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JSW Steel’s 2QFY2011 standalone net revenue stood at `5,713cr, above our
estimates. Adj. net profit at `340cr was also above our estimates of `284cr.
The deviation was largely due to higher sales volume reported by the company.
Margin hit by higher raw-material cost: Consolidated net revenue grew by 26.5%
yoy to `5,908cr, aided by higher sales volume and improved product mix. Sales
volume grew by 8.9% yoy and 32.9% qoq and semis as a percentage of total
sales declined to 5.5% as compared to 27.9% in 2QFY2010. Realisations also
increased by 16.8% yoy to `36,089/tonne, down 6.7% qoq. On account of
higher raw-material cost, EBITDA margin contracted by 617bp yoy to 17.3%.
Consequently, EBITDA declined by 6.7% yoy to `1,023cr. While depreciation was
higher by 16.5% yoy to `379cr, interest expenses declined by 13.4% yoy to
`261cr as the company prepaid debt of `2,330cr. Moreover, other income
included a translation gain of `157cr on foreign exchange. Hence, lower interest
cost and exceptional gain aided the 15.6% yoy increase in net profit to `373cr.
Outlook and valuation: We believe JSW Steel is well placed to capitalise on strong
domestic demand on the back of its expanded capacity, improving product mix,
commissioning of beneficiation plant to lower iron ore cost and recovery in its US
operations. At the CMP, the stock is trading at 8.7x FY2011E and 6.0x FY2012E
EV/EBITDA. We recommend Accumulate with a revised Target Price of `1,310
(earlier `1,344), valuing the stock at 6.5x FY2012E EV/EBITDA.
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