Credit Suisse, : JSW Steel - Heavy capex likely to pressure gearing

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JSW Steel ------------------------------------------------------------------- Maintain UNDERPERFORM
Heavy capex likely to pressure gearing and erode fair value in the near term


● 3Q11 results were weaker than our estimates, but this was largely
expected after the weak numbers reported by SAIL two weeks
back. The only disappointment for us in the results was in the
lower-than-expected net non-operating income – we had expected
a boost from the high cash holdings of the company.
● FY12 & 13 are capex now expected to be substantially higher
than our prior estimates: Rs70 bn in FY12 and Rs70-80 bn in
FY13. In addition to the working capital increase due to higher
volumes and higher prices, this could pressure gearing again.
● End-Dec net debt was Rs122 bn. This is likely to jump up to
Rs150-160 bn by the year-end: Rs21 bn has been paid for Ispat in
Jan, and Rs2 bn of capex is likely to happen this quarter. Note
that higher debt erodes fair value (Rs32 bn of increase is ~Rs131/
share) till the time the capacity is close to getting commissioned.
● 4Q11 EBITAD/t likely to see a jump, as JSW is confident of taking
Rs4,500/t of price increases, and costs are largely tied up. We
maintain our 4Q11 EBITDA/t estimate of $175. But we continue to
find consensus estimates too high. Maintain UNDERPERFORM
and our target price of Rs880.
Results weaker than estimates but expectedly so
3Q11 results were weaker than our estimates, but this was largely
expected after the weak numbers reported by SAIL two weeks back.
The decline in the stock post results was therefore surprising. The
only disappointment for us in the results was in the lower-thanexpected
net non-operating income – we had expected a boost from
the high cash holdings of the company.
The slight EBITDA miss as expected happened because of slightly
lower prices – after SAIL, this should have been anticipated. On the
cost front, better-than-expected power and other costs offset higher
material costs.


Analyst meet takeaways
● FY12 and 13 capex are now expected to be substantially higher
than our prior estimates. Management guided Rs70 bn of capex in
FY12 (Rs40 bn in JSW Bengal, Rs20 bn on remaining capex in
Vijaynagar 10 mtpa expansion and Rs10 bn on the Cold Rolling
Mill), and Rs70-80 bn in FY13. In addition to the working capital
increase due to higher volumes and higher prices, this can
pressure gearing again.
● End-Dec net debt was Rs122 bn. This is likely to jump up to
Rs150-160 bn by the year-end – Rs21 bn has been paid for Ispat,
and Rs2 bn of capex is likely to happen this quarter.
● The Bellary Steel acquisition (0.5 mt capacity) is primarily for the
700 acres of land that come with the company. JSW repeatedly
clarified that this is an asset purchase, and it is not inheriting any
liabilities. There has been a counter-suit, pending which the
acquisition cannot be closed. Payment has been made.
● Rs4,500/t price increase expected in 4Q11: Rs1,500 has been
taken, and the company expects Rs1,500 each of increase in Feb
and March as well. This should help improve 4Q EBITDA/t
substantially, as costs are only expected to go up marginally QoQ:
we maintain our US$175/t estimate.
● The company has reduced FY12 volume guidance to 9 mt of sales
from 10 mt given last quarter. We maintain 8.1 mt.