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JSW Steel reported disappointing set of numbers for 3QFY2011. Consolidated
revenue increased by 25.2% yoy to `6,003cr (in line with our estimate of
`6,042cr), while net profit decreased by 32.1% yoy to `292cr (significantly below
our estimate of `391cr).
Margins hit on the back of higher raw-material costs: JSW Steel’s consolidated net
revenue grew by 25.2% yoy to `6,003cr, aided by higher sales volume and
improved product mix. The company reported the highest-ever crude steel
production of 1.64mn tonnes in 3QFY2011. The company’s saleable steel sales
increased by 14.0% yoy to 1.59mn tonnes in 3QFY2011. Realisations also
increased by 12.6% yoy to `36,237/tonne. However, EBITDA margin contracted
by 493bp yoy to 17.6% mainly due to higher raw-material cost; thus,
EBITDA/tonne declined by 15.5% yoy to US $142. The company’s US operations
reported EBITDA of US $1.7mn in 3QFY2011. JSW Steel’s net profit declined by
32.1% yoy to `292cr.
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. However, we have lowered our profitability estimates for FY2012E to
account for higher raw-material costs. At the CMP, the stock is trading at 7.5x
FY2011E and 5.9x FY2012E EV/EBITDA. Nevertheless, given the significant
decline in the stock price, we upgrade the stock to Buy from Accumulate with a
revised Target Price of `1,047 (earlier `1,310), valuing the stock at 6.5x FY2012E
EV/EBITDA.
Despite an increase in top line, EBITDA margin contracted by 493bp yoy to 17.6%
on account of rising prices of key inputs, iron ore and coking coal. Consequently,
EBITDA/tonne declined by 15.5% yoy to US $142 in 3QFY2011.
Key analyst meet takeaways
JSW Steel’s US subsidiary reported EBITDA of US $1.7mn in 3QFY2011.
However, it reported net loss of US $12.9mn on account of higher interest
costs. The company expects improvement in profitability going forward as the
US economy recovers.
JSW Steel announced it will set up a new cold rolling mill complex with a
capacity of 2.3mn tonnes for an estimated capex of `4,024cr.
JSW Steel will commence construction of the 4.5mn tonnes p.a. steel plant in
West Bengal project during April 2011.
The company announced to acquire majority stake in loss-making Ispat
Industries during the quarter for `2,157cr. Also, the company announced to
acquire assets of Bellary Steel in 3QFY2011 for `210cr.
JSW Steel commenced iron ore mining in Chile during November 2010.
The company plans to make the first shipment during 1QFY2012. As per
management, the FOB cost of production after beneficiating is expected at
US $60/tonne. However, we await clarity on the grade of iron ore, mining and
logistics costs and volumes.
Outlook
Spot iron ore prices have continued to rise…
Higher crude steel production has led to an increase in international spot iron ore
prices to over US $180/tonne. However, growth in production of iron ore in China
has remained flat during the past quarter. Due to crackdown on illegal mining by
the government, India’s iron ore prices have increased as well.
…while coking coal prices have spurted recently
The flooding in Australia during December 2010–January 2011 has severely hit
mining operations in Queensland, which accounts for ~50% of the world’s coking
coal trade, which has resulted in spurt in spot prices of coking coal since then.
The rise in spot prices is likely to result in higher contract prices for 1QFY2012.
…resulting in rise in steel prices recently
The steep rise in iron ore and coking coal prices has resulted in higher steel prices
across the globe.
However, steel production continues to rise globally, while there is lack of clarity on
demand in western economies. We believe the rise in prices of key inputs will be
more than offset by the increase in steel prices during FY2012. Hence, we expect
profitability of companies with low levels of integration such as JSW Steel to decline
in the coming few quarters.
Investment rationale
Strong volume growth: JSW Steel is expanding its capacity by 3.2mn tonnes from
the current level of 7.8mn tonnes, thus taking its total capacity to 11mn tonnes by
FY2011E. We believe the company will benefit from increased capacity as volumes
are expected to grow at an 18.2% CAGR over FY2010–12E.
Savings due to low-grade ore usage: The commissioning of the beneficiation
plant by March 2011 is expected to lower iron ore cost for the company. In case of
rising iron ore prices, sourcing of low-grade iron ore fines from Bellary (Karnataka)
is likely to reduce the impact of increasing iron ore costs. As 50% of the company’s
total iron ore requirement is met from third party, usage of low-grade iron ore is
expected to lower iron ore cost by US $10–30/tonne.
Improving performance of the US subsidiary: Going ahead, we expect
performance of the company’s US subsidiary to improve. The subsidiary is
expected to post EBITDA of `258cr in FY2012E as compared to a loss of `188cr in
FY2010.
Valuation
JSW Steel is expanding its capacity by 3.2mn tonnes from the current level of
7.8mn tonnes, thus taking its total capacity to 11mn tonnes by FY2011.
Furthermore, JSW Steel will become India’s largest steel company with total
capacity of 14.3mn tonnes on successful completion of Ispat Industries’ acquisition.
We expect the company to reap benefits of economies of scale on account of
large-scale production, which should slightly destroy per unit cost of production.
Also, the commissioning of the beneficiation plant by March 2011 is expected to
lower iron ore cost for the company by US $10–30/tonne. However, rise in prices
of key inputs (particularly coking coal) is likely to result in profitability decline
during FY2012.
At the CMP, the stock is trading at 7.5x FY2011E and 5.9x FY2012E EV/EBITDA.
Given the recent decline in the stock price, we upgrade the stock to Buy from
Accumulate with a revised Target Price of `1,047 (earlier `1,310), valuing the
stock at 6.5x FY2012E EV/EBITDA.
We have increased our estimates for FY2012E to factor in higher realisations.
However, we have lowered our EBITDA margin estimates for FY2012E to account
for higher iron ore and coking coal costs.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel – 3QFY2011 Result Update
Angel Broking upgrades JSW Steel to Buy from Accumulate with a Target Price of Rs. 1,047.
JSW Steel reported disappointing set of numbers for 3QFY2011. Consolidated
revenue increased by 25.2% yoy to `6,003cr (in line with our estimate of
`6,042cr), while net profit decreased by 32.1% yoy to `292cr (significantly below
our estimate of `391cr).
Margins hit on the back of higher raw-material costs: JSW Steel’s consolidated net
revenue grew by 25.2% yoy to `6,003cr, aided by higher sales volume and
improved product mix. The company reported the highest-ever crude steel
production of 1.64mn tonnes in 3QFY2011. The company’s saleable steel sales
increased by 14.0% yoy to 1.59mn tonnes in 3QFY2011. Realisations also
increased by 12.6% yoy to `36,237/tonne. However, EBITDA margin contracted
by 493bp yoy to 17.6% mainly due to higher raw-material cost; thus,
EBITDA/tonne declined by 15.5% yoy to US $142. The company’s US operations
reported EBITDA of US $1.7mn in 3QFY2011. JSW Steel’s net profit declined by
32.1% yoy to `292cr.
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. However, we have lowered our profitability estimates for FY2012E to
account for higher raw-material costs. At the CMP, the stock is trading at 7.5x
FY2011E and 5.9x FY2012E EV/EBITDA. Nevertheless, given the significant
decline in the stock price, we upgrade the stock to Buy from Accumulate with a
revised Target Price of `1,047 (earlier `1,310), valuing the stock at 6.5x FY2012E
EV/EBITDA.
Result highlights
Consolidated net revenue grew by 25.2% yoy to `6,003cr, aided by higher sales
volumes and improved product mix. The company reported the highest-ever crude
steel production of 1.64mn tonnes in 3QFY2011. The company’s saleable steel
sales increased by 14.0% yoy to 1.59mn tonnes in 3QFY2011.
Flat product sales volume increased by 37.0% yoy to 1.2mn tonnes yoy. Sales
volume of long products grew by 13.0% yoy to 0.3mn tonnes. Sales volume of
value-added products was higher by 8.0% yoy to 0.4mn tonnes and that of semis
fell by 72.0% yoy to 0.1mn tonnes.
Despite an increase in top line, EBITDA margin contracted by 493bp yoy to 17.6%
on account of rising prices of key inputs, iron ore and coking coal. Consequently,
EBITDA/tonne declined by 15.5% yoy to US $142 in 3QFY2011.
Key analyst meet takeaways
JSW Steel’s US subsidiary reported EBITDA of US $1.7mn in 3QFY2011.
However, it reported net loss of US $12.9mn on account of higher interest
costs. The company expects improvement in profitability going forward as the
US economy recovers.
JSW Steel announced it will set up a new cold rolling mill complex with a
capacity of 2.3mn tonnes for an estimated capex of `4,024cr.
JSW Steel will commence construction of the 4.5mn tonnes p.a. steel plant in
West Bengal project during April 2011.
The company announced to acquire majority stake in loss-making Ispat
Industries during the quarter for `2,157cr. Also, the company announced to
acquire assets of Bellary Steel in 3QFY2011 for `210cr.
JSW Steel commenced iron ore mining in Chile during November 2010.
The company plans to make the first shipment during 1QFY2012. As per
management, the FOB cost of production after beneficiating is expected at
US $60/tonne. However, we await clarity on the grade of iron ore, mining and
logistics costs and volumes.
Outlook
Spot iron ore prices have continued to rise…
Higher crude steel production has led to an increase in international spot iron ore
prices to over US $180/tonne. However, growth in production of iron ore in China
has remained flat during the past quarter. Due to crackdown on illegal mining by
the government, India’s iron ore prices have increased as well.
…while coking coal prices have spurted recently
The flooding in Australia during December 2010–January 2011 has severely hit
mining operations in Queensland, which accounts for ~50% of the world’s coking
coal trade, which has resulted in spurt in spot prices of coking coal since then.
The rise in spot prices is likely to result in higher contract prices for 1QFY2012.
…resulting in rise in steel prices recently
The steep rise in iron ore and coking coal prices has resulted in higher steel prices
across the globe.
However, steel production continues to rise globally, while there is lack of clarity on
demand in western economies. We believe the rise in prices of key inputs will be
more than offset by the increase in steel prices during FY2012. Hence, we expect
profitability of companies with low levels of integration such as JSW Steel to decline
in the coming few quarters.
Investment rationale
Strong volume growth: JSW Steel is expanding its capacity by 3.2mn tonnes from
the current level of 7.8mn tonnes, thus taking its total capacity to 11mn tonnes by
FY2011E. We believe the company will benefit from increased capacity as volumes
are expected to grow at an 18.2% CAGR over FY2010–12E.
Savings due to low-grade ore usage: The commissioning of the beneficiation
plant by March 2011 is expected to lower iron ore cost for the company. In case of
rising iron ore prices, sourcing of low-grade iron ore fines from Bellary (Karnataka)
is likely to reduce the impact of increasing iron ore costs. As 50% of the company’s
total iron ore requirement is met from third party, usage of low-grade iron ore is
expected to lower iron ore cost by US $10–30/tonne.
Improving performance of the US subsidiary: Going ahead, we expect
performance of the company’s US subsidiary to improve. The subsidiary is
expected to post EBITDA of `258cr in FY2012E as compared to a loss of `188cr in
FY2010.
Valuation
JSW Steel is expanding its capacity by 3.2mn tonnes from the current level of
7.8mn tonnes, thus taking its total capacity to 11mn tonnes by FY2011.
Furthermore, JSW Steel will become India’s largest steel company with total
capacity of 14.3mn tonnes on successful completion of Ispat Industries’ acquisition.
We expect the company to reap benefits of economies of scale on account of
large-scale production, which should slightly destroy per unit cost of production.
Also, the commissioning of the beneficiation plant by March 2011 is expected to
lower iron ore cost for the company by US $10–30/tonne. However, rise in prices
of key inputs (particularly coking coal) is likely to result in profitability decline
during FY2012.
At the CMP, the stock is trading at 7.5x FY2011E and 5.9x FY2012E EV/EBITDA.
Given the recent decline in the stock price, we upgrade the stock to Buy from
Accumulate with a revised Target Price of `1,047 (earlier `1,310), valuing the
stock at 6.5x FY2012E EV/EBITDA.
We have increased our estimates for FY2012E to factor in higher realisations.
However, we have lowered our EBITDA margin estimates for FY2012E to account
for higher iron ore and coking coal costs.
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