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Visit http://indiaer.blogspot.com/ for complete details �� ��
Why We Are Overweight
• Our positive stance on steel prices
• JSW’s steep production growth
trajectory. We estimate volume
growth (including Ispat) of 37% pa
for F11-F13.
• Expertise of maintaining low
conversion cost should aid a quick
turnaround of Ispat, assuaging
concerns of overpaying for the
acquisition. We estimate EBITDA
per ton of Rs3604 In F12 for Ispat vs.
Rs313 in 1HF11
• The stock looks attractive at P/E and
EV/EBITDA of 9.3x and 5.9x on our
F12E forecasts in light of our
EBITDA CAGR forecast of 48% for
F11–13e.
Key Value Drivers
• For every 1% rise in steel prices,
F12E EPS increases by 5%.
• Iron ore and coking coal costs.
Initiatives to improve RM self
sufficiency, US mills profitability,
project pace in India.
• Sales volume. We expect sales
volume CAGR of 37% in F2011–13.
• Ispat turnaround
Catalysts
• Benign Chinese export data
• Quarterly results in 2HF11, which
would provide evidence of
turnaround of Ispat operations
• Commissioning of brownfield project
by 4QF11, beginning of work on
JSW Bengal by 2HF12.
Key Risks
• Steel prices fall steeply
• Unexpected increase in Ispat
liabilities
• Government intervention in steel
pricing, increase in taxes
JSW: Ispat Acquisition Has Not Been Received Well…
But Things Looking Up from Here; Remain OW
Why We Would Buy JSW Stock
Strong steel pricing trends through 1HCY11: As the
restocking cycle in steel picks up steam, steel prices
should surprise the street positively in the coming 3-4
weeks in our view. Also as the utilization of the HR mill
improves, average realization should rise in 2HF11.
Evidence of Ispat turnaround could aid the stock…
Please see our detailed analysis of JSW’s proposal to
acquire Ispat in our note dated December 21, Purchase of
41% stake in Ispat a Slight Negative, but We Stay OW
With the second leg of its brownfield expansion set to be
completed by March-end 2011, JSW is looking for
avenues for faster growth. This is evidenced by its recent
acquisition of the Ispat stake and attempt to buy Bellary
Steel and Alloys (Reuters, January 1, 2011).
…which we think has overreacted: We are not too
positive on the acquisition of Ispat and agree that it is
value-dilutive (albeit mildly). However, we believe the
stock has overreacted and hence think the stock can trend
up from here, especially as Ispat’s turnaround trajectory
becomes visible in the next two to three quarters.
Versus our estimate of value depletion of Rs167 per share
from Ispat, the stock has fallen by Rs347 (26%) since the
announcement was made on December 21.
The Bellary Steel acquisition has not yet been announced
by the company. So far only the media has reported that
JSW has emerged as the highest bidder.
We envisage Ispat’s turnaround happening in two
stages:
1) Restructuring debt, which would reduce interest costs:
We have built in an interest cost reduction from
Rs2.6b in 2QF11 to Rs9.5b in F12
2) Captive raw material facilities: We estimate that with
captive coke, power and pellet plants, Ispat can
achieve a cost reduction of ~Rs1300t. That should
push up its EBITDA per ton from -Rs.1770/t in 2QF11
to Rs.3604 in F12
Potential profit drivers for JSW Steel from here
• Commissioning of 3 mt expansion in 4QF11,
production ramp up beginning 1HF12
• Beginning of construction work on JSW Bengal, in
2HF12
• Evidence of profits from Chile iron ore mines starting
1HF12
Earnings Estimate Changes
1) We increase our steel price assumptions by 1% for
F12 and prune F11 by 4% and keep it unchanged for
F13
2) We increase our iron ore and coking coal assumptions
by 21.7% for F12 and 8.3% for F13
3) We consolidate Ispat financials and estimate that the
acquisition will be marginally positive for F12 and
EPS-accretive for F13
Valuation and Price Target
JSW stock is trading at a P/E of 9.3x and an EV/EBITDA of
5.9x, based on our F12 estimates. In our view, this does
not capture the earnings growth potential in the stock.
Cutting Our Price Target from Rs1,675 to Rs1,221
Our price target is based on a DCF model for JSW
standalone (including SISCOL) with an explicit phase of
six years. Our base-case value declines from Rs1,675 to
Rs1,221 after incorporating the Ispat acquisition, which in
our view, is value-depletive. We also note that standalone
EBITDA moves down, owing to an increase in coking coal
and coke prices in line with our global strategy team, and
lower base of steel realizations for F11.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Why We Are Overweight
• Our positive stance on steel prices
• JSW’s steep production growth
trajectory. We estimate volume
growth (including Ispat) of 37% pa
for F11-F13.
• Expertise of maintaining low
conversion cost should aid a quick
turnaround of Ispat, assuaging
concerns of overpaying for the
acquisition. We estimate EBITDA
per ton of Rs3604 In F12 for Ispat vs.
Rs313 in 1HF11
• The stock looks attractive at P/E and
EV/EBITDA of 9.3x and 5.9x on our
F12E forecasts in light of our
EBITDA CAGR forecast of 48% for
F11–13e.
Key Value Drivers
• For every 1% rise in steel prices,
F12E EPS increases by 5%.
• Iron ore and coking coal costs.
Initiatives to improve RM self
sufficiency, US mills profitability,
project pace in India.
• Sales volume. We expect sales
volume CAGR of 37% in F2011–13.
• Ispat turnaround
Catalysts
• Benign Chinese export data
• Quarterly results in 2HF11, which
would provide evidence of
turnaround of Ispat operations
• Commissioning of brownfield project
by 4QF11, beginning of work on
JSW Bengal by 2HF12.
Key Risks
• Steel prices fall steeply
• Unexpected increase in Ispat
liabilities
• Government intervention in steel
pricing, increase in taxes
JSW: Ispat Acquisition Has Not Been Received Well…
But Things Looking Up from Here; Remain OW
Why We Would Buy JSW Stock
Strong steel pricing trends through 1HCY11: As the
restocking cycle in steel picks up steam, steel prices
should surprise the street positively in the coming 3-4
weeks in our view. Also as the utilization of the HR mill
improves, average realization should rise in 2HF11.
Evidence of Ispat turnaround could aid the stock…
Please see our detailed analysis of JSW’s proposal to
acquire Ispat in our note dated December 21, Purchase of
41% stake in Ispat a Slight Negative, but We Stay OW
With the second leg of its brownfield expansion set to be
completed by March-end 2011, JSW is looking for
avenues for faster growth. This is evidenced by its recent
acquisition of the Ispat stake and attempt to buy Bellary
Steel and Alloys (Reuters, January 1, 2011).
…which we think has overreacted: We are not too
positive on the acquisition of Ispat and agree that it is
value-dilutive (albeit mildly). However, we believe the
stock has overreacted and hence think the stock can trend
up from here, especially as Ispat’s turnaround trajectory
becomes visible in the next two to three quarters.
Versus our estimate of value depletion of Rs167 per share
from Ispat, the stock has fallen by Rs347 (26%) since the
announcement was made on December 21.
The Bellary Steel acquisition has not yet been announced
by the company. So far only the media has reported that
JSW has emerged as the highest bidder.
We envisage Ispat’s turnaround happening in two
stages:
1) Restructuring debt, which would reduce interest costs:
We have built in an interest cost reduction from
Rs2.6b in 2QF11 to Rs9.5b in F12
2) Captive raw material facilities: We estimate that with
captive coke, power and pellet plants, Ispat can
achieve a cost reduction of ~Rs1300t. That should
push up its EBITDA per ton from -Rs.1770/t in 2QF11
to Rs.3604 in F12
Potential profit drivers for JSW Steel from here
• Commissioning of 3 mt expansion in 4QF11,
production ramp up beginning 1HF12
• Beginning of construction work on JSW Bengal, in
2HF12
• Evidence of profits from Chile iron ore mines starting
1HF12
Earnings Estimate Changes
1) We increase our steel price assumptions by 1% for
F12 and prune F11 by 4% and keep it unchanged for
F13
2) We increase our iron ore and coking coal assumptions
by 21.7% for F12 and 8.3% for F13
3) We consolidate Ispat financials and estimate that the
acquisition will be marginally positive for F12 and
EPS-accretive for F13
Valuation and Price Target
JSW stock is trading at a P/E of 9.3x and an EV/EBITDA of
5.9x, based on our F12 estimates. In our view, this does
not capture the earnings growth potential in the stock.
Cutting Our Price Target from Rs1,675 to Rs1,221
Our price target is based on a DCF model for JSW
standalone (including SISCOL) with an explicit phase of
six years. Our base-case value declines from Rs1,675 to
Rs1,221 after incorporating the Ispat acquisition, which in
our view, is value-depletive. We also note that standalone
EBITDA moves down, owing to an increase in coking coal
and coke prices in line with our global strategy team, and
lower base of steel realizations for F11.
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