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Q3FY11 results in line with estimates
JSW Steel (JSW) reported Q3FY11 consolidated net revenue of INR 60 bn (up
25% Y-o-Y, flat Q-o-Q) due to rise of 13% in realisations and 12% in volumes
(at ~1.6 mt), Y-o-Y, at the standalone level. EBITDA and PAT, at INR 10.1 bn
(down 5.8% Y-o-Y, flat Q-o-Q) and INR 2.9 bn (down 32.1% Y-o-Y and 21.8%
Q-o-Q), respectively, were both in line with our estimates.
3.2 mtpa expansion on track; reduced FY12 volume guidance
Management reiterated timely completion of 3.2 mtpa brownfield expansion by
March 2011. However, with slower-than-expected growth, the company has
reduced guidance for saleable steel volume for FY12 from 9.5 mt earlier to 9 mt
(we are retaining our estimate at 8.5 mt).
Chile iron ore mine commences production; upside not factored in
JSW’s Chile iron ore mine commenced operations in November 2010;
management guided for production volume of 0.2 mt and 1 mt for Q1FY12 and
FY12, respectively. While the company awaits permits in the US for its coking
coal mines, it reiterated volume of 1 mt for FY12. Assuming volumes at 25%
discount to management guidance, commencement of operations at these mines
implies 7% upside to our FY12E EBITDA estimates.
Announces new INR 40 bn capex in CRM facility; completion by FY15
The company has announced fresh capex of INR 40.2 bn to set up 2.3 mtpa cold
rolling mill (CRM) facility at its Vijaynagar plant. This project is to be funded by
D/E of 2:1 and is expected to be completed by FY15.
Completes acquisition of 41.3% stake in Ispat; open offer in progress
JSW has completed investment of INR 21.6 bn into Ispat Industries.
Management reiterated synergy benefits of cheaper power from JSW Energy,
cheaper iron ore sourcing from Karnataka, coke sourcing from JSL Stainless,
cross-selling/freight/VAT savings and debt refinancing at lower interest.
Outlook and valuations: Growth ahead; maintain ‘BUY’
We retain our FY12 EBITDA estimates, led by volume growth at JSW. However,
with interest costs rising, we cut our FY12 EPS estimates by ~5%. Overall, we
are positive on JSW’s growth story and maintain ‘BUY/Sector Outperformer’
on it with a reduced fair valuation of INR 1,204/share (earlier 1,279/share). We
introduce FY13 estimates.
JSW (standalone): Flat sales volume Q-o-Q; semis proportion reduces
Q3FY11 crude steel production was 1.64 mt, up 11% Y-o-Y and 4% Q-o-Q. Inventory
has declined 62 kt Q-o-Q to 374 kt during the quarter. Semis proportion has gone down
significantly from 19% in Q3FY10 to 4.8% in Q3FY11. Domestic sales were 88% during
the quarter. Retail constituted 26% of total domestic sales
EBITDA/t largely flat Q-o-Q at USD 140/t
With blended realisations being flat Q-o-Q at ~INR 36,500/t and costs remaining
unchanged during the quarter, EBITDA/t of the standalone business was flat at USD
140/t.
US business: Utilisation rate drops both Q-o-Q and Y-o-Y
Other key highlights
• Iron ore mining in Chile has commenced with ROM production of 600 kt till date. The
company is targeting 200 kt of process iron ore shipments (62.5 Fe) in Q1FY12 and 1
mt for FY12. Estimated FOB cash cost is USD 60/t.
• The company is still awaiting permits in the US for its coking coal mines. Assuming
these are obtained by April 2011, the targeted coking coal volume for FY12 is 1 mt @
FOB cost of USD 80 to 110/t with a freight cost of USD 40/t to India.
• Brownfield expansion of 3.2mtpa: 300 MW power plant, two batteries of coke oven
plant, caster, converter have commenced trial operations. Balance facilities of SMS,
coke oven and blast furnace to be completed by March 2011.
• The proposed CRM facility of 2.3mtpa consists of 1.9mtpa CR facility (two lines of
0.95mtpa each) and a 0.4mtpa galvanizing-cum-galvannealing line. Phase I with
capex of ~INR 30 bn consists of 1.9mtpa CR facility to be completed by FY14 and
Phase II consists of the 0.4mtpa facility with capex of ~INR 10 bn to be completed by
FY15.
• JSW has won the bid for debt-free asset purchase of Bellary Steel for INR 2.1 bn,
which includes 700 acres of land and some facilities for 0.5 mtpa steel plant. Key
rationale for acquisition is the usage of land for JSW’s potential expansion and
possible use of the facilities of Bellary Steel already installed/under installation.
• The total capex for FY12 is estimated at INR 70-75 bn (3.2 mtpa expansion: INR 20
bn, 4.5 mtpa West Bengal project: INR 40 bn and new CRM facility: INR 10 bn).
• The company has repaid loan of INR 5.0 bn during the quarter.
• The average cost of debt is lower at 6.94% in Q3FY11 against 7.08% in Q2FY11.
• The company has adequate coking coal inventory until March 2011.
Valuation
While we are yet to incorporate Ispat’s financials, considering the increased debt from
the acquisition as well as the upward revision in JSW’s own interest cost, we cut our
EV/EBITDA multiple to 5.75x from 6.0x. Our fair valuation stands reduced from INR
1,279/share to INR 1,204/share.
Company Description
JSW, part of the USD 8 bn O.P. Jindal Group, was incorporated as Jindal Vijaynagar Steel
(JVSL). It began operations in 1999 with the commissioning of the first Corex-2000
module in India (third in the world after Posco in South Korea and Isicor in South Africa),
with a capacity to produce 0.8 mn tonnes of hot metal. In FY05, the company merged
group company JISCO (Jindal Iron and Steel Company), which had a strong presence in
downstream products such as CR and GP/GC products. In FY06, the company merged
Euro Ikon, Euro Coke, and JSW Power and was renamed JSW Steel, transforming into an
integrated steel manufacturer. The current steel capacity of JSW Steel is 7.8 mtpa, which
includes 6.8 mtpa capacity at Vijaynagar and 1 mtpa capacity at Salem that caters
exclusively to the long product segment.
Investment Theme
Global steel demand is showing definite signs of revival. Flat steel prices have increased
in the past 6 months, both globally and in India. JSW has expanded rapidly to emerge as
India’s second largest steel producer in terms of capacity and is adding 3mtpa more next
year. It continues to focus on the domestic market and increasing its penetration in
semi-rural and rural areas by opening retail outlets.
Key Risks
• Delays in completion of brownfield expansion
• Weakness in global steel demand leading to lower international prices
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Q3FY11 results in line with estimates
JSW Steel (JSW) reported Q3FY11 consolidated net revenue of INR 60 bn (up
25% Y-o-Y, flat Q-o-Q) due to rise of 13% in realisations and 12% in volumes
(at ~1.6 mt), Y-o-Y, at the standalone level. EBITDA and PAT, at INR 10.1 bn
(down 5.8% Y-o-Y, flat Q-o-Q) and INR 2.9 bn (down 32.1% Y-o-Y and 21.8%
Q-o-Q), respectively, were both in line with our estimates.
3.2 mtpa expansion on track; reduced FY12 volume guidance
Management reiterated timely completion of 3.2 mtpa brownfield expansion by
March 2011. However, with slower-than-expected growth, the company has
reduced guidance for saleable steel volume for FY12 from 9.5 mt earlier to 9 mt
(we are retaining our estimate at 8.5 mt).
Chile iron ore mine commences production; upside not factored in
JSW’s Chile iron ore mine commenced operations in November 2010;
management guided for production volume of 0.2 mt and 1 mt for Q1FY12 and
FY12, respectively. While the company awaits permits in the US for its coking
coal mines, it reiterated volume of 1 mt for FY12. Assuming volumes at 25%
discount to management guidance, commencement of operations at these mines
implies 7% upside to our FY12E EBITDA estimates.
Announces new INR 40 bn capex in CRM facility; completion by FY15
The company has announced fresh capex of INR 40.2 bn to set up 2.3 mtpa cold
rolling mill (CRM) facility at its Vijaynagar plant. This project is to be funded by
D/E of 2:1 and is expected to be completed by FY15.
Completes acquisition of 41.3% stake in Ispat; open offer in progress
JSW has completed investment of INR 21.6 bn into Ispat Industries.
Management reiterated synergy benefits of cheaper power from JSW Energy,
cheaper iron ore sourcing from Karnataka, coke sourcing from JSL Stainless,
cross-selling/freight/VAT savings and debt refinancing at lower interest.
Outlook and valuations: Growth ahead; maintain ‘BUY’
We retain our FY12 EBITDA estimates, led by volume growth at JSW. However,
with interest costs rising, we cut our FY12 EPS estimates by ~5%. Overall, we
are positive on JSW’s growth story and maintain ‘BUY/Sector Outperformer’
on it with a reduced fair valuation of INR 1,204/share (earlier 1,279/share). We
introduce FY13 estimates.
JSW (standalone): Flat sales volume Q-o-Q; semis proportion reduces
Q3FY11 crude steel production was 1.64 mt, up 11% Y-o-Y and 4% Q-o-Q. Inventory
has declined 62 kt Q-o-Q to 374 kt during the quarter. Semis proportion has gone down
significantly from 19% in Q3FY10 to 4.8% in Q3FY11. Domestic sales were 88% during
the quarter. Retail constituted 26% of total domestic sales
EBITDA/t largely flat Q-o-Q at USD 140/t
With blended realisations being flat Q-o-Q at ~INR 36,500/t and costs remaining
unchanged during the quarter, EBITDA/t of the standalone business was flat at USD
140/t.
US business: Utilisation rate drops both Q-o-Q and Y-o-Y
Other key highlights
• Iron ore mining in Chile has commenced with ROM production of 600 kt till date. The
company is targeting 200 kt of process iron ore shipments (62.5 Fe) in Q1FY12 and 1
mt for FY12. Estimated FOB cash cost is USD 60/t.
• The company is still awaiting permits in the US for its coking coal mines. Assuming
these are obtained by April 2011, the targeted coking coal volume for FY12 is 1 mt @
FOB cost of USD 80 to 110/t with a freight cost of USD 40/t to India.
• Brownfield expansion of 3.2mtpa: 300 MW power plant, two batteries of coke oven
plant, caster, converter have commenced trial operations. Balance facilities of SMS,
coke oven and blast furnace to be completed by March 2011.
• The proposed CRM facility of 2.3mtpa consists of 1.9mtpa CR facility (two lines of
0.95mtpa each) and a 0.4mtpa galvanizing-cum-galvannealing line. Phase I with
capex of ~INR 30 bn consists of 1.9mtpa CR facility to be completed by FY14 and
Phase II consists of the 0.4mtpa facility with capex of ~INR 10 bn to be completed by
FY15.
• JSW has won the bid for debt-free asset purchase of Bellary Steel for INR 2.1 bn,
which includes 700 acres of land and some facilities for 0.5 mtpa steel plant. Key
rationale for acquisition is the usage of land for JSW’s potential expansion and
possible use of the facilities of Bellary Steel already installed/under installation.
• The total capex for FY12 is estimated at INR 70-75 bn (3.2 mtpa expansion: INR 20
bn, 4.5 mtpa West Bengal project: INR 40 bn and new CRM facility: INR 10 bn).
• The company has repaid loan of INR 5.0 bn during the quarter.
• The average cost of debt is lower at 6.94% in Q3FY11 against 7.08% in Q2FY11.
• The company has adequate coking coal inventory until March 2011.
Valuation
While we are yet to incorporate Ispat’s financials, considering the increased debt from
the acquisition as well as the upward revision in JSW’s own interest cost, we cut our
EV/EBITDA multiple to 5.75x from 6.0x. Our fair valuation stands reduced from INR
1,279/share to INR 1,204/share.
Company Description
JSW, part of the USD 8 bn O.P. Jindal Group, was incorporated as Jindal Vijaynagar Steel
(JVSL). It began operations in 1999 with the commissioning of the first Corex-2000
module in India (third in the world after Posco in South Korea and Isicor in South Africa),
with a capacity to produce 0.8 mn tonnes of hot metal. In FY05, the company merged
group company JISCO (Jindal Iron and Steel Company), which had a strong presence in
downstream products such as CR and GP/GC products. In FY06, the company merged
Euro Ikon, Euro Coke, and JSW Power and was renamed JSW Steel, transforming into an
integrated steel manufacturer. The current steel capacity of JSW Steel is 7.8 mtpa, which
includes 6.8 mtpa capacity at Vijaynagar and 1 mtpa capacity at Salem that caters
exclusively to the long product segment.
Investment Theme
Global steel demand is showing definite signs of revival. Flat steel prices have increased
in the past 6 months, both globally and in India. JSW has expanded rapidly to emerge as
India’s second largest steel producer in terms of capacity and is adding 3mtpa more next
year. It continues to focus on the domestic market and increasing its penetration in
semi-rural and rural areas by opening retail outlets.
Key Risks
• Delays in completion of brownfield expansion
• Weakness in global steel demand leading to lower international prices
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