Bhushan Steel has outperformed the Sensex (+19%) & metal index (+26%) over the past six months, and now appears expensive at 8.5x Sep13 EV/EBITDA (domestic peers at 5-6x). The historical premium (40-55%) vs. peers should moderate 1) as BSL transforms from being a steel processor to a steel producer; 2) earnings growth at 8% in FY11-14 is more tepid vs. 33% in FY08-11 & EBITDA/t is range bound; & 3) potential value for captive raw material assets may be overdone given socio/political risks.
Thus agreed that A premium should remain, but with the convergence of business model, net D/E at 3x & a muted steel outlook, we expect it to narrow. Book Profits in Bhushan Steel.
BSL EPS Estimates for FY 2012, 13 and 14 are 45.62, 44.52 and 55.81
