One of the best performing steel stocks globally
JSW Steel is one of the best performing steel stocks globally with
YTD returns of 30%. While steel stocks in general were supported by
strong steel prices, JSW Steel was helped in particular by
deleveraging of the balance sheet, with the stake sale to JFE and
3.2mn tonne expansion expected to come online by end FY11. Most
of the benefits from improvement product mix have also come through.
Catalysts already played out – little to look forward to
The stock has already reacted to reduced leverage and strong
earnings growth in FY12. However, we see limited earnings growth as
further volume growth will likely be limited, owing to issues with
greenfield capacities. With moderation in our view on the steel cycle,
we do not see a catalyst for the stock in the near term. The stock is at
10x FY12F EPS, a premium to local and global peers. JSW will likely
see limited earnings growth after FY12, until there is more visibility on
greenfield expansion. We expect raw material prices to remain high,
hence JSW Steel will likely see margin pressure despite improving
product mix and efficiency. Therefore, we believe the stock has limited
upside thus downgrade the stock to NEUTRAL from Buy.
US operations still in losses — mining operations ramp up
JSW Steel’s US pipes business is at 30-35% utilisation and despite
turning EBITDA positive will likely be loss-making in the near term.
JSW Steel’s iron ore mines in Chile and coking coal mines in the US
will likely start producing at the rate of one mtpa by end 2010 and
should start getting positive value with the ramp up of production. We
ascribe a negative value of US$164mn to the US pipes business;
however, we give a positive value of US$141mn to iron ore mines and
US$315mn to US coking coal mines.
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