Monnet Ispat's Q3FY11 revenue at Rs3.5bn and EBITDA at Rs1.1bn declined 7% and 3% YoY respectively as contribution from power sales declined 40% YoY due to reduced tariff. OPM expanded by 120bps YoY to 31.4%. However, PAT at Rs702mn grew 3% YoY on higher other income and lower interest.

Steel output subdued in Q3, but focus coming back: Steel sales (incl. DRI, ferro alloys) declined 10% YoY to 151kt on lower sales of steel (down 98% YoY to 626 tonnes, mostly rejects at a realisation of only ~Rs12/kg). The company has increased focus on steel production (billets, structurals) and expects to ramp-up output and sales in Q4.

Merchant power: The company sold 210mn units of power at an average tariff/unit of Rs3.4 (vs Rs4.3 in Q2FY11, Rs4.9 in Q3FY10).

Expansion Update: Monnet's proposed 1.4 mn tonnes integrated steel plant is expected to get completed by FY13 with gradual increase in capacities post Q1FY12 (ref pg3), delayed by a qtr.

Monnet Power (87.5% sub. of Monnet Ispat) is setting up a 1,050MW commercial power plant at a capex of Rs51bn expected by FY14, supported by captive coal mines. The company has announced further brownfield 660MW at a capex of Rs33bn, planned to be commissioned by FY15-FY16 (not factored in our valuation).

OUTLOOK

With 1.4mntpa expansion by FY13, Monnet is on the path of transforming itself from primarily sponge iron maker to an integrated steel producer. We expect this transition to boost Monnet's steel segment EBITDA by 54% CAGR over FY10-12E as blended EBITDA/ t expands from Rs3,300 in FY10 to Rs5,900 in FY12. Consequently, we expect PAT CAGR of 23% over FY10-12E.

VALUATIONS AND RECOMMENDATION

We have revised our estimates and target price for Monnet Ispat to factor in the delay of a qtr in steel expansion project, rising steel and raw material prices and to value CWIP at BV (pls ref pg4 for the changes). We value Monnet Power at Rs309/share (based on stake sale to Blackstone), 18% disc to our DCF-based fair value of Rs376. Our fair value for Monnet Ispat is Rs388/sh (4.5x FY12E EV/EBITDA, FY12E CWIP valued at Rs110).At 3.1x FY12E EV/EBITDA (adj. for value of Monnet power, CWIP), stock is attractively valued. Upgrade to 'BUY' with a SOTP-based revised target price of Rs697.