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We downgrade JSW Steel from BUY to Outperform with a target price of
Rs1,075. The company’s Ebitda per tonne was flat QoQ in 3Q but should
rise in 4Q. A hike in industry prices is ahead of material cost pressures.
However, we expect a slip in steel prices by mid-CY11. On the outlook, we
cut JSW FY11-13 Ebitda/t by 9-17%. Loss forecasts for Ispat Industries
compounds results for a sharp 17-29% cut in our consolidated EPS
estimates over the same period.
Margins expanding near-term but expect a retrace in 2H. JSW’s
(JSTL IB - Rs965.6 - O-PF) third-quarter volumes, ASPs and revenues
were all in-line with estimates. But the company’s Ebitda, at Rs10bn and
Ebitda/t at US$141, came in 10% ahead. The improvement was mainly
driven by lower-than-expected raw-material and manufacturing costs. Net
profit was up 15% QoQ and flat YoY, benefiting from lower interest costs.
JSW’s margins are likely to widen in 4Q as steel prices climb in anticipation
of rising costs. But we expect margins to come under pressure in 2H as
steel buyers enter a destocking cycle.
Thinner margins ahead. Steel-industry profitability disappointed in
2HFY11 and margins remained flat versus our expectations of
improvement. Steel prices did rise but the upturn was due to cost spikes,
not improvements in underlying supply and demand. Convertors like JSW
are particularly vulnerable to the situation, so we reduce Ebitda/t forecasts
for the next three years. Our new outlook is US$158 in FY11 (down 9%),
US$165 in FY12 (down 17%) and US$183 in FY13 (down 12%).
Acquiring Ispat increased JSW’s risk profile. In the near term we see
the Ispat Industries purchase as dilutive to EPS and value; we assume an
Ebitda/t of US$100 for the division through FY13. JSW aims to improve
Ispat’s profitability by setting up captive power, coke oven and pellet
plants. But completion is still two years off and too early to factor in. Ispat
remains vulnerable to steel down cycles in the interim. Overall the
acquisition increased the risk profile of JSW’s stock.
Downgrade to Outperform. Even after our sharp cuts, we still forecast a
strong 46% consolidated EPS Cagr over FY11-13, but we believe this is
already priced in. The stock is down 31% from its October 2010 peak but
we only recommend buying on a further 10% drop. A successful start to
production in the iron ore mines in Chile and coking coal mines in the US
will add upside to our estimates. We prefer Tata Steel (TATA IB - Rs650.3
- BUY) and Jindal Steel & Power (JSP IB - Rs672.7 - BUY) in the current
rising raw material price environment. Both have low-cost advantages and
stronger growth projects post-FY12.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
We downgrade JSW Steel from BUY to Outperform with a target price of
Rs1,075. The company’s Ebitda per tonne was flat QoQ in 3Q but should
rise in 4Q. A hike in industry prices is ahead of material cost pressures.
However, we expect a slip in steel prices by mid-CY11. On the outlook, we
cut JSW FY11-13 Ebitda/t by 9-17%. Loss forecasts for Ispat Industries
compounds results for a sharp 17-29% cut in our consolidated EPS
estimates over the same period.
Margins expanding near-term but expect a retrace in 2H. JSW’s
(JSTL IB - Rs965.6 - O-PF) third-quarter volumes, ASPs and revenues
were all in-line with estimates. But the company’s Ebitda, at Rs10bn and
Ebitda/t at US$141, came in 10% ahead. The improvement was mainly
driven by lower-than-expected raw-material and manufacturing costs. Net
profit was up 15% QoQ and flat YoY, benefiting from lower interest costs.
JSW’s margins are likely to widen in 4Q as steel prices climb in anticipation
of rising costs. But we expect margins to come under pressure in 2H as
steel buyers enter a destocking cycle.
Thinner margins ahead. Steel-industry profitability disappointed in
2HFY11 and margins remained flat versus our expectations of
improvement. Steel prices did rise but the upturn was due to cost spikes,
not improvements in underlying supply and demand. Convertors like JSW
are particularly vulnerable to the situation, so we reduce Ebitda/t forecasts
for the next three years. Our new outlook is US$158 in FY11 (down 9%),
US$165 in FY12 (down 17%) and US$183 in FY13 (down 12%).
Acquiring Ispat increased JSW’s risk profile. In the near term we see
the Ispat Industries purchase as dilutive to EPS and value; we assume an
Ebitda/t of US$100 for the division through FY13. JSW aims to improve
Ispat’s profitability by setting up captive power, coke oven and pellet
plants. But completion is still two years off and too early to factor in. Ispat
remains vulnerable to steel down cycles in the interim. Overall the
acquisition increased the risk profile of JSW’s stock.
Downgrade to Outperform. Even after our sharp cuts, we still forecast a
strong 46% consolidated EPS Cagr over FY11-13, but we believe this is
already priced in. The stock is down 31% from its October 2010 peak but
we only recommend buying on a further 10% drop. A successful start to
production in the iron ore mines in Chile and coking coal mines in the US
will add upside to our estimates. We prefer Tata Steel (TATA IB - Rs650.3
- BUY) and Jindal Steel & Power (JSP IB - Rs672.7 - BUY) in the current
rising raw material price environment. Both have low-cost advantages and
stronger growth projects post-FY12.
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