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UBS Investment Research
JSW Steel
Results above UBS-e; below consensus
Pre-ex profit above UBS-e due to lower interest expenses; EBITDA inline
JSW Steel’s consolidated pre-ex profit of Rs2.9bn (-11% YoY, 1% QoQ) was
above our forecast of Rs2.5bn and below consensus of Rs3.8bn. EBITDA at
Rs9.8bn (-7% YoY, 2% QoQ) was inline with our forecast of Rs9.6bn and below
consensus of Rs11.3bn. Net sales of Rs59.6bn was below our estimate of Rs60.7bn
and consensus of Rs61.1bn. Average selling price (ASP) was flat at Rs36,230/t
(1% above our estimates). Volumes at 1.59mt were below our estimate of 1.64mt.
Q4FY11: coking coal prices locked in; volumes / ASP to improve
JSW has locked in Q4FY11 coking coal prices at $225/t (vs $209/t in Q3) and has
comfortable stock levels for Q4FY11. JSW has increased prices by 3% in January
and expects to increase further in February. Sales volumes are also expected to be
strong in Q4. EBITDA/t was US$134/t in Q3 (US$130/t in Q2) and JSW expects
to maintain this EBITDA/t level in FY12. JSW has guided for FY12 sales volumes
of at least 9mt vs UBS-e of 8.6mt.
Debt ratios decreases post cash infusion; management targets D/E < 1
Consolidated D/E declined to 0.74x post cash infusion from JFE. Gross debt as of
December 2010 is Rs143bn, net debt is Rs121bn and cash & cash equivalents was
Rs21b. JSW has paid Rs5bn of the Rs22bn for Ispat in Q3 and the rest will be paid
in Q4, which will increase its net debt. JSW promoters will invest Rs15bn and the
management expects to maintain the leverage below 1. Capex for FY11 is reduced
from Rs75bn to Rs60bn and the rest is expected to be spent in FY12.
Valuation: Buy rating, price target of Rs1,300
We continue to value JSW Steel on a sum-of-the-parts basis with the core business
at a mid-cycle multiple of 6.7x EV/EBITDA using normalized FY12-13 EBITDA.
Key takeaways from the analyst meeting
Management believes the current run-rate of EBITDA/t of US$134/t can be
maintained in FY12. While iron ore prices remain firm, the coking coal
prices are expected to normalize after March 2011 as more coal fields
affected by Queensland rain start to operate again and supply resumes to
normal level. Further the company expects both a cost push and demand
driven steel price increase in Q4FY11 and also in FY12.
Raw materials: 1) Iron ore — the Chilean mines are expected to produce 1mt
of 62.5% beneficiated iron ore at US$60/t production cost. JSW plans to
ramp up production to 5mt in 5 years. The company will sell the output in
the market and will not ship it to India. The output from this mine is
expected to be a financial hedge for JSW’s iron ore purchases. Currently
JSW purchases 40% through internal sources and NMDC contracts and 60%
at spot prices.
JSW has reduced the FY12 sales guidance to at least 9mt (from 9.5mt
earlier). The company expects to beat this volumes guidance. We have
factored in sales of 8.6mt for FY12.
JSW has commissioned new coke ovens, sintering plant and set up captive
power plants, which together will save $25-$40/t costs in FY12. JSW expects
to meet 90% of power requirement through captive power plants by FY12.
Capex: The 3.2mt brownfield expansion at the Vijaynagar plant is on
schedule for completion in March 2011. JSW had committed Rs75b as capex
for FY11. However, till 3Q only Rs40bn had been spent and c.Rs20bn will
be spent in Q4. The remaining Rs15bn will be spent in FY12 in addition to
the planned FY12 capex of Rs15bn.
Consolidated net debt is Rs121.5bn (including Rs4.7bn in cash and cash
equivalents and Rs16.8bn in mutual funds/FDs).
— The consolidated net debt/equity ratio has improved to 0.74x from 0.8x as
of Sep 2010 following the JFE warrants conversion and GDR issuance.
— The company prepaid debt of Rs4bn in this quarter.
The company further expects a potential cash injection of over Rs15bn over
21 months from promoters through warrants conversion.
Ispat Acquisition: JSW expects to breakeven in 18 months. The cash infusion
and refinancing of debt in Q4FY11 will reduce the stress on the company.
JSW plans to fund the Rs160bn capex for 4.5mt Bengal project in the ratio of
2:1. JSW expects work to start in Q4FY11 and the financing for the project
will be completed by Q1FY12.
— The project is scheduled to be completed by FY14. The company plans to
spend Rs40bn in FY12 on the Bengal project.
— JSW plans to invest Rs53bn as equity in this project.
JSW Steel
JSW Steel, a flagship of the Sajjan Jindal group, is the fastest growing steel
company in India. It targets to increase crude steel capacity from 3.8m tonnes at
present to 10m tonnes by 2010.With the proposed integration of SISCOL
(Southern Iron and Steel Company Ltd), JSW will become the third largest steel
company in the country in terms of volume. It was the first Indian company to
operate steel making units in 1994 using the coal reduction (Corex) process. In
August 2007, JSW acquired a plates and pipes business in the US in order to
move into higher value-added steel products.
Statement of Risk
Our earnings estimates and valuation are subject to fluctuations based on global
and domestic steel prices and the prices of key raw materials such as coking coal,
which are difficult to predict
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
JSW Steel
Results above UBS-e; below consensus
Pre-ex profit above UBS-e due to lower interest expenses; EBITDA inline
JSW Steel’s consolidated pre-ex profit of Rs2.9bn (-11% YoY, 1% QoQ) was
above our forecast of Rs2.5bn and below consensus of Rs3.8bn. EBITDA at
Rs9.8bn (-7% YoY, 2% QoQ) was inline with our forecast of Rs9.6bn and below
consensus of Rs11.3bn. Net sales of Rs59.6bn was below our estimate of Rs60.7bn
and consensus of Rs61.1bn. Average selling price (ASP) was flat at Rs36,230/t
(1% above our estimates). Volumes at 1.59mt were below our estimate of 1.64mt.
Q4FY11: coking coal prices locked in; volumes / ASP to improve
JSW has locked in Q4FY11 coking coal prices at $225/t (vs $209/t in Q3) and has
comfortable stock levels for Q4FY11. JSW has increased prices by 3% in January
and expects to increase further in February. Sales volumes are also expected to be
strong in Q4. EBITDA/t was US$134/t in Q3 (US$130/t in Q2) and JSW expects
to maintain this EBITDA/t level in FY12. JSW has guided for FY12 sales volumes
of at least 9mt vs UBS-e of 8.6mt.
Debt ratios decreases post cash infusion; management targets D/E < 1
Consolidated D/E declined to 0.74x post cash infusion from JFE. Gross debt as of
December 2010 is Rs143bn, net debt is Rs121bn and cash & cash equivalents was
Rs21b. JSW has paid Rs5bn of the Rs22bn for Ispat in Q3 and the rest will be paid
in Q4, which will increase its net debt. JSW promoters will invest Rs15bn and the
management expects to maintain the leverage below 1. Capex for FY11 is reduced
from Rs75bn to Rs60bn and the rest is expected to be spent in FY12.
Valuation: Buy rating, price target of Rs1,300
We continue to value JSW Steel on a sum-of-the-parts basis with the core business
at a mid-cycle multiple of 6.7x EV/EBITDA using normalized FY12-13 EBITDA.
Key takeaways from the analyst meeting
Management believes the current run-rate of EBITDA/t of US$134/t can be
maintained in FY12. While iron ore prices remain firm, the coking coal
prices are expected to normalize after March 2011 as more coal fields
affected by Queensland rain start to operate again and supply resumes to
normal level. Further the company expects both a cost push and demand
driven steel price increase in Q4FY11 and also in FY12.
Raw materials: 1) Iron ore — the Chilean mines are expected to produce 1mt
of 62.5% beneficiated iron ore at US$60/t production cost. JSW plans to
ramp up production to 5mt in 5 years. The company will sell the output in
the market and will not ship it to India. The output from this mine is
expected to be a financial hedge for JSW’s iron ore purchases. Currently
JSW purchases 40% through internal sources and NMDC contracts and 60%
at spot prices.
JSW has reduced the FY12 sales guidance to at least 9mt (from 9.5mt
earlier). The company expects to beat this volumes guidance. We have
factored in sales of 8.6mt for FY12.
JSW has commissioned new coke ovens, sintering plant and set up captive
power plants, which together will save $25-$40/t costs in FY12. JSW expects
to meet 90% of power requirement through captive power plants by FY12.
Capex: The 3.2mt brownfield expansion at the Vijaynagar plant is on
schedule for completion in March 2011. JSW had committed Rs75b as capex
for FY11. However, till 3Q only Rs40bn had been spent and c.Rs20bn will
be spent in Q4. The remaining Rs15bn will be spent in FY12 in addition to
the planned FY12 capex of Rs15bn.
Consolidated net debt is Rs121.5bn (including Rs4.7bn in cash and cash
equivalents and Rs16.8bn in mutual funds/FDs).
— The consolidated net debt/equity ratio has improved to 0.74x from 0.8x as
of Sep 2010 following the JFE warrants conversion and GDR issuance.
— The company prepaid debt of Rs4bn in this quarter.
The company further expects a potential cash injection of over Rs15bn over
21 months from promoters through warrants conversion.
Ispat Acquisition: JSW expects to breakeven in 18 months. The cash infusion
and refinancing of debt in Q4FY11 will reduce the stress on the company.
JSW plans to fund the Rs160bn capex for 4.5mt Bengal project in the ratio of
2:1. JSW expects work to start in Q4FY11 and the financing for the project
will be completed by Q1FY12.
— The project is scheduled to be completed by FY14. The company plans to
spend Rs40bn in FY12 on the Bengal project.
— JSW plans to invest Rs53bn as equity in this project.
JSW Steel
JSW Steel, a flagship of the Sajjan Jindal group, is the fastest growing steel
company in India. It targets to increase crude steel capacity from 3.8m tonnes at
present to 10m tonnes by 2010.With the proposed integration of SISCOL
(Southern Iron and Steel Company Ltd), JSW will become the third largest steel
company in the country in terms of volume. It was the first Indian company to
operate steel making units in 1994 using the coal reduction (Corex) process. In
August 2007, JSW acquired a plates and pipes business in the US in order to
move into higher value-added steel products.
Statement of Risk
Our earnings estimates and valuation are subject to fluctuations based on global
and domestic steel prices and the prices of key raw materials such as coking coal,
which are difficult to predict
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