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JSW Steel (JSTL.BO): Downgrade to Neutral on valuations
We downgrade JSW Steel to Neutral from Buy as the stock is close to our new 12-month
P/B-based TP of Rs1,343 (Rs1,387 previously) yielding limited potential upside. Since we
added it to our Buy List on May 8, 2009, JSW has risen 224% vs. 71% for Sensex.
While we still like the long-term structural growth story unfolding at JSW driven by strong
volume growth, superior product mix, low conversion costs, and improving upstream
integration, we believe that the current valuations (post the recent outperformance) already
reflect the strong fundamentals.
The stock currently trades at 1.6X FY2012E P/B, in line with the sector average of 1.7X vs. a
FY2012E ROE of 16% (sector ROE: 20%).
We revise our FY2011E-FY2013E EPS estimates by -6% to -18% to account for lower volumes
in FY11E, and changed commodity price assumptions. For FY11E/FY12E, we now expect an
EBITDA/ton of US$159/US$184 (vs. US$176/US$189 previously). Subsequently, we revise our
12-month P/B-based target price to Rs1,343 (from Rs1,387 previously). Key upside risks include
stronger-than-expected steel prices; downside risks include delays in project execution.
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