Batlivala & Karani B&K Securities

SECTOR U P D A T E 4th October 2006

Sponge Iron Industry – Growing with Steel

Indian economy is one of the fastest growing economies of the world

with 7.5-8% expected Real GDP growth. Steel demand is expected to
double by 2012 on rising demand from infrastructure and construction
sector. About 48% of steel is made through secondary route (Electric
route) which uses mix of sponge iron and scrap in steel making.
We see the demand of sponge iron to remain buoyant driven by growth
in steel production.
Production of steel scrap in India is low at 15-20% of its consumption
due to longer product life cycle, as the country is in developing phase and
the consumption pattern is tilted in favour of infrastructure and
construction rather than consumer durables. Therefore, secondary steel
makers have to depend on imported steel scrap. Coal based sponge iron
is fast replacing imported steel scrap due to low cost of production as
non-coking coal and iron ore (two critical raw materials) are domestically
available and its production is rising.
The growth of gas based sponge iron has been limited due to poor
availability and higher cost of gas. Essar Steel, Ispat Industries and Vikram
Ispat are the only producers in India who came up in 1990s on western
coast of India.
The future of sponge iron will belong to the players who have their
captive sources of raw materials which will insulate them from market
fluctuations. Presently, only Jindal Steel & Power and Monnet Ispat have
captive resources of both iron ore and coal. Tata Sponge has recently
acquired 115 mn tonnes mineable coal deposit in Orissa which will get
functional by FY09.

Key industry data (Sponge Iron production)

(Mn tonnes) FY06 FY12E CAGR (%)

Gas based 4.5 7.1 8

Coal based 7.3 16.3 14

Total 11.8 23.4 12

% of Coal based 61.6 69.6 –

Sanjay Jain Ashish Kejriwal

sanjay.jain@bksec.com ashish.kejriwal@bksec.com
Tel.: 91-22-4007 6217 Tel.: 91-22-4007 6216
 B&K RESEARCH OCTOBER 2006

Investment arguments
The production of sponge iron (Direct Reduced Iron/Hot Briquetted Iron) started in late
1970’s with one small sponge iron plant in the public sector in Andhra Pradesh viz. Sponge
Iron India Limited. During last decade, due to growth in domestic steel demand, a vigorous
growth in domestic steel production led by the secondary steel making sector, relatively low
cost of investment and ease of setting up of a sponge iron plant, availability of mineral
resources, frequent problems of scrap (affordability and availability), the sponge iron industry
has grown manifold and India became the world leader in sponge iron production in 2003.

Growth in steel production

The demand for steel continues to rise due to boom in infrastructure and construction
industry. The production of crude steel has grown at a CAGR of 9% during FY01-06 and
reached at 41.3 MT in FY06.
Increasing crude steel production

45
40 Crude steel production
35
30
(mn tons)

25
20
15
10
5
0
FY01

FY02

FY03

FY04

FY05

FY06
Source: SAIL

Domestically available raw
materials would continue to
drive growth
The production of steel through the secondary route (EAF, IF), using hot metal (pig iron),
sponge iron/scrap as their basic raw materials, accounts for approx. 48% of the total steel
output and has grown at a CAGR of 18% during FY01-05. The trend is expected to continue
due to rising availability of coal based sponge iron produced from domestically available raw
material. The flue gases generated in sponge iron making are utilised for production of power
for captive consumption.

Increasing production through the secondary route

(Mn tonnes) FY01 FY02 FY03 FY04 FY05 CAGR (%)

Crude steel production 26.9 28 30.4 34.2 38.5 9

Main producers 17.3 17.8 19.0 20 20.0 4

Secondary producers 9.6 10.2 11.5 14.2 18.5 18

EAF 5.3 5.9 6.7 8.2 10.2 –

IF units 4.3 4.3 4.8 6 8.2 –

% share of secondary producers 36 36 38 42 48 –

Source: JPC

SPONGE IRON INDUSTRY 2

 B&K RESEARCH OCTOBER 2006

Continued substitution demand for scrap

Sponge iron replacing
imported steel scrap due to
low cost of production
Proportion of sponge iron in secondary production is expected to go up. Production of steel
scrap in India is low at 15-20% of its consumption due to longer product life cycle, as the
country is in developing phase and the consumption pattern is tilted in favour of infrastructure
and construction. Domestic availability of scrap is low, as the ship-breaking industry (main
source of indigenous scrap generation) isn’t getting enough ships for breaking. Therefore,
secondary steel makers have to depend on imported steel scrap. Coal based sponge iron is
fast replacing imported steel scrap due to low cost of production, as non-coking coal and iron
ore (two critical raw materials) are domestically available and its production is rising.

Increasing share of sponge iron by secondary producers

(%) 00-01 01-02 02-03 03-04 04-05 05-06
Sponge iron 30 30 38 43 50 60
Scrap/Pig iron 70 70 62 57 50 40
Source: AML Steel

As Indian steel producers have to depend on import of scrap, the domestic prices of sponge
iron align with the landed price of scrap.
Scrap vs. DRI prices

300 16,000

250 14,000
Sponge iron price move in line 12,000
200
with landed cost of steel 10,000
scrap 150 8,000

100 6,000
Scrap Shredded fob Rotterdam $/ton (LHS) 4,000
50 DRI prices , Kolkata (Rs /ton incl. excis e & taxes , RHS) 2,000
0 -
1996
1998
2000
2002
Feb-03

Jun-03

Oct-03
Dec-03
Feb-04

Jun-04

Oct-04
Dec-04
Feb-05

Jun-05

Oct-05
Dec-05
Feb-06

Jun-06
Apr-03

Aug-03

Apr-04

Aug-04

Apr-05

Aug-05

Apr-06

Source: Metal Bulletin, JPC

SPONGE IRON INDUSTRY 3

 B&K RESEARCH
Sponge iron produced by
reducing iron ore using
non-coking coal
Requires high capital
investment, sponge iron
produced by reducing iron ore
pellets using natural gas
SPONGE IRON INDUSTRY
OCTOBER 2006
Overview
The Indian sponge iron industry has seen a rapid and powerful growth in the coal based
sponge iron segment in the country, while the gas based segment is restricted mainly to 3
producers namely Essar Steel, Vikram Ispat and Ispat Industries due to expensive and limited
supply of natural gas. Moreover, the cost of setting a gas based sponge iron unit is very high
which is not feasible for small players. The demand of sponge iron in India has grown at a
CAGR of 10% over the last 10 years.
Production – Processes & Technologies
In India, mainly coal based rotary kilns and gas based shaft furnace reactors are used for
producing sponge iron.
Coal based process
Coal based plants are of smaller size, requires low capital investment. Sponge iron is produced
by reducing iron ore using non-coking coal. Iron ore lumps and non-coking coal are charged
into a rotary kiln in requisite proportion along with fluxes. Coal plays a dual role in the process
by acting as a redundant as well as fuel for providing heat to maintain the requisite temperature
inside the kiln at 950°-1050°C. The reduction process occurs in solid state. Waste heat from
spent gases is utilised to produce power.
Gas based process
Gas based plants are of relatively larger sizes, require higher capital investment and uses
Midrex and HYL-III technologies for reducing iron ore pellets with natural gas as the redundant
in the reactor. The difference between the two technologies is the process of reforming and
use of the spent gas. The Midrex uses CO2 (+ steam) based reforming of the natural gas while
HYL-lll uses mainly the H2O reforming process. The specific consumption of various raw
materials for production of 1 tonne sponge iron (by Midrex process) include iron oxide 1.49
tonnes, natural gas of 2.5 GCal and 100 KWh of electricity. The hematite ore pellets/lumps
should possess 67% Fe minimum.
Composition of Coal and Gas based Sponge Iron
(%) Fe (Metallic) Metallisation Carbon Sulphur Phosphorus Size
Coal based 81-84 90 (+/-2) 0.2-0.3 .025-.03 max .05-.06 max 3-30 mm
Gas based 86.5 93+ 1.5-3 .015 max .04 max 6-200 mm
India has been the world’s largest producer of sponge iron since 2003 producing 11.8 mn
tonnes in FY06, registering a growth of 15% over the last year. This has been due to rapid and
powerful growth in the coal based sponge iron segment in the country.
4
 B&K RESEARCH OCTOBER 2006

Sponge iron (DRI/HBI) production

(Mn tonnes) FY04 FY05 FY06 FY07E FY08E FY09E FY10E FY11E FY12E

Gas based 4 5 5 6 7 7 7 7 7

Coal based 4 6 7 10 12 13 15 16 16

Total 8 10 12 16 19 20 22 23 23

Growth (%) 17 27 15 32 20 7 8 7 1

% of Coal based 51 55 62 62 63 65 67 69 70
Source: B&K Estimates

Sponge Iron production

18
16 Gas Based Coal Based
14
production (mtpa)

12
Gap expected to widen further 10
in coming years 8
6
4
2
0

FY07E

FY08E

FY09E

FY10E

FY11E

FY12E
FY04

FY05

FY06

Source: JPC & B&K Estimates

The share of coal based DRI production has increased from about 37% in FY01 to about
62% in FY06 and the gap is expected to widen further in the coming years.

SPONGE IRON INDUSTRY 5

 B&K RESEARCH
Vast reserves of non-coking
coal but of inferior quality
with higher percentage of ash
content
Players located near coal
mines
Increasing coal prices put
pressure on the margins of
the players
SPONGE IRON INDUSTRY
OCTOBER 2006
Raw materials scenario
Non-coking coal
Non-coking coal is the basic raw material for coal based sponge iron plant. Although, India
has a vast reserves of non-coking coal (about 221 bn tonnes out of which proven reserves
are about 79 bn tonnes) but of inferior quality with higher percentage of ash content. The
high ash content is a major problem for sponge iron producers, as higher coal consumption is
needed in order to affect the same degree of reduction. Over 75% of non-coking coal
production is the lower D, E, and F grade. Generally, with 1% increase in the ash content,
production capacity decreases by about 2.5%. According to industry estimates, calibrated
non-coking coal (grade B/C) requirement is about 1-1.2 tonnes per tonne of sponge iron
produced but if low grade (grade D/E/F) coal is being used, then the coal required will go up
to as much as 2.5 tonnes or more.
The non-coking coal with a higher % of ash content needs to be washed and should be
brought it to a level of 25% or less for use in sponge iron kilns which adds to the cost. Freight
charges by railways constitutes about 30-40% of the total cost of non-coking coal. So, it’s
beneficial for the DRI (Direct Reduced Iron)/sponge iron producers to set up plants near
coal mines so as to save on transportation costs. Therefore, most of the players are located in
Chhattisgarh, Orissa and West Bengal region.
Many big players have already acquired captive coal blocks or are in the process of acquiring
it. But small players which are numerous in India have to depend on the market. Coal India
Limited has introduced the system of E-auction and supply of coal through Multi Commodity
exchange for the core sector other than the power utilities. So, now the prices are market
driven which will inevitably interrupt consistent supplies for producers who depend on market.
Higher ash content and increasing coal prices due to demand-supply mismatch put pressure
on the margins of the players. Some players like Tata Sponge Iron Limited started importing
low ash content non-coking coal and blend it with high ash content domestic non-coking coal.
Although, imported non-coking coal is very expensive vis-à-vis domestic one but in order to
improve the efficiency of the kilns, large players have started doing so.
Iron ore
Coal based sponge iron plants normally use 100% lump ores with Fe content greater than
62% while the gas based plants normally use a feed mix of iron ore pellets and lumps of
around 67% Fe content. According to industry norm, about 1.6 tonnes of calibrated lump
iron ore (5-18mm, Fe: Minimum 62%) is required to produce 1 tonne of sponge iron.
India has vast reserves of medium grade iron ore (hematite ores, Fe: 62-65%) which are
mainly located in the states of Orissa, Jharkhand, Chhattisgarh, Karnataka and Goa region.
6
 B&K RESEARCH OCTOBER 2006

Recoverable reserves of hematite as on 1.4.2000

(Mn tonnes) High Grade Medium Grade Low Grade Others Total
(Fe+65%) (Fe 62-65%) (Fe<62%)

Chhattisgarh 461 562 463 417 1,903

Orissa 548 1,857 508 291 3,204

Vast reserves of medium Jharkhand 44 1,754 873 188 2,859

grade iron ore available in
Karnataka 215 583 79 90 966
India
Goa Region 0 133 392 56 581

Others 30 134 146 104 406

Total 1,298 5,023 2,461 1,146 9,919

% share in total 13 51 25 12 100

Source: IBM, Nagpur

Increasing prices
About 54% of the total domestic production is exported in FY05 due to better realisation at
the global level owing to the higher demand of steel worldwide, in particular China. The price
at the domestic level is also moving northward.

Iron Ore
(MT) FY03 FY04 FY05
Production 99 121 145
Export 48 63 78
% of production exported 48 52 54
Source: IBM & MMTC

Dolomite
Dolomite acts in the coal based process as a desulphuriser, removing sulphur from the feed
mix during the reduction process. It constitutes a very small proportion of total raw materials
required in the process and doesn’t have much impact on the cost.

Availability of natural gas
restricted to western part of
country
Natural gas
Natural gas is used in gas based sponge iron units mainly through two processes in India
namely Midrex and HYL-III. Availability of natural gas is restricted to the western part of the
country which has favoured the growth of the gas based units there. High price of natural gas
in India is increasing the cost of production of the gas based producers.

Power generation
Power generation through waste heat from spent gases at very low cost is one of the biggest
advantages the coal based sponge iron unit is enjoying with. This would help the companies
in reducing the cost of production and earn additional income by selling the surplus power.

SPONGE IRON INDUSTRY 7

 B&K RESEARCH OCTOBER 2006

Captive power position

(Unit: KWh) Module-wise power position
Module (TPA) Power generation Own consumption Surplus power

Additional income to Coal 150,000 10-12 3.5 6.5

based sponge iron plant 100,000 7-8 3 5
30,000 2-2.5 1.5 1
Source: JPC

Raw material facility

More than 80% of the sponge iron producers are small producers (installed capacity of less
than 60,000 TPA) and have to depend on the market for basic raw materials. Producers are
unable to utilise their capacity to the fullest and are on the verge of closure amidst fluctuating
and increasing prices of raw materials, shortage of power facilities and lack of infrastructure.
Integrated players having captive raw materials are at advantageous position.

Regional overview
State/Region Total No. Captive power Coal Iron ore
of units generation linkage source

Chhattisgarh 38 8 24 7

Orissa 33 4 24 2

West Bengal 30 0 23 2

Jharkhand 11 2 5 2

Karnataka 13 1 1 3

Andhra Pradesh 12 1 6 1

Tamil Nadu 2 0 2 1

Goa 3 0 1 1

Maharashtra 5 0 2 1

Others 56 0 0 0

Total 203 16 88 20
Source: JPC

Raw material availability and regional production

Chhattisgarh alone accounts for about 38% of total coal based sponge iron production.
Besides, production is largely concentrated in Eastern region (Orissa, West Bengal and
Jharkhand) contributing about 39% in total coal based production in FY05 due to their
proximity to basic raw materials – iron ore and non-coking coal. The industry is virtually non-
existent in North India due to scarcity of raw materials. Gas based producers are located in
Western India only due to their proximity to natural gas. The whole production is consumed
domestically. This scenario is unlikely to change in the coming years due to increasing domestic
demand by the secondary producers.

SPONGE IRON INDUSTRY 8

 B&K RESEARCH OCTOBER 2006

Sponge iron production – Geographical distribution

Chhattisgarh, Orissa, West

Bengal and Jharkhand
contributing approx. 77% of
total Coal based DRI
production in FY05

SPONGE IRON INDUSTRY 9

 B&K RESEARCH
World’s largest gas based DRI
plant having production
capacity of 3.4 MTPA
Long-term linkages for iron
ore and natural gas
Production mainly for captive
consumption
SPONGE IRON INDUSTRY
OCTOBER 2006
The Gas based Sponge Iron producers
Gas-based sponge iron is produced by Midrex process and HYL-III process using naphtha
or natural gas. This process is employed by Essar Steel, Ispat Industries and Vikram Ispat
(only Vikram Ispat uses HYL-III process). The entire sponge iron production of Vikram
Ispat is sold in the open market. Other gas based producers mainly consume it internally for
the production of steel.
Essar Steel
Essar Steel operates the world’s largest gas based Direct Reduced Iron (DRI) plant with a
production capacity of 3.4 million tonnes per annum (MTPA) at Hazira, Gujarat (5 gas based
modules with Midrex technology). The plant uses state-of-the-art technology, which ensures
high quality raw material for the steel plant. DRI is produced in two forms, namely, Hot
Briquetted Iron (HBI) and Hot Direct Reduced Iron (HDRI).The HDRI system is an Essar
innovation that saves approx. 100 KWh/tonne of HDRI consumed by Electric Arc Furnace,
thus, utilising the 650° Celsius heat contained in the HDRI. The plant is supported by a
captive power plant of 32 MW, which operates at 100% capacity.
Raw materials linkages
• Iron ore – The company has a long-term contract with National Mineral Development
Corporation for calibrated lump iron ore and fines. The company has 8 MTPA capacity
pelletisation plant at Visakhapatnam and 8 MTPA iron ore beneficiation plant at Bailadila.
• Natural gas – The company also has long-term contracts for the supply of gas with GAIL,
IOCL, BPCL, GSPC etc. But, the supply of gas is erratic. Normally, 125 KWh of electricity
is consumed and on an average 325 SM3 of natural gas is used for producing a unit of
HBI.
HBI produced for captive consumption
Essar uses the HBI-Electric Arc Furnace-Continuous caster-Hot strip mill route to strip
making. The company consumes almost entire HBI produced for making steel.
Sponge iron
4
3.5
3
2.5
mtpa
2
1.5
1
0.5
0
FY01
FY02
FY03
FY04
FY05
FY06
Capacity Production Sales Captive cons.
Source: Essar Steel, annual reports
10
 B&K RESEARCH OCTOBER 2006

Ispat Industries Ltd.

Ispat Industries Limited (IIL) (formerly known as Nippon Denro Ispat), promoted by the
Mittals of Ispat group, is one of the leading integrated steel makers in India. The company
commissioned its gas based single mega-module plant for making sponge iron in Dolvi, Raigarh
(Maharashtra) in 1994 using direct-reduction technology “Megamond series 1000 module”
from Midrex Corporation, US, the world leader in this field. The current installed capacity of
the plant is 1.6 MTPA.

Raw materials dependence

Less availability of natural
gas restricts plant to operate
at its enhanced capacity
• Iron ore – The company sources its iron ore pellets requirements from National Mineral
Development Corporation, as IIL has no captive iron ore mines.
• Natural gas – Natural gas is sourced from GAIL, India but IIL is getting less gas due to
overall shortage of gas supply in India. Therefore, the company is not able to operate the
plant at its enhanced capacity.

Captive consumption
Ispat Industries, being the producer of hot rolled coils in India, currently consumes almost
entire sponge iron produced internally. In FY06, the production of HBI got affected due to
lower availability of natural gas as well as due to shutdown of plant for 35 days during May-
June for capital repairs.

Sponge iron

1.8
1.6
1.4
1.2
1
mtpa

Production mainly for captive

0.8
consumption 0.6
0.4
0.2
0
FY01

FY02

FY03

FY04

FY05

FY06
Capacity Production Sales Captive cons .

Source: Ispat Industries, annual reports

SPONGE IRON INDUSTRY 11

 B&K RESEARCH
Plant having capacity of 0.9
MTPA can produce both HBI
and DRI from the same
reactor
Entire production is sold in
the open market
SPONGE IRON INDUSTRY
OCTOBER 2006
Vikram Ispat (Unit of Grasim Ind.)
Vikram Ispat, a unit of Grasim Industries Ltd. is located at Salav village in Raigad, Maharashtra.
The plant was set up in 1989 with a capacity of 0.75 MTPA of sponge iron in the form of
HBI, based on HYL-III technology from HYLSA, Mexico. In 1998, Oxygen Injection System
and DRI Cooling system was commissioned and the plant capacity was increased to 0.9
MTPA. The plant can produce both HBI and DRI from the same reactor.
Raw materials
• Iron ore in the form of pellets is sourced from Gujarat Industrial Investment Corporation
and lump ore from Bailadila .The company doesn’t have captive mines.
• Natural gas consisting of 90-95% methane is sourced from the piping network of GAIL,
India. The plant has been integrated with total energy concept (due to HYL III process)
with 8.7 MW power capacity.
Sponge iron
0.8
0.6
mtpa
0.4
0.2
0
FY01
FY02
FY03
FY04
FY05
FY06
Capacity Production Sales
Source: Grasim Industries, annual reports
Less availability of natural gas rising input cost
In FY06, due to an acute shortage of natural gas (continuous reduction in the generation of
gas from ONGC wells over the last five years), the plant couldn’t be utilised properly and
hence production fell. In order to cater to the market demand, the plant has been using
supplementary energy sources like naphtha and propane which are 5-6 times costlier than
natural gas. The input cost has increased in multiples leaving the business margins bare
minimum.
No captive consumption
Vikram Ispat is the only gas based sponge iron player selling its entire production in the
market, as the company has no steel making facility. In FY06, sponge iron constitutes approx.
9% to the total turnover of the company.
12
 B&K RESEARCH
World’s largest coal based
sponge iron plant having
capacity of 1.37 MTPA
Increased production of DRI
will be used internally for
ramping up of production of
steel
SPONGE IRON INDUSTRY
OCTOBER 2006
Coal based sponge iron producers
Jindal Steel & Power Ltd.
Jindal Steel & Power Limited (JSPL) with an installed capacity of 1.37 MTPA (10 kilns) in
Raigarh, Chhattisgarh is the world’s largest coal based sponge iron plant today. JSPL, being
integrated backwardly has its own captive raw material resources (iron ore & coal) and power
generation, which in turn has enabled the company to insulate itself from the market fluctuations
of raw material prices and to control quality and enhance production. Presently, JSPL is using
in-house Jindal technology for producing sponge iron.
Captive raw materials insulating JSPL from market fluctuations
• Iron ore: JSPL is operating a captive iron ore mine at Tensa in Orissa. The requirement of
iron ore is met from company’s Tensa mines.
• Non-coking coal: The total requirement of non-coking coal of +6-20 mm size is met from
the captive colliery (equipped with coal washery with the capacity of 6 MTPA) developed
by JSPL at Tamnar in Chhattisgarh. JSPL saves on transportation owing to having its
plant near captive coal mines.
• Dolomite: Dolomite is sourced from Baradwar in Chhattisgarh (about 70 km from Raigarh).
• Captive power generation: JSPL also saves on power front due to captive power generation
based on flue gases generated in sponge iron making.
Sponge iron
1.6
1.4 Capacity Production
Sales Captive cons .
1.2
1
(mtpa)
0.8
0.6
0.4
0.2
0
FY01
FY02
FY03
FY04
FY05
FY06
*Increased capacity in FY05 to 1.37mtpa from 0.65mtpa
Source: JSPL, annual reports
Four new kilns for making sponge iron have been added in 2005 which has raised the
capacity from 0.65 MTPA to 1.37 MTPA. The increased production of sponge iron will be
consumed internally for ramping up production of steel.
13
 B&K RESEARCH
Production capacity expected
to increase to 0.8 MTPA by
3QFY07
Captive coal mines insulate
MIL from market fluctuations
of coal prices
SPONGE IRON INDUSTRY
OCTOBER 2006
Monnet Ispat
Monnet Ispat Limited (MIL), promoted jointly by Sandeep Jajodia and Jindal Strips in 1990
manufactures sponge iron, steel billets and various finished steel products near Raipur in
Chhattisgarh. MIL is one of the largest coal-based sponge iron producer in India (installed
capacity: 0.3 MTPA) backed by captive resources of raw material viz. coal, iron ore and
captive power.
Over the years, MIL has steadily ramped up capacities from 0.1 MTPA of sponge iron in
FY00 to 0.3 MTPA in FY04. MIL is setting up six sponge iron kilns (4 kilns of 350 TPD and
2 kilns of 100 TPD each) with total capacity of 0.5 MTPA which is expected to commence
production in the beginning of 3QFY07.
The company also has captive power plant at Raipur (60 MW) operating on flue gases from
sponge iron kilns which reduces company’s dependence on state electricity boards. MIL is
also in the process of installing 90 MW captive power plant at Raigarh operating on char and
coal fines from sponge iron plant and captive coal mine.
Backward integration gives competitive advantage
Coal Mine – Raigarh: This underground mine has extractable reserves of 86 mn tonnes
(estimated reserves are 126 mn tonnes). The quality of coal is better than open-cast mine.
MIL started the production of coal in April 2005 and is currently mining at the rate of 0.6
MTPA and plans to ramp it up to 1.2 MTPA in order to meet the increased demand of coal
from Raigarh project. Most of the company’s in-house requirements for coal would be met
from the captive sources.
Iron Ore Mine – Orissa: The mine has estimated 30 mn tonnes of extractable iron ore
reserves which will be entirely for captive use.
Sponge iron
0.4
0.3 Capacity Production
Sales Captive cons.
0.3
0.2
mtpa
0.2
0.1
0.1
0.0
FY01
FY02
FY03
FY04
FY05
FY06
Source: Monnet Ispat, annual reports
Over the years, MIL has started increasing the usage of sponge iron for captive consumption.
Sponge iron contributes approx. 25% to the total turnover of the company.
14
 B&K RESEARCH OCTOBER 2006

Coal based sponge iron producers

Company Present capacity Production Coal cost/ Iron ore cost/ Remarks
(tonnes) (FY05) tonne DRI tonne DRI

Jindal Steel & Power 1,370,000 692,682 1,050 1,575 Captive raw materials, produces steel.
Tata Sponge Iron Ltd. 390,000 223,686 3,750 2,880 Acquired coal mines, get operational by FY09.
Monnet Ispat Ltd.* 300,000 240,133 1,375 2,400 Captive raw materials, iron ore mines get
operational soon. produces steel.
GSAL (India) Ltd. 220,000 68,967 3,479 5,526 No captive resources.
Raipur Alloy & Steel 210,000 91,767 2,800 6,400 Acquired iron ore & coal mines, will get
operational in future, produces steel.
Singhal Enterprises (P) 198,000 134,537 3,450 5,280 No captive resources.
Bihar sponge Iron Ltd. 180,000 140,998 3,250 4,370 No captive resources.
Sunflag Iron & Steel Co. 150,000 134,192 3,103 6,720 No captive resources, produces steel.
HEG Ltd. 120,000 87,141 3,019 5,965 No captive resources, produces steel.

Orissa Sponge Iron Ltd. 100,000 108,116 2,750 4,740 No captive resources, produces steel.

*Increasing its capacity to 800,000 tonnes in FY07.

Source: Industry sources.
Cost structure (Coal based sponge Iron producers)

Secured Future
Others
9000 Acquired coal
8000 mines Power
7000 d iron Fuel oil
6000 Acquire e s
5000 o r e m in Dolomite
(Rs)

4000 Non-CokingCoal
3000
2000 Iron Ore
1000
0
Linkage-Iron
Captive coal

Linkages(4th)
Captive Raw
Materials(1st)

mines(2nd)

ore(3rd)

Struggling to
No

Survive

Plants with
Source: B&K Research
Note: Jindal Steel & Power falls in 1st, Monnet Ispat in 2nd and Tata Sponge in 3rd category.

Players like JSPL having The players like Jindal Steel & Power who has captive raw materials incurred approx. Rs.
captive raw materials 2,900/tonne variable cost in making sponge iron against approx. Rs. 8,800/tonne for players
produce at a very low cost and
having no captive raw material sources. Monnet Ispat has acquired iron ore mines to reduce
have a secured future
its variable cost/tonne of sponge iron further. Tata Sponge is moving towards second level,
as the company has recently acquired coal mines which will insulate the company from the
market fluctuations and helps in reducing coal cost. Increasing prices of raw materials make
small players vulnerable and many players have shutdown temporarily.

Future prospects
The sponge iron industry has been posting strong growth over the last five-six years. The
growth of Indian sponge iron industry will be propelled mainly by coal based sponge iron
producers. This is due to availability of abundant raw material domestically and low capital
required in installing sponge iron plant. There is limited scope for new gas based sponge iron

SPONGE IRON INDUSTRY 15

 B&K RESEARCH
Demand for sponge iron
expected to grow due to
availability of abundant raw
material domestically,
growth being propelled by
Coal based DRI producers and
the future will belong to the
players who have captive
sources of raw materials
SPONGE IRON INDUSTRY
OCTOBER 2006
unit coming in near future. The existing 3 players may plan for further expansion but it
depends on the future availability of natural gas which is in short supply currently. The
availability of natural gas is expected to improve for Ispat Industries and Vikram Ispat by end
2007, as the Dahej-Uran gas pipeline is slated to be commissioned by then.
On the raw material front, the supply of basic inputs for coal based sponge iron, iron ore and non-
coking coal are abundant. But increasing iron ore prices and inferior quality of non-coking coal
poses a problem for DRI producers. Increasing freight and power cost also poses problem for
small producers. Therefore, the future of sponge iron will belong to the players who have captive
sources of raw materials which will insulate them from market fluctuations. Presently, only Jindal
Steel & Power and Monnet Ispat have captive resources of both iron ore and coal (production
from iron ore mines of Monnet Ispat will commence soon). Tata Sponge has recently acquired
115 mn tonnes mineable coal deposit in Orissa which will be functional by FY09.
The demand for sponge iron is expected to remain firm, as it directly depends on the demand
of steel which is expected to reach more than 110 mn tonnes by 2020. With increasing share
of secondary producers which uses mix of sponge iron and scrap in making steel and reduced
domestic availability of high quality scrap and its increasing cost, the future demand for
sponge iron looks promising.
16
 B&K RESEARCH
Increasing steel production
through EAF route and low
availability of scrap boost
demand for sponge iron
SPONGE IRON INDUSTRY
OCTOBER 2006
Global scenario
Global production of sponge iron (DRI/HBI) has been strong over the last decade. The steel
industry globally is using about 25% of the alternative iron sources like DRI/HBI to produce high
quality steels in the EAFs. DRI is now recognised as a high purity, top quality charge material
throughout the world which has been reflected by the strong growth of sponge iron (DRI/HBI)
production which has risen to 56 MTPA in 2005 as against about 40 MTPA in 2001.
World DRI production
70
60
50
40
( Mt)
30
20
10
2006E
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source: Midrex Technologies, Inc & B&K estimates
EAF production – Increasing share in steel making
The production through the EAF route has gone up from about 26.6% in 1988 of the global
production to about 31.7% in 2005. Outside China, very few new blast furnaces have been
built in recent years. EAF steelmaking continues to grow because of its capital and operating
cost advantages vis-à-vis the integrated route. This growth results in increased demand for
EAF charge materials which includes scrap, DRI/HBI and pig iron. Since world steel production
was essentially flat from 1980-95, the growth rate of the obsolete scrap supply leveled off
which led to increase in their prices. Amidst these limitations, demand for DRI increased and
its use in EAFs increased by almost 12 MT in 2000-05. We expect this trend to continue in
future.
Geographical distribution
Sponge iron producers are mainly concentrated in Latin America (including Mexico), Middle
East and Asian region. Latin America is still the largest producers of DRI in the world but over
the last three years, their share has declined from 36% of total world DRI production to 34%
in 2005. This is due to increasing prices of natural gas and larger growth in the coal based DRI
production by Indian producers which led to overall increase in India’s share to 20%.
17
B&K RESEARCH OCTOBER 2006

Production – Geographical distribution

(Mn tonnes) 2000 2001 2002 2003 2004 2005

Latin America 16.0 14.1 16.0 17.0 19.0 19.3

Argentina 1.4 1.3 1.5 1.7 1.7 1.8

Brazil 0.4 0.4 0.4 0.4 0.4 0.4

Mexico 5.8 3.7 4.9 5.6 6.5 6.0

Peru 0.1 0.1 0.0 0.1 0.1 0.1

Trinidad & Tobago 1.5 2.3 2.3 2.3 2.4 2.1

Venezuela 6.7 6.4 6.9 6.9 7.8 9.0

Middle East/N. Africa 12.1 12.1 13.0 13.9 15.3 15.9

Egypt 2.1 2.4 2.5 2.9 3.0 2.9

Iran 4.7 5.0 5.3 5.6 6.4 6.9

Libya 1.5 1.1 1.2 1.3 1.6 1.7

Qatar 0.6 0.7 0.8 0.8 0.8 0.8

Saudi Arabia 3.1 2.9 3.3 3.3 3.4 3.6

Asia/Oceania 10.1 10.6 11.3 13.8 14.7 15.3

Australia 0.6 1.4 1.0 2.0 0.7 –

Myanmar 0.0 0.0 0.0 0.0 0.0 –

China 0.1 0.1 0.2 0.3 0.4 0.4

India 5.4 5.6 6.6 7.7 9.4 11.1

Indonesia 1.8 1.5 1.5 1.2 1.5 1.4

Malaysia 1.3 1.1 1.1 1.6 1.7 1.4

New Zealand 0.9 0.9 0.9 1.0 1.0 1.0

North America 2.7 0.1 0.7 0.7 1.3 0.8

Canada 1.1 – 0.2 0.5 1.1 0.6

US 1.6 0.1 0.5 0.2 0.2 0.2

Former USSR/Eastern Europe 1.9 2.5 2.9 2.9 3.1 3.3

Russia 1.9 2.5 2.9 2.9 3.1 3.3

Sub-Saharan Africa 1.5 1.6 1.6 1.5 1.6 1.8

South Africa 1.5 1.6 1.6 1.5 1.6 1.8

Western Europe 0.5 0.2 0.5 0.6 0.6 0.4

Germany 0.5 0.2 0.5 0.6 0.6 0.4

World Total 44.7 41.3 46.0 50.5 55.6 56.8

Source: Midrex Technologies, Inc.

SPONGE IRON INDUSTRY 18

 B&K RESEARCH OCTOBER 2006

Major DRI Producing Blocs (2002) Major DRI Producing Blocs (2005)

6% 3% 1% 1% 6% 3%1% 1%
14% 36% 34%
20%

10% 7%
29% 28%

Latin America( including Mexico) Middle Eas t/ North Africa

As ia/ Oceania(excluding India) India
Former USSR/Eas tern Europe Sub-Saharan Africa
North America(US & Canada) Wes tern Europe

Source: Midrex Technologies, Inc

85% of sponge iron produced
through gas based process in
gas rich areas like Middle
East, Latin America and
Russia
Production processes
Globally, about 85% of the sponge iron is produced through gas based process mainly in large
gas rich areas like Middle East, Latin America and Russia. Coal based process has increased
from less than 10% in the 1990s to about 15% in 2005 due to the proliferation of small rotary
kiln plants in India. Among different production processes, Midrex Technology continues to
dominate the world scenario with more than 60% market share since 1987.

World DRI capacity utilisation by process (2005)

40 140
35 120
Capacity & production

30 100

Utilisation(%)
25
80
20
60
15
10 40
5 20
0 0
Midrex HYL Finmet Coal-bas ed

Capacity(Mt) Production(Mt) Utilis ation (%)

Source: Midrex Technologies, Inc

India leads the way

Growth in Indian sponge iron
industry due to setting up
large number of small
capacity rotary kilns
Sponge iron growth in 2005 was entirely due to a number of small capacity rotary kilns
started in India. India led the world in sponge iron production with 11.1 million tonnes
followed by Venezuela with 8.9 million tonnes, Iran with 6.9 million tonnes and Mexico with
6.0 million tonnes in CY05.

SPONGE IRON INDUSTRY 19

B&K RESEARCH OCTOBER 2006

Top 5 Global DRI producers

16
14

Production (Mt)
12
10
8
6
4
2
0

2006E
2000

2001

2002

2003

2004

2005
India Vanezuela Iran Mexico Saudi Arabia

Source: Midrex technologies, Inc & B&K estimates

New capacity on the way

Even though very little sponge iron capacity has been added over the past few years outside of
India, the strong surge in its price has encouraged investment in new capacity. As at the end of first
quarter 2006, over 15 million tonnes of new gas based DRI capacity has been contracted (Midrex
process), the first of these plants will begin operation by late 2006. The newly contracted capacity
has been focused in areas where inexpensive natural gas is abundant, including the Middle East
and South America, as well as projects in Malaysia and Russia. This new investment was driven by
sustained high prices of alternate iron and of low residual, high quality scrap steel.

SPONGE IRON INDUSTRY 20

 B&K RESEARCH OCTOBER 2006

Share Data Tata Sponge Iron (Rs. 113) Not Rated

Reuters code TTSP.BO
Tata Sponge Iron (TSIL) is the largest coal based sponge iron producer in Eastern India with
Bloomberg code IPIT IN total installed capacity of 390,000 TPA. The company is ideally located in close proximity of
Market cap. (US$ mn) 36 iron ore mines in Keonjhar, Orissa. Recently, the company has acquired a coal block on a 30-
6m avg. daily turnover (US$ mn) 0.3 year lease basis in Orissa along with two more associates and is expected to become operational
by FY09 which will help reducing the company’s coal cost significantly. The company has also
Issued Shares (mn) 15.4
increased its power generation facility from 7.5 MW to 26 MW which insulates its dependence
Performance (%) 1m 3m 12m
on state electricity boards and increase earnings by selling surplus power. We spoke to the
Absolute (4) (1) (36) management recently. Following are the key highlights:
Relative (10) (19) (56) • Increasing production through the secondary route
Major shareholders (%) Increase in steel production through the secondary route (EAF, IF), which uses hot metal
Promoters 41 (pig iron), sponge iron/scrap as their basic raw materials, accounts for 48% of the total
Institutions 3 steel output. It has grown at a CAGR of 18% during FY01-05. The trend is expected to
continue due to rising availability of coal based sponge iron produced from domestically
Public & Others 56
available raw material.
Relative performance • Sponge iron is fast replacing imported steel scrap in secondary steel making
350 Production of steel scrap in India is low at 15-20% of its consumption due to longer
300
250 product life cycle, as the country is in developing phase and the consumption pattern is
200
150 tilted in favour of infrastructure and construction rather than consumer durables.
100 Therefore, secondary steel makers have to depend on imported steel scrap. Coal based
50
0 sponge iron is fast replacing imported steel scrap due to low cost of production, as non-
Dec-04

Nov-05
Mar-06
Jun-06
Oct-06
Apr-05
Aug-05

coking coal and iron ore (two critical raw materials) are domestically available and its
production is rising.
Tata Sponge Iron
(Actual) • Own power generation
Sens ex
By realising the importance of captive power plant for having an edge in the cost competitive
markets, recently TSIL has expanded its power generation facilities by installing two more
power plants (18.5 MW) in Kiln 1 and Kiln 3 increasing total capacity from 7.5 MW to 26
MW. The new 18.5 MW power plant is expected to get operational by October 2006.
TSIL’s total power requirement is about 10 MW for the current capacity. Sale of surplus
power (made an arrangement to sell 10-12 MW of power @ Rs. 3.15/unit) will contribute
additional revenue (approx. 160 mn per year) from FY07 itself.
• Captive coal block: A reality
Recently, TSIL has acquired a coal block on a 30-year lease basis in Orissa along with two
more associates. The estimated mineable coal deposit is about 115 mn tonnes. TSIL’s
share is 51%. The coal block is expected to become operational by the end of FY09. This
will insulate the company from volatility in non-coking coal prices and reduce its coal cost
significantly which presently constitutes about 44% of total expenses.
• Strategic location
TSIL is located at Bilaipada near Joda, in the Keonjhar District of Orissa. The plant is
ideally located in the close proximity of iron ore mines (25 kms away from plants) and
sponge iron consumers of Eastern region which saves on transportation cost.

SPONGE IRON INDUSTRY 21

B&K RESEARCH OCTOBER 2006

• Over capacity due to smaller players

The situation of over capacity exists due to emergence of many small coal based players
which keep a cap on the prices of sponge iron.
• Increasing prices of iron – ore and non-coking coal
Though, the company has leased out some mining assets to Tata Steel Ltd. for operation
of its Khondbond iron ore mine for its captive use and are better placed than the players
having no captive sources but then also the prices are expected to increase further due to
high demand both at domestic as well as global level, particularly from China which
squeezes the margin of the company. Non-coking coal prices are also increasing and we
expect the prices to be firm in near future.

Raw material cost

2,800
2,600
2,400
2,200
2,000
1,800
1,600
1,400
1,200
1,000
800
600 Coal (Rs /ton)
400 Iron Ore (Rs /ton)
200
0

FY07E

FY08E
FY00

FY01

FY02

FY03

FY04

FY05

FY06
Source: Company & B&K research

SPONGE IRON INDUSTRY 22

 B&K RESEARCH
Increased installed capacity
of sponge iron to 390,000 TPA
and captive co-power
generation facilities to 26 MW
Acquired a coal block on 30
year lease basis in Orissa
SPONGE IRON INDUSTRY
OCTOBER 2006
Business background
Tata Sponge Iron (TSIL) was incorporated in 1982 as a Joint Venture of Tata Steel and
Industrial Promotion & Investment Corporation of Orissa Ltd. (IPCOL) for the production
of sponge iron, based on TISCO-Direct Reduction (TDR) Technology. The plant is located
at Bilaipada near Joda, in the Keonjhar district of Orissa. In 1991, Tata Steel acquired
IPICOLs stake and TSIL became its subsidiary.
Growth path
450
400 Production Capacity
350
300
(000 tons)
250
200
150
100
50
0
FY 86
FY 91
FY 98
FY 06
Source: Company
The plant was initially designed for a production capacity of 90,000 TPA and subsequently
the capacity was enhanced to 120,000 TPA in 1990-91 by entering into foreign collaboration
with Lurgi, Germany in 1987-89. The company later to meet the growing demand of sponge
iron doubled its capacity by adding another Kiln of equivalent capacity in 1998-99, bringing
the capacity to 240,000 TPA.
In December 2001, TSIL commissioned a 7.5 MW captive power plant to produce electricity
from the waste heat of exit gases of its Kiln No.2.
Capacity expansion
• Recently, TSIL expanded its capacity by installing 3rd Kiln having a capacity of 150,000
TPA. As a result, the company’s sponge iron making facility has increased from 240,000
TPA to 390,000 TPA. The facility commenced production from March 2006. Also, TSIL
has set up power generation facilities of 18 MW by recovering the waste heat of the kilns
which is expected to be operational from October 2006. The total cost incurred was
approx. Rs. 1.9 bn.
• Recently, TSIL has acquired a coal block on a 30 year lease basis in Orissa along with two
more associates (SPS Sponge Iron Ltd. and Messrs Scaw Industries Ltd.). The estimated
mineable coal deposit is about 115 mn tonnes. TSIL’s share is 51%. The coal block is
expected to become operational by the end of FY09. The total expected cost incurred on
coal mines is approx. Rs. 3 bn.
In-house TDR Technology
Tata Steel developed in-house technology based on Coal to produce sponge iron. It was the
first sponge iron plant in India to receive the ISO-9002 and the ISO-14000 certifications.
23
 B&K RESEARCH OCTOBER 2006

Process

Rotary kiln cross-section

Source: Company

Iron ore (hematite) and non-coking coal are charged into a rotary kiln in requisite proportion
with dolomite to produce sponge iron. Coal plays a dual role in the process by acting as a
redundant as well as fuel for providing heat to maintain the requisite temperature inside the
kiln at 950°-1050°C. The reduction process occurs in solid state. In this reduction process,
coal is combusted in a controlled manner and it converts to carbon monoxide to remove
oxygen from the iron ore. At the end of the process, iron ore is optimally reduced and
discharged to a rotary cooler for cooling below 120°C and finally sponge iron comes out of
the kiln. Power is generated by using the waste heat of the hot spent gases of the kiln.
Source: Company
Valuations
Full ramp-up of 3rd kiln by October 2006 would provide volume CAGR of 38% during
FY06-08E. 26 MW of captive power and sale of approx. 10-12 MW surplus power would
Potential to grow earnings in add to earnings. Coal mines (expected to start by FY09) would reduce coal cost (currently
long-term
form 44% of total cost). At the current price of Rs. 113, the stock is trading at 6.2x FY07E
and 4.1x FY08E earnings. We feel that the company has potential to grow earnings in long-
term. We don’t have rating on the stock.

SPONGE IRON INDUSTRY 24

B&K RESEARCH OCTOBER 2006

Financials
Production
The company is poised for major growth in the production of sponge iron in the coming two
years post increasing its installed capacity to 390,000 TPA.
Production

Source: Tata Sponge, Annual Reports, B&K estimates

Revenues
Revenues of TSIL are expected to increase at 40% CAGR over the next two years due to
recent capacity expansion from 240,000 TPA to 390,000 TPA. The company has shown a
decline of 20% in its revenue in FY06 due to lesser production (due to higher ash content in
non-coking coal received by Coal India Limited which reduces productivity and increasing
prices of both iron ore and non-coking coal) as well as due to pressure on realisation front.

Net sales and growth

Source: Tata Sponge, Annual Reports, B&K estimates

Cost
The average cost of iron ore is expected to remain firm in the next two years. More of non-
coking coal is required due to higher % of ash content in it which needs to be washed to
reduce the ash content to an acceptable level which will increase its prices.

SPONGE IRON INDUSTRY 25

 B&K RESEARCH OCTOBER 2006

Raw Material Cost

Source: Tata Sponge, Annual Reports, B&K estimates

Margins
Margins of the company have declined in FY06 due to lower realisation coupled with the
higher input prices. The company is targeting high growth in revenues to improve margins.
We expect realisation to be comparatively better in the next two years. Margins will be under
pressure due to higher iron ore and coal prices. The company has been allotted a coal mine in
Orissa but will be able to get advantage only from FY09.

EBITDA and Margins EBITDA/ton, Cost/ton, Price/ton

Source: Tata Sponge, Annual Reports, B&K estimates

Capex
Recently, TSIL added a 150,000 TPA sponge iron unit and 18.5 MW waste gas recovery
based captive power plant with an investment of approx. Rs. 1.9 bn (expected to be fully
ramped up by October 2006). TSIL has also acquired a coal block on a 30 year lease basis in
Orissa along with two more associates. The company will use its reserves as well as take debt
to finance projects. The total expected cost incurred on coal mines is approx. Rs. 3 bn. The
company plans to spend approx. Rs. 400 mn for development of colliery in FY07.

SPONGE IRON INDUSTRY 26

B&K RESEARCH OCTOBER 2006

PAT and Margin

We expect PAT to increase by 38% CAGR in the next two years driven by higher volume
growth (due to capacity expansion) and sustainability on realisation front.

PAT and margin

Source: Tata Sponge, Annual Reports, B&K estimates

Improving quarterly results

Net sales

Source: Tata Sponge, Annual Reports

First quarter of FY07 shows some sign of improvement. Net sales starts increasing due to
installation of 3rd kiln of 150,000 tonnes capacity in the last two quarters. EBITDA and PAT
margin also improved on q-o-q basis. With improvement in prices, we expect the trend to
continue.

SPONGE IRON INDUSTRY 27

 B&K RESEARCH OCTOBER 2006

EBITDA and margin PAT and margin

Source: Tata Sponge, Annual Reports

Raw material cost

Source: Tata Sponge, Annual Reports, B&K Estimates

SPONGE IRON INDUSTRY 28

 B&K RESEARCH OCTOBER 2006

Income Statement Cash Flow Statement

Yr. ended 31 Mar. (Rs. m) FY05 FY06 FY07E FY08E Yr. ended 31 Mar. (Rs. m) FY05 FY06 FY07E FY08E

Net sales 2,304 1,852 2,720 3,618 Pre-tax profit 951 343 429 650
Growth (%) 36.2 (19.6) 46.9 33.0 Depreciation 71 75 93 105
Operating expenses (1,375) (1,546) (2,380) (3,127) Chg in working capital 358 (54) 44 (16)
Operating profit 929 306 340 491
Total tax paid (552) (88) (171) (230)
Other operating income 80 160
Cash flow from oper. (a) 828 276 396 509
EBITDA 929 306 420 651
Capital expenditure (300) (1,294) (639) (700)
Growth (%) 75.1 (67.1) 37.4 54.9
Cash flow from inv. (b) (300) (1,294) (639) (700)
Depreciation (72) (76) (95) (106)
Free cash flow (a+b) 528 (1,018) (243) (191)
Other income 94 113 120 125
Debt raised/(repaid) (1) 700 825 825
EBIT 952 344 445 670
Interest paid (1) (1) (16) (20) Dividend (incl. tax) (92) (116) (132) (70)

Pre-tax profit 951 343 429 650 Cash flow from fin. (c) (93) 583 693 755

(before non-recurring items) Net chg in cash (a+b+c) 434 (434) 450 563

Pre-tax profit 951 343 429 650

Key Ratios
(after non-recurring items)
Yr. ended 31 Mar. (%) FY05 FY06 FY07E FY08E
Tax (current + deferred) (342) (121) (152) (230)
Net profit 609 221 278 420 EPS (Rs) 39.5 14.4 18.0 27.3

Adjusted net profit 609 221 278 420 EPS growth 77.2 (63.6) 25.3 51.3

Growth (%) 77.2 (63.6) 25.3 51.3 EBITDA margin 40.3 16.5 15.0 17.2
Net income 609 221 278 420 EBIT margin 41.3 18.5 15.9 17.7

ROCE 73.2 17.4 15.2 16.6

Balance Sheet
Net debt/Equity (34.4) 46.3 62.9 65.0
Yr. ended 31 Mar. (Rs. m) FY05 FY06 FY07E FY08E

Current assets 799 498 1,017 1,758 Valuations

Investments 8 8 8 8 Yr. ended 31 Mar. (x) FY05 FY06 FY07E FY08E
Net fixed assets 1,165 2,384 2,930 3,525 PER 2.8 7.8 6.2 4.1
Total assets 1,972 2,890 3,955 5,292 PCE 2.5 5.8 4.7 3.3
Price/Book 1.3 1.2 1.0 0.9

Current liabilities 440 477 510 672 Yield (%) 6.2 3.6 3.6 3.6

Total Debt 7 707 1,532 2,357 EV/Net sales 0.6 1.3 1.0 0.8

Other non-current liabilities 205 235 235 235 EV/EBITDA 1.4 7.9 6.6 4.7

Total liabilities 652 1,419 2,277 3,264

Du Pont Analysis – ROE
Yr. ended 31 Mar. (x) FY05 FY06 FY07E FY08E
Share capital 154 154 154 154
Net margin (%) 26.4 12.0 10.2 11.6
Reserves & surplus 1,166 1,317 1,524 1,874
Asset turnover 1.3 0.8 0.8 0.8
Shareholders’ funds 1,320 1,471 1,678 2,028 Leverage factor 1.6 1.7 2.2 2.5
Total equity & liabilities 1,972 2,890 3,955 5,292 Return on equity (%) 56.6 15.9 17.6 22.7

SPONGE IRON INDUSTRY 29

 B&K RESEARCH OCTOBER 2006

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