.NS Promoters 6.6 FII 1.1 DIIs 1.34 Stock Data Nifty 7,925 Sensex 26,34 52 week high/low 178/15 Maket Cap (Rs. bn) 7.5 Face Value Rs. 5 Price performance (%) 1M 3M 6M 1Y Absolute 12.8 35.2 56.2 1.5 Relative to Sensex 12.8 33.9 61.7 15.2 Relative Performance 12 11 1 9 8 7 6 5 BSE Sensex 29 th December, 215 SECTOR: IRON & STEEL/INTERM PRODUCTS 8% Reuters Code As on 3th September 215 Kalyani Steels Exhibit 1: Financial summary (Rs mn) Year end: March FY13 FY14 FY15 FY16e FY17e FY18e Net sales 8,91 11,16 12,266 12,766 14,137 16,336 Growth (%) (17.2) 37.9 9.9 4.1 1.7 15.6 Operating margin (%) 9.5 11.5 13.6 16. 16. 16. PAT 239 586 833 1,35 1,156 1,359 Adjusted PAT 239 586 833 1,35 1,156 1,359 EPS (Rs) 5.5 13.4 19.1 23.7 26.5 31.1 Growth (%) 44.2 145.5 42.2 24.3 11.6 17.6 P/E(x) 31.7 12.9 9.1 7.3 6.5 5.6 ROE (%) 6.9 15.6 19.1 2.1 19.4 19.7 ROCE (%) 6.9 11.9 13.9 15.1 14.8 15.4 Debt/equity (x).4.5.4.4.3.3 P/Bv (x) 2.1 1.9 1.6 1.4 1.2 1. Vaishali Parkar Kumar vaishali.parkar@bobcaps.in +91 22 6138 9382 Rishabh Mehta rishabh.mehta@bobcaps.in +91 22 6138 9384

Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 (Wholly owned subsidiary of Bank of Baroda) Industry Outlook More than 7% GDP growth expected with major contribution from domestic consumption industries According to major global agencies and RBI, the Indian GDP is expected to grow at 7%+over the next few years for which the major contributor would be domestic consumption industries. With the Industrial development taking place, we believe, that the auto industry (two wheelers/ four wheelers, commercial segment), industrial equipment segment, spending in defence through the Make in India initiative (with the indigenously designed and developed components) and rapid infrastructure development will create a huge opportunity in automotive forging, bearing, seamless tubes, construction equipment and aluminium smelting segment of Kalyani Steels Ltd. Exhibit 2: GDP Growth Rate and Forecast 1 8 6 4 2 Source: Bloomberg, BOBCAPS Forging Industry According to the SIAM s Automotive Mission Plan 216-26, the Indian forging industry has emerged as a major contributor to the manufacturing sector of the Indian Economy. It is a key element in the growth of the Indian automobile industry as well as other industries such as general engineering, construction equipment, oil, gas and power. The Indian forgings industry has made rapid strides and currently, not only meets almost all the domestic demand, but has also emerged as a large exporter of forgings. The industry is increasingly addressing opportunities arising out of the growing trend among global automotive OEM s (Original Equipment Manufacturers) to outsource components from manufacturers in low-cost countries. As a result, the industry has been making significant contributions to country s growing exports. Exhibit 3: Production and Installed Capacity of the Indian Forging Industry Year Installed Capacity (Lakh Tonnes) Total Production (Lakh Tonnes) Capacity Utilization (Percentage) FY12 37.7 24.5 64.9 FY13 37.7 21.1 55.9 FY14 37.7 21.5 57 FY15 37.7 23 61 FY16 37.7 24.5 64.9 Source: Industry, Bobcaps Automotive and Allied Industry Current share of auto sector is about 61% of total forging production while the rest is with the non-auto sector. Changes in Indian automobile industry directly impact Indian forging industry, because the forging components form the backbone of the Indian automobile industry. According to the SIAM s Automotive Mission Plan 216-26 (the collective vision of Government of India and the Indian Automotive Industry) foresees that the Indian Automotive Equity research 2

(Wholly owned subsidiary of Bank of Baroda) Industry would grow 3.5 to 4 times in value from its current output of ~Rs 4,64bn (circa 215, which is one year before end of the mission plan period) to ~Rs16,16-18,885bn by 226 (based on the base case of average GDP growth of 5.8% and an optimistic case with an average GDP growth of 7.5% during the period) Automotive sector forms 61% of total forging production and the industry is expected to grow 3.5 to 4 times in value Exhibit 4: Automotive Mission Plan 226 Forecasts Systems/components in-house/domestic 1,251 4,45 5,49 Component Imports 843 1,485 1,83 OEM Valu addition 832 1,838 2, OEM Exports 625 2,233 2,95 Component Exports 69 4,367 4,625 Component after market 399 1,787 2, - 1, 2, 3, 4, 5, 6, Rs bn FY15 FY26 Base case FY26 Optimistic case Source: SIAM s Automotive Mission Plan 216-26, BOBCAPSe Note: All values in the above chart are in Rs. bn and at current year (215) prices In terms of global ranking in manufacturing output, India is presently the second largest in two wheelers, eight largest in commercial vehicles, sixth largest in passenger vehicles and the largest in tractors. Over the last ten years India has emerged as one of the most preferred locations in the world for manufacturing high quality automotive components. The forging industry is increasingly addressing opportunities arising out of the growing trend among global automotive OEM s (Original Equipment Manufacturers) to outsource components from manufacturers in low-cost countries like India. Exhibit 5: Auto Components Production Volume by Product Range Electrical Parts 9% Equipments 1% Others 7% Engine Parts 31% Source: Industry, BOBCAPSe Suspension and Braking Parts 12% Body and Chassis 12% Drive Transmission and Steering Parts 19% Turnover of the Indian auto component industry stood at USD35.1bn in FY13-14, the industry is expected to reach USD 115bn by 22 led by the expected growth in the automotive industry and increase in the global OEM sourcing from India. Equity research 3

US$ bn US $bn (Wholly owned subsidiary of Bank of Baroda) Exhibit 6: Auto Component Industry Turnover 8 7 6 5 4 3 2 1 66 41.3 42.2 39.7 35.1 3.8 26.5 24.1 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY16e Source: Industry, BOBCAPSe Exhibit 7: Value of auto component exports 12 1 8.8 9.7 1.2 8 6 4 5.1 4.2 6.6 2 FY9 FY1 FY11 FY12 FY13 FY14 Source: Industry, BOBCAPSe India is fourth largest and among the low cost steel manufacture with ~5% of total world s production. Steel is the key component in the automotive industry and will ensure massive scope in auto ancillary segment. Construction Equipment industry The construction equipment industry s revenues are estimated to reach USD 22.7bn by 22 from USD 6.5bn in FY14. Unit sale of construction equipment is expected to grow to 96,73 by 218 from 6,655 in FY14 led by infrastructure spending to be ~1% of GDP during 212-17, vs 7.6% during 27-12. Construction equipment industry s revenue expected to reach USD 22.7bn by 22 led by Infrastructure development The growth in Construction equipment industry is linked to Infrastructure development and accounts for more than 6% of the Infrastructure spending. Exhibit 8: Construction Equipment Segment Description Earth-moving equipments Earth-moving equipments is the largest segment of the construction equipment sector in India; these equipments primarily find use in mining and construction. Equipments include backhoe leaders, excavators, wheeled loaders, dumpers/tippers, skid steer loaders. Source: Industry, BOBCAPSe Material handling and cranes Material handling equipments have four categories: storage and handling equipments, engineered systems, industrial trucks, and bulk material handling. There are 5 units in the organized sector for the manufacture of material handling equipments and many units in the smallscale sector as well. Concrete equipments Concrete equipments are used to mix and transport concrete. They include equipments such as concrete pumps, aggregate crushers, transit mixers, asphalt pavers, batching plants. Road building equipments Road building equipments are used in the various stages of road construction. Widely used ones are excavators, diggers, loaders, scrapers, bulldozers etc. Equity research 4

US$ bn FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15e FY16e FY17e US$ bn (Wholly owned subsidiary of Bank of Baroda) Exhibit 9: Infrastructure spending 3 25 2 15 1 75.7 69.4 89.5 11.6 11.9 157.4 181.2 26 233.5 264.4 5 Source: Industry, BOBCAPSe Exhibit 1: Revenues Growth from Construction Equipment 12 1 9.9 8 6 4 3.7 3.9 4.3 4.6 4.2 5.1 3.9 6.5 2 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15e Source: Industry, BOBCAPSe Equity research 5

Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 US$/tonne US$/tonne US$/tonne (Wholly owned subsidiary of Bank of Baroda) Investment Rational Commodity price crash; an Opportunity The meltdown of the Chinese economy and dumping of commodities by them has led to the global commodity index to crash by over 65% from FY8 to FY15. Crash in commodity prices and Baltic Dry Index will lead to EBITDA margin becoming 16% (conservatively) over FY15-18e. Commodity prices have fallen to their lowest levels since almost a decade, providing margin expansion opportunity for companies like Kalyani Steels Ltd. with its major inputs being iron ore and coking coal. Various data suggest that China may face a hard or soft landing. In case of a hard landing, the further drop in commodity prices would create good opportunity for commodity consuming companies. The Baltic Dry Index (BDI), compiled by the London-based Baltic Exchange and covers prices for transported cargo such as coal, grain and iron ore, fell to a new low hitting 471 points on 16 th and 17 th December, 215. The BDI was at 1,222 as recently as August, 215. The fundamentals of weak trade growth in coal and iron ore, a more rapidly growing fleet of dry bulk vessels and falling oil prices could further test the record low prices. Lower dry bulk freight rates will put a downward pressure on commodity prices and industry costs. Exhibit 11: Commodity prices movement Iron Ore Hard Coking Coal Prime Coking Coal 25 2 15 1 5 12 11 1 9 8 7 6 25 2 15 1 5 Source: Bloomberg, BOBCAPS Source: Bloomberg, BOBCAPS Source: Bloomberg, BOBCAPS The crash in commodity prices have expanded KSL s EBITDA margins from 4.4% in FY12 to 13.6% in FY15 and further improved their margins in H1FY16 to 18.7%. With further possibility of a commodity price fall led by Chinese hard landing and additional downward pressure from lowering of dry bulk freight rates, we believe that the company has high opportunity of further betterment of its margins. However, looking at the volatile nature of its raw material prices, we expect the EBITDA margins to be at ~16% over FY15-18e. Global commodity index has crashed over 65% from FY8-15 Exhibit 12: Commodity meltdown augurs well for KSL 8% 6% 4% 2% % FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e Cost of raw material as% of sales EBITDA margins % Equity research 6

(Wholly owned subsidiary of Bank of Baroda) Benefiting from lower cost of inventory procurement The company has already utilised its high cost inventory and the present inventory is procured at the lower levels mainly due to the crash in iron ore prices by more than 4% within the last one year. Due to the crash in prices of iron ore and coke, KSL posted a healthy increase in its EBITDA margins (18.7% in H1FY16). We believe that even if the commodity prices increase in the near future, Kalyani Steels Ltd. will be able to maintain its healthy margins at least for the next few quarters just because of the presence of the low cost inventory that it currently holds. Strong Parentage; ensuring revenue growth KSL is a part of the Kalyani Group and a supplier to Bharat Forge Ltd. (world s largest forging company and part of Kalyani Group) Kalyani Steels Ltd. was established in February 1973 as a part of the Kalyani Group with the primary objective of fulfilling the group s in-house requirements of forging quality steel. The Kalyani Group has an annual turnover of ~USD 3bn and along with being the parent company of KSL; it also parents the world s largest forging company, Bharat Forge Ltd. It contributes 3-35% of its revenue to the Kalyani Group. Kalyani Steels Ltd. is a supplier of high quality steel to Bharat Forge Ltd. which caters to several critical business verticals such as Defence, energy, oil & gas, aerospace, rail & marine and other infrastructure related businesses. It has huge plans of doubling its revenue to Rs. 7bn by FY18. We believe, with the support of such a strong parent with the world s largest forging company, KSL will grow at ~1% revenue CAGR over FY15-18e. Industrial Growth; A driving force Kalyani Steels Ltd. primarily serves the forging Industry which is driven by the Automotive and allied Industries and Construction Equipment Industry. The fast paced industrial development is a major driving force that would create high opportunities for companies like KSL leading to its revenue growth at a CAGR of ~1% over FY15-18e. Automotive and allied Industries The Indian Automotive Industry forms 61% of the forging production and is expected to contribute 8% of global passenger vehicle market by 22, from 4.68% in 214. By 226, the Indian Automotive Industry is expected to be among the top three of the world in engineering, manufacture and export of vehicles and auto components and growing in value to over 12% of the Indian GDP. Automotive, auto component and construction equipment industry growth to drive KSL s revenue at a 1% CAGR over FY15-18e SIAM s Automotive Mission Plan 216-26 (the collective vision of the Government of India and Indian Automotive Industry), envisions that the Indian Automotive Industry will grow 3.5 to 4 times in terms of value from its current output of ~ Rs.4,64bn (circa 215, which is one year before end of the mission plan period) to ~ Rs.16,16 18,885bn by 226 (based on the base case of average GDP growth of 5.8% and an optimistic case with an average GDP growth of 7.5% during the period) Over the last decade India has emerged as one of the most preferred locations in the world for manufacturing high quality automotive components. The Indian Auto Component Industry is expected to reach USD 115bn by 22 from USD 35.1bn in FY13-14 led by growth in the Automotive Industry and India emerging as a preferred outsourcing hub for low cost manufacturing. Construction Equipment Industry The Indian Construction equipment industry is estimated to reach revenue of USD 22.7bn by 22 from USD 6.5bn in FY14. The foremost driver for growth in this sector is the infrastructure development taking place in India as construction equipments account for more than 6% of the infrastructural investments. Equity research 7

Km (Wholly owned subsidiary of Bank of Baroda) This infrastructure spending has been set as ~1% of the Indian GDP during 212-17 vs. 7.6% during 27-12. The growth in the Automotive, Auto Components and Construction Equipments is inevitable in a rapidly developing country like India led by its high requirements for Infrastructural development and the rising per capita income of the masses. This will create huge demand for forging quality steel and thus provide opportunity for companies like Kalyani Steels Ltd. Indian Railways; Engine of Growth Indian Railways spending to be ~Rs. 8.56tn over the next 5 years towards expansion and modernization Infrastructure development is the primary requisite for the growth of an economy, especially for a country like India which is on the road to development. Indian Railways (IR) forms a significant part of this development as it is a key mode of connectivity spread throughout the country. Indian Railways is the third largest rail network in the world. As of FY15, Indian Railways had 12,617 passenger trains carrying over 23 million passengers daily. On the commercial front, 111 million tonnes of freight was transported via trains in FY15 and is targeted to reach 1,186 million tonnes in FY16. Indian Railways has strong plans of spending ~Rs. 8.56tn as per Indian railways budget FY16 for modernisation and expanding railways over the next five years. It has a target of commissioning 25 km BG track for FY16. Exhibit 13: IR s annual target of commissioning 25km BG track Doubling Gauge Conversion New Lines Source: Indian Railways, BOBCAPSe 4 8 12 km Exhibit 14: IR s 5 year target for commissioning Tracks 3, 2,5 2, 1,5 1, 5 - FY15 FY16 FY17 FY18 FY19 New Line Gauge Conversion Doubling Source: Indian Railways, BOBCAPSe Steel being one of the most crucial component for infrastructural development in railways, we believe that such high amount of investments in the Indian Railways will open a wide range of opportunities for manufacturing companies, especially for a company like Kalyani Steels Ltd. which provides high quality medium carbon, medium alloy and micro alloyed steels. These Equity research 8

(Wholly owned subsidiary of Bank of Baroda) products find usage in the forging of crankshaft, axel, connecting rod and claw lock & piston railway locomotives. Also, having a strong parentage of the Kalyani Group and the support from Bharat Forge (railway among the four sectors identifies by them under the Make in India initiative), KSL s opportunity in the railway sector will only grow stronger and provide a revenue/earnings growth of ~1%/23% over FY15-18e. Defence spending; Boost from Make in India initiative Apart from Railways, Defence is another sector for which KSL provides high quality steel and is expected to contribute highly in the revenue mix going forward. Government allocation of Rs. 2467.27bn towards modernization, self dependance and Make in India Initiative The Government is emphasizing on modernization, self dependence and Make in India in the defence sector and has allocated Rs 2467.27bn in the budget allocation of FY15-16. Defence has huge investment opportunities in Defence products manufacturing Supply chain sourcing opportunity Defence offsets India s current requirements for defence are fulfilled through imports. The opening of the strategic defence sector for private sector participation will help foreign original equipment manufacturers to enter into strategic partnerships with Indian companies and leverage the domestic markets and also aim at global business. Besides helping build domestic capabilities, this will bolster exports in the long term. We believe that due to the boost being provided in the defence sector, through initiatives like Make in India, Kalyani Steels Ltd. has another opportunity developing in this sector for its rolled steel bars. Exhibit 15: Budget allocation for Defence 212-13 Actuals 213-14 Actuals 214-15 Revised 215-16 Budgeted (Rev+ Cap) (Rev+ Cap) (Rev+ Cap) (Rev+ Cap) Army 91,451 99,464 1,19,435 1,3,658 Navy 29,594 33,393 32,443 4,529 Air Force 5,59 57,79 53,897 56,687 DGOF -267 1,298 2,333 3,644 DGQA 696 766 816 85 R&D 9,795 1,869 13,447 14,358 Total 1,81,776 2,3,499 2,22,37 2,46,727 Source: Industry, BOBCAPS Government spending of up to Rs. 48bn over 5 years on development of 98 smart cities Government s thrust for Smart Cities As per the Smart Cities mission document, the mission will cover 98 cities in five years (FY16-FY2). The total no. of Smart Cities have been distributed among the states and UT (United Territories). The Smart City Mission will be operated as a Centrally Sponsored Scheme (CSS) and the Central Government proposes to give financial support to the Mission to the extent of Rs. 48bn over five years (on an average Rs. 1bn per city per year. An equal amount, on a matching basis, will have to be contributed by the State/ULB), therefore, Rs ~1bn of Government/ULB funds will be available for Smart Cities development. Recently state Government of Maharashtra announced its first smart city project out of total 1 projects in Maharashtra. The estimated total investment for this project would be Rs 347.7bn for the modern amenities, better road and transport and construction of metro railway network. Equity research 9

(Wholly owned subsidiary of Bank of Baroda) As high amount of quality steel products are required in such advanced infrastructural developments, we believe, these huge investments in next five years will provide high growth opportunities to companies like KSL and thus contributing in its volume expansion. Exhibit 16: 98 cities to cover under Smart Cities project State/Union Territory No. of Cities State/Union Territory No. of Cities Andaman & Nicobar Islands 1 Madhya Pradesh 7 Andhra Pradesh 3 Maharashtra 1 Arunachal Pradesh 1 Manipur 1 Assam 1 Meghalaya 1 Bihar 3 Mizoram 1 Chandigarh 1 Nagaland 1 Chhattisgarh 2 Odisha 2 Daman & Diu 1 Puducherry 1 Dadra & Nagar Haveli 1 Punjab 3 Delhi 1 Rajasthan 4 Goa 1 Sikkim 1 Gujarat 6 Tamil Nadu 12 Haryana 2 Telangana 2 Himachal Pradesh 1 Tripura 1 Jharkhand 1 Uttar Pradesh 12 Karnataka 6 Uttarakhand 1 Kerala 1 West Bengal 4 Lakshaweep 1 Source: Industry, BOBCAPS Equity research 1

Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 INR (Wholly owned subsidiary of Bank of Baroda) Key risk Raw material price trend: KSL is in to the manufacturing of steel and allied products, any movement in raw material prices would directly affect the company s operating profit. The crash in commodity prices has augur well for the company, any upward trend in the commodity would be the risk for the operating margin. Currency risk: Rs/USD has depreciated by ~5% in last one year, KSL imports ~45% of its raw material. However, considering that Indian economy is one of the most promising economy in the world and the likely growth is expected to be in upwards of 7.5-8% for next few years, we feel that Rs has a fair chance of appreciating from the current level in the medium term. Exhibit 17: USD/INR Price Movement 68 66 64 62 6 58 56 54 Source: Bloomberg, BOBCAPS Anti dumping duty: Currently Government has imposed anti dumping duty on cold rolled stainless steel. Any change in the government policy about bringing more products under anti dumping duty may pose risk to the company s financials. Equity research 11

3-Dec-1 3-Mar-11 3-Jun-11 3-Sep-11 31-Dec-11 31-Mar-12 3-Jun-12 3-Sep-12 31-Dec-12 31-Mar-13 3-Jun-13 3-Sep-13 31-Dec-13 31-Mar-14 3-Jun-14 3-Sep-14 31-Dec-14 31-Mar-15 3-Jun-15 3-Sep-15 (x) (Wholly owned subsidiary of Bank of Baroda) Valuation: Kalyani Steels Ltd., (KSL) is a prominent Indian manufacturer of Forging and Engineering quality carbon & alloy steels using the Blast Furnace route, with a sharp focus on Quality and a strong R&D backup. KSL trades at 6x P/E, and following factors will create an huge opportunities: 1) expected two fold growth in auto industry over next 1 years, 2) expected positive development in domestic consumption industries, 3) meltdown in commodity prices and the Baltic Dry Index being at its life low to augur well for the company, 4) improving EBITDA margins ~445bps over FY15-18e. We understand KSL is a commodity consumer company, where the operating margins of the company will be largely dependent on the trend of commodity prices and the whole fundamentals of the company can change accordingly. However, we believe that with the large say of China (being the largest consumer) in commodity trend, may do a hard/soft landing, in case of hard landing the crash in the commodity prices would be huge which will augur well for KSL. On conservative side we expects revenue/earnings to grow at a CAGR of 1%/23% over FY15-18e. The stock is trading at 7.3/6.5/5.6x of FY16/17/18e, we assign 1x (discounting for volatility of business) to FY18e EPS of Rs 31.1 and arrive to the target price of Rs 311 with a potential upside of 8%. Exhibit 18: One year forward PE chart 3 25 2 15 1 5 5 yr mean = 7x PE(x) avg Current = 6x Source: Industry, BOBCAPS Equity research 12

Rs. Mn (%) Rs. Mn (%) (Wholly owned subsidiary of Bank of Baroda) Financial Summary Sales growth led by economic development: KSL manufactures industrial grade steel, forging quality steel, rolled bars etc. which are mainly used in the automotive industry and other industrial activities. With the GDP expected to grow more than 7% over next few years led by growth in domestic consumption industries, we expect, KSL will benefited from the economic development, expected growth in automobile and construction equipment industry. KSL grew at a CAGR of 8% over FY12-15, we expect the company to grow at a CAGR 1% (on a conservative basis by considering the nature of business) over FY15-18e. Sales growth at 1% CAGR over FY15-18e led by economic development led by growth in domestic consumption industry Exhibit 19: Net sales to grow at a CAGR of ~1% over FY-18e 2, 15, 1, 5, - FY13 FY14 FY15 FY16e FY17e FY18e Net sales Growth % 5 4 3 2 1-1 -2 EBITDA margins to see improvement led by low iron ore and coke prices EBITDA margin to improve by ~445 bps: Being a commodity consumer, KSL has benefited from the crash in the commodity prices from FY12 and has seen an improvement in the EBITDA margins from 4.4% in FY12 to 13.6% in FY15. In 1HFY16 the margins of the company stood at 18.7% which was the highest. By looking at the world economic situation and Chinese economy turmoil we are of the view that commodity prices will remain at bottom, however, on conservative basis we have expected EBITDA margins at 16% level over FY16-18e. Even after that we see the EBITDA margin improvement at 445bps over FY15-18e. Any further downturn in commodity prices will help KSL to improve its margins. Exhibit 2: EBITDA margins to improve by ~445 bps 3 25 2 15 1 5 FY13 FY14 FY15 FY16e FY17e FY18e 2. 15. 1. 5.. EBITDA EBITDA margin % Equity research 13

x No fo Days % (Wholly owned subsidiary of Bank of Baroda) Return ratios to improve: KSL has seen improvement in its return ratios over FY12-15 from (7% to 14% in ROCE; and 5% to 19% in ROE) percolating the commodity crash effect. We expect, Return ratio to remain at high teen over FY15-18e. ROE to remain at high teen over FY15-18e. Exhibit 21: Return ratios to remain high over FY15-18e 25 2 15 1 5 FY13 FY14 FY15 FY16e FY17e FY18e ROE ROCE Working capital cycle: The working capital cycle of the company has improved over FY11 to FY15 to ~94 days to 5 days. We are maintaining working capital cycle days at same level. Working capital cycle to remain low at 5 days over FY15-18e Exhibit 22: WCC to hold ground over FY15-18e 17 14 11 8 5 2-1 FY13 FY14 FY15 FY16e FY17e FY18e Debtors Days Inventory Days Creditors Days WCC Debt Equity Ratio: Kalyani Steels Ltd. has maintained its debt equity ratio below 1 over FY11-15. Going forward, we believe that the company will maintain this attractiveness over FY15-18e. Exhibit 23: Attractive debt equity ratio.8.7.6.5.4.3.2.1. FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e Equity research 14

(Wholly owned subsidiary of Bank of Baroda) Exhibit 24: Income statement (Rs mn) Y/E Mar (Rsmn) FY13 F14 F15 F16e F17e F18e Net sales 8,91 11,16 12,266 12,766 14,137 16,336 growth (%) (17.2) 37.9 9.9 4.1 1.7 15.6 COGS 4,566 5,586 5,851 5,382 5,96 6,887 Staff Cost 378 578 664 766 848 98 R&D Cost - - - - - - SG&A Cost 2,38 3,71 4,8 4,579 5,71 5,86 EBITDA 766 1,286 1,671 2,39 2,258 2,69 growth (%) 8 68 3 22 11 16 Depreciation 236 34 31 357 392 433 EBIT 531 947 1,361 1,682 1,866 2,176 Other income 72 118 27 27 27 27 Interest paid 225 17 148 168 172 18 Extraordinary/Exceptional items - - - - - - PBT 377 895 1,24 1,541 1,72 2,23 Tax 139 39 47 56 565 664 Minority interest - - - - - - PAT 239 586 833 1,35 1,156 1,359 Non-recurring items - - - - - - Adjusted PAT 239 586 833 1,35 1,156 1,359 growth (%) 44 145 42 24 12 18 Exhibit 25: Balance sheet (Rs mn) Y/E Mar (Rsmn) FY13 F14 F15e F16e F17e F18e Cash & Bank balances 9 168 49 68 763 833 Other Current assets 3,693 5,453 5,369 5,665 6,216 7,1 Investments 487 312 768 768 768 768 Net fixed assets 3,515 3,491 4,559 4,982 5,44 6,7 Goodwill - - - - - - Other non-current assets 576 921 97 97 97 97 Total assets 8,36 1,345 1,842 12,119 13,283 14,85 Current liabilities 2,98 4,77 3,736 3,994 4,249 4,662 Borrowings 1,518 1,851 1,82 2,71 2,121 2,221 Other non-current liabilities 389 439 527 527 527 527 Total liabilities 4,814 6,366 6,83 6,591 6,897 7,49 Share capital 219 219 219 219 219 219 Reserves & surplus 3,327 3,76 4,541 5,31 6,168 7,177 Shareholders' funds 3,546 3,979 4,759 5,528 6,387 7,396 Total liabilities 8,36 1,345 1,842 12,119 13,283 14,85 Equity research 15

(Wholly owned subsidiary of Bank of Baroda) Exhibit 26: Ratios Y/E Mar FY13 F14 F15e F16e F17e F18e Per share data (Rs) EPS 5.5 13.4 19.1 23.7 26.5 31.1 CEPS 1.9 21.2 26.2 31.9 35.5 41. DPS 1.8 3.5-6.1 6.8 8. BV 81.2 91.1 19. 126.6 146.3 169.4 Profitability ratios (%) Gross margins 38.9 44.8 46.9 51.8 51.8 51.8 Operating margins 9.5 11.5 13.6 16. 16. 16. Net margins 3. 5.2 6.8 8.1 8.2 8.3 Valuation ratios (x) PE 31.7 12.9 9.1 7.3 6.5 5.6 P/BV 2.1 1.9 1.6 1.4 1.2 1. EV/EBITDA 11.1 6.9 5.1 4. 3.6 3.1 EV/Sales 1.1.8.7.6.6.5 RoE 6.9 15.6 19.1 2.1 19.4 19.7 RoCE 6.9 11.9 13.9 15.1 14.8 15.4 RoIC 3 11 13 16 16 17 Exhibit 27: Cash flow statement (Rs mn) Y/E Mar (Rsmn) FY13 F14 F15e F16e F17e F18e Profit after tax 239 586 833 1,35 1,156 1,359 Depreciation 236 338 328 357 392 433 Chg in working capital 898 (94) 575 (38) (296) (472) Total tax paid 61 53 18 - - - Cash flow from operations 1,433 38 1,844 1,354 1,252 1,32 Capital expenditure (1,234) (31) (1,394) (78) (85) (1,) Change in investments 2 176 (457) - - - Cash flow from investments (1,34) (135) (1,851) (78) (85) (1,) Free cash flow 399 (97) (7) 574 42 32 Issue of shares - - - - - - Net inc/dec in debt (49) 333 (31) 251 5 1 Dividend (incl. tax) - - - (266) (298) (35) Other financing activities (91) (158) (81) Cash flow from financing (5) 175 (112) (16) (248) (25) Inc/(Dec) in Cash & Bank bal. (1) 78 (119) 559 155 7 Equity research 16

(Wholly owned subsidiary of Bank of Baroda) Company Profile Kalyani Steels Ltd. (KSL) was established in February 1973 in Pune as a part of the Kalyani Group, primarily with the objective of fulfilling the group s in-house requirements of forging quality steel. In early 9 s, KSL identified potential beyond serving the in-house requirement and shifted the base to Hospet, Karnatka, to set up an integrated steel mill (iron-ore based, blast furnace route) in 1997. Today, the integrated steel plant has hot metal capacity of 65, TPA of carbon and alloy steels, in a green 375 acre campus. The forging industry in India is the primary market for the company s products. Indian and international component manufacturers, for commercial vehicles, two wheelers, diesel engines, bearings, tractors, turbines and rail form a significant part of the company s clientele. Additionally, KSL has earned the status of preferred steel supplier for engineering, seamless tube and aluminum-smelting industry. Exhibit 28: Management details Mr. Mr. B. N. Kalyani Mr. R. K. Goyal Mr. B. M. Maheshwari Mrs. Sunita Kalyani Source: Company, BOBCAPS Chairman CEO & Managing Director Chief Financial Officer Director Exhibit 29: Products Offered and their Application Industry Segments AUTOMOTIVE FORGINGS CONSTRUCTION EQUIPMENT BEARINGS SEAMLESS TUBES ALUMINIUM SMELTING ENGINE Manufactures a range of grades for Crankshaft, Camshaft, Connecting Rods, Piston Pins, Diesel Injection Rails and other critical components of automotive engines. TRANSMMISSION Case hardening and microalloyed grades used in Gears, Input Shaft, Output Shaft and other transmission components. Case Carburizing, Through Hardening and Hub Bearing grades Leading producer of round casts for supply to manufacturers of seamless tubes. These are for usage in Oil & Gas industries and High Pressure Critical Boilers. Low Electrical Resistivity (LER) steel, developed specifically for primary aluminium industry to reduce level of electrical resistance within the steel during the electrolysis process of aluminium smelting. AXLE PARTS Steel bears the load in the Axles Beams and Shafts of Light, Medium and Heavy Commercial Vehicles, as well as that of Farm and Construction Equipment Source: Company, BOBCAPS Equity research 17

(Wholly owned subsidiary of Bank of Baroda) Exhibit 3: Steel Making Process Source: Company, BOBCAPS Equity research 18

(Wholly owned subsidiary of Bank of Baroda) Exhibit 31: Clientele Source: Company, BOBCAPS Equity research 19

(Wholly owned subsidiary of Bank of Baroda) Sales and Dealing Team Purvesh Shelatkar Senior Vice President & Head Equity +91-22-6138 933 purveshshelatkar@bobcaps.in Anil Pawar Senior Manager Dealing +91-22-6138 9325 anil@bobcaps.in Sachin Sambare Manager Dealing +91-22-61389331/33 sachin.sambare@bobcaps.in Ashwin Patil Executive Dealing +91-22-6138 9326 ashwin@bobcaps.in Research Team Sectors Vishal Dalmia Head of Research Capital Goods +91-22-6138 9387 vishal @bobcaps.in Vaishali Parkar Kumar Analyst Agri, Auto, Defence +91-22-6138 9382 vaishali.parkar@bobcaps.in Padmaja Ambekar Analyst Auto Ancillary, Infra, Midcap +91-22-6138 9381 padmaja.ambekar@bobcaps.in Akanksha Tripathi Analyst Footwear, FMCG +91-22-6138 9383 akanksha.tripathi@bobcaps.in Rishabh Mehta Analyst Textile, FMCG, Infra, Chemicals +91-22-6138 9384 rishabh.mehta@bobcaps.in Hareesha Kakkera - Associate Bio Technology, Pharmaceuticals +91-22-6138 9351 hareesha@bobcaps.in Retail Dealing Team Kshitij Kelkar +91-22-61389386 kshitij@bobcaps.in Kiran Sawardekar +91-22-61389385 kiran@bobcaps.in Debt Dealing Team Minaxi Tiwari +91-22-61389336 minaxi.tiwari@bobcaps.in UTI Tower, 3rd Floor, South Wing, Bandra-Kurla Complex, Bandra (E), Mumbai - 4 51. India. Ph.: +91.22.6138.93 Fax: +91.22.6671.8535 Email: research@bobcaps.in Web: www.bobcaps.in Disclaimer 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. NSE SEBI No. (CASH): INB23134537 NSE SEBI No. (DERIVATIVES): INF23134537 BSE SEBI No. : INB1134533 The BoB Capital Markets research team hereby certifies that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report." BOB Capital Markets Ltd. generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, BOB Capital Markets Ltd. generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of BOB Capital Markets Ltd.. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. BOB Capital Markets Ltd. does not provide tax advice to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment in certain transactions including those involving futures, options, and other derivatives as well as non investment-grade securities that give rise to substantial risk and are not suitable for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material, but regulatory, compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material, may from time to time have "long" or "short" positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein and may from time to time add to or dispose of any such securities (or investment). We and our affiliates may act as market maker or assume an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or advisory services for or relating to those companies and may also be represented in the supervisory board or any other committee of those companies. For the purpose of calculating whether BOB Capital Markets Ltd. and its affiliates hold, beneficially own, or control, including the right to vote for directors, 1% or more of the equity shares of the subject, the holding of the issuer of a research report is also included. BOB Capital Markets Ltd. and its non-us affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent that it relates to non-us issuers, prior to or immediately following its publication. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies, affectively assume currency risk. In addition, options involve risks and are not suitable for all investors. Please ensure that you have read and understood the current derivatives risk disclosure document before entering into any derivative transactions. In the US, this material is only for Qualified Institutional Buyers as defined under rule 144(a) of the Securities Act, 1933.No part of this material may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without BOB Capital Markets Ltd. s prior written consent. No part of this document may be distributed in Canada or used by private customers in the United Kingdom. Equity research 2