2QFY11 Results Update

SECTOR: METALS

Jai Balaji Industries

STOCK INFO. BLOOMBERG
18 November 2010
BSE Sensex: 19,931 JBIL IN Buy
REUTERS CODE
S&P CNX: 5,999 JAIB.BO Previous Recommendation: Buy Rs274
Equity Shares (m) 63.8
52-Week Range (Rs) 333/178
1,6,12 Rel. Perf. (%) 5/12/2
M.Cap. (Rs b) 17.5
M.Cap. (US$ b) 0.4

Consolidated

 Jai Balaji Industries' 2QFY11 adjusted PAT increased 12% QoQ to Rs116m due to improved performance of the
metallics division. Revenues increased 20% QoQ to Rs4.95b due to higher pig iron volumes and better sponge
realizations. Pig iron sales grew 80% QoQ to 58,230 tons as the company improved pig iron production after restarting
its second blast furnace in August 2010. Sponge sales declined 9% QoQ to 15,888 tons as the company produced
more steel and produced less sponge due to scarcity of iron ore.
 EBITDA grew 7% QoQ to Rs662m due to higher pig iron sales, despite higher RM costs and a labor wage settlement
in 2QFY11. Iron ore costs increased due to scarcity of ore led by the monsoons and ongoing mining issues in Orissa.
 Its ductile iron (DI) pipe mill started commercial production from the first week of November and is producing ~250tons
a day. Capacity utilization is expected to improve to 500 tons a day by the end of November 2010. The demand for
DI pipes is robust. The order book is 30,000 tons.
 The syndication to raise Rs12.3b debt for the Purulia project is in progress. The company has so far received firm
sanction letters of Rs3.5b from three banks. The management is confident of completing financial closure by Dec'10.
 In the near term Jai Balaji is focusing on ramping up DI pipe production, which will improve its margins due to its use
of captive pig iron and sinter. In the longer term, it is focusing on increasing steel production capacity and developing
coal blocks so as to keep down the cost of steel production. Capex requirement will be high over a few years. We
expect capex of Rs2.5b in FY11 and Rs6b in FY12 largely due to investment in a greenfield project at Purulia.
 As near-term earnings do not capture large long term upsides, we have valued the stock based at 2x FY12E book
value, implying a target price of Rs323, an upside of 18%. Maintain Buy.

Sanjay Jain (SanjayJain@MotilalOswal.com);Tel:+9122 39825412/ Tushar Chaudhari (Tushar.Chaudhari@MotilalOswal.com); +9122 39825425

 Jai Balaji Industries

Better pig iron performance aided PAT growth of 12% QoQ

 Jai Balaji Industries' 2QFY11 adjusted PAT increased 12% QoQ to Rs116m due to
better performance of its metallics division
 Net sales increased 20% QoQ to Rs4.95b due to higher pig iron volumes and better
sponge realizations.
 Revenue from pig iron grew 73% QoQ to Rs1.2b. Pig iron sales grew 80% QoQ
to 58,230 tons as the company improved pig iron production after re-starting its
second blast furnace in August 2010. But sponge sales declined 9% QoQ to 15,888
tons as the company produced more steel and produced less sponge due to
unavailability of iron ore during the quarter. Sponge iron realization improved 2%
QoQ to 15,673/ton and that of pig iron declined 4% QoQ to Rs20,855/ton.
 Revenue from the steel division was sequentially flat at Rs2.3b. Sales grew 9%
QoQ to 89,003 tons and realizations declined 7% QoQ to Rs25,851/ton as steel
prices declined in 2QFY11.
 Revenue from the ferro alloy division declined 24% QoQ to Rs370m on lower
volumes and prices.
 EBITDA grew 7% QoQ to Rs662m due to higher pig iron sales, despite higher raw
material costs and a labor wage settlement (impact of ~Rs60m) in 2QFY11. Iron ore
costs increased due to scarcity of ore led by the monsoons and ongoing mining issues
in Orissa.

DI pipe mill starts commercial production; volumes to ramp up

 The company's ductile iron (DI) pipe mill started commercial production from the first
week of November and is producing ~250 tons a day. Capacity utilization is expected
to improve to 500 tons a day by the end November 2010.
 The demand for DI pipes is robust. The order book is 30,000 tons.
 Pig iron production improved during the quarter due to the re-start of the second blast
furnace. This furnace was taken into maintenance due to weakening of pig iron demand
over the past few quarters. Production from the second blast furnace will be used to
feed the DI pipe unit.
 The sinter plant runs at 100% capacity utilization and contributes significantly to cutting
the cost of production of pig iron. The average cost of sinter was Rs2,400/ton which
is ~40% lower than that of iron ore lumps. The sinter plant reduced the company's
dependence on external lumps to 50%.
 Steel production grew only 11% QoQ to 86,375 tons as margins for converting billets
from metallics has fallen over the past few months. If billet realization improves the
company will gradually increase production in 2HFY11.

18 November 2010 2
 Jai Balaji Industries

Production ('000 Tonnes)

139 133 Billets

240 Sponge iron Pig iron 126
114
180 86
114 129 78
95
120 89
65 98
60 97
92 94 81 65 46
0
1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11
Source: Company/MOSL

Dumri coal block to receive statutory clearances before March 2011

 The company has received environment clearance for its Dumri coal block and the
forest clearance is being processed. It also received a GO certificate from the forest
authorities. The management expects to receive all clearances before March 2011.

Purulia project: Rs17b capex in first phase; financial closure (Rs12.3b)

expected by end December
 A syndication to raise Rs12.3b debt for the Purulia project is in progress. The company
has so far received firm sanction letters of Rs3.5b from three banks. The management
is confident of completing financial closure for the amount by the end of December
2010.
 The company has firmed up Phase 1 of Rs17b capex to set up a 1.2mtpa pellet plant,
a 0.7mtpa sponge iron unit, a 75MW of waste-heat recovery based CPP and a 450ktpa
EAF route steel making facility. Work on the project has started. The company has
acquired 1000 acres of land, which has been fenced.

Valuation and view

 In the near term, Jai Balaji is focusing on ramping up DI pipe production, which will
improve its margins due to the use of captive pig iron and sinter. Demand is robust. In
the long term, it is focusing on increasing steel production capacity and development
of coal blocks so as to keep down the cost of steel production. Capex requirement will
remain high over a few years. We expect capex of Rs2.5b in FY11 and Rs6b in FY12
largely due to investment in a greenfield project at Purulia.
 We expect EBITDA to increase more than 50% in 2HFY11 from the previous half, to
Rs1.9b due to increased contribution from DI pipes. Earnings in FY12 will increase
from higher utilization of DI pipe capacities and productivity improvement from coke
oven batteries.
 Though valuations look stretched due to deployment of capital in green field projects,
the stock is attractive from a long-term perspective. We believe large coal reserves
coupled with significant capex plans to monetize them, will enable the company to
drive strong earnings growth over five years.
 As near-term earnings do not capture large longer-term upsides, we have valued the
stock based on 2x FY12 book value, implying a target price of Rs323, an upside of
18%. Maintain Buy.

18 November 2010 3
 Jai Balaji Industries

Jai Balaji Industries: an investment profile

Company description Recent developments
Jai Balaji Industries (JBI) has emerged as the largest mini  The company recently received BIS certification for
mill after the merging of Sri Ramrupai Balaji and Jai Balaji 700-1,000mm diameter for its newly installed 240ktpa
Sponge and it has touched the one million ton mark by ductile iron pipe plant.
building a fully integrated steel plant and ferro alloy plant
along with a captive power unit and private railway siding.
Valuation and view
JBI's metallics capacity has increased by 48% CAGR to
 The stock trades at EV/EBITDA of 11x FY11E.
954,000tpa over FY03-09.
Maintain Buy.

Key investment arguments

Sector view
 Strong growth in earnings backed by aggressive
 Indian steel demand is expected to grow 10-12% over
capacity additions in metallics and crude steel over the
FY10-12 due to planned infrastructure investment by
next few years.
the government and a rebound of corporate capex.
 Allotment of coal blocks will result in lower cost and
Industrial production started growing in double digits
secured availability in future.
due to the economic recovery and a boost from stimulus
 Geometric proximity to raw material sources and well
packages. Automobile and white goods demand started
built logistics infrastructure.
growing in double digits. Large power capacity addition
will drive industrial production further. According to
Key investment risks WSA, Indian steel demand is expected to grow 8.2%
 High financial leverage and aggressive capex ahead and 13.6% in 2010 and 2011 respectively. We are
would need further equity infusion. positive about domestic steel companies.

Comparative valuations EPS: MOSL forecast v/s consensus (Rs)

Jai Balaji SAIL Monnet Ispat MOSL Consensus Variation
P/E (x) FY11E 22.3 12.6 11.3 Forecast Forecast (%)
FY12E 15.0 12.8 9.6 FY11 12.3 15.6 -21.4
P/BV (x) FY11E 1.9 2.0 1.8 FY12 18.3 27.0 -32.1
FY12E 1.7 1.8 1.6
EV/Sales (x) FY11E 1.7 1.7 3.3 Target Price and Recommendation
FY12E 1.7 1.8 3.0 Current Target Upside Reco.
EV/EBITDA (x) FY11E 10.8 7.9 11.7 Price (Rs) Price (Rs) (%)
FY12E 10.2 8.4 10.4 274 323 17.9 Buy

Stock performance (1 year)

Jai Balaji Inds (Rs) - LHS Rel. to Sensex (%) - RHS

340 30

Shareholding Pattern (%) 300 15

Sep-10 Jun-10 Sep-09
260 0
Promoter 50.8 50.8 58.3
220 -15
Domestic Inst 2.7 2.8 2.4
Foreign 22.8 23.5 15.0 180 -30
Nov-09 Feb-10 May-10 Aug-10 Nov-10
Others 23.8 23.0 24.3

18 November 2010 4
 Jai Balaji Industries

Financials and Valuations

18 November 2010 5
 Jai Balaji Industries

For more copies or other information, contact

Institutional: Navin Agarwal. Retail: Manish Shah
Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: reports@motilaloswal.com
Motilal Oswal Securities Ltd, 3rd Floor, Hoechst House, Nariman Point, Mumbai 400 021
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MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Disclosure of Interest Statement Jai Balaji Industries

1. Analyst ownership of the stock No
2. Group/Directors ownership of the stock No
3. Broking relationship with company covered No
4. Investment Banking relationship with company covered No

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18 November 2010 6