JSW Steel Margin under pressure, should improve; Accumulate: Emkay

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JSW Steel

Margin under pressure, should improve; Accumulate

ACCUMULATE

CMP: Rs 903                                       Target Price: Rs 1,060

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n     JSW Steel’s Q3FY11 consolidated performance remained broadly weak, despite topline growing by 25% YoY to

n     Rs 60.03 bn, matching our expectations 

n     Higher raw material costs pulled the EBITDA down by 6% YoY to Rs 10.2 bn. EBITDA margin came dropped 544 bps YoY to 16.9%, while EBITDA/ tonne came at Rs 6280  

n     Along with pressure at the EBITDA level, higher depreciation costs due to capitalization, dragged the PAT to Rs 2.92 bn,  down 32% and 22% on YoY and QoQ respectively

n     Factoring in the concerns on raw material costs, better  volume and integration, we estimate FY11E and FY12E EPS at Rs 66.5 and Rs 106.5 respectively  

Revenue in line with expectations, margin contracts

Revenue for the quarter came at Rs 60.03 bn, in line with our expectations of Rs 59.98

bn depicting a YoY growth of 25%. On QoQ basis it remained flat. Sales volume while

remained flat on QoQ basis, however rose ~12% on YoY basis to 1.593 mn tonne.

Average net realizations per tonne also remained flat on QoQ basis, but improved 11%

on YoY basis. At the EBITDA level, however the performance was not up to the mark

and fell to Rs 10.2 bn, down by 6% YoY and 1% QoQ. This was because of higher raw

material costs (up 37% YoY). EBITDA margin contracted more than expected to 16.9%,

down by 544 bps YoY. EBITDA/ tonne during the quarter remained at Rs 6280

compared to Rs 7840 during the corresponding quarter and Rs 6270 during Q2FY11.

Margin contraction

US operation continue to remain laggard

The US plate and pipe mill continued to post weak performance during Q3FY11 also

with low capacity utilization of 12% and 11% respectively. Though, the unit managed to

post positive EBITDA of US$1.67 mn for the quarter, it posted a net loss of US$12.9

mn, higher than US$11 mn in Q3FY10

Volume guidance cut; projects on track

The company has cut its sales volume guidance to 9 mn tonne from 9.5 mn

tonne looking at the slow pace of growth in the current year. On the other hand

however, better raw material integration and commissioning of coke ovens,

HSM, sinter plant we expect the company to do better in FY12E.

Outlook and Valuations

At the CMP of Rs 903, the stock is trading at 8.5x FY12E EPS and 5.4x FY12E EV/

EBITDA. Factoring in the recent concerns on the raw material price rise and better

integration we value the company 6xFY12 EV/ EBITDA to arrive at a target price of Rs

1060/ share, which provides 17% upside for the CMP. We assign ACCUMULATE rating

on the stock.

Key takeaways

Chile iron ore mine started production

§ The company has started its Chile iron ore mines in the month of November ’10

§ The management expects production of 0.2 mn tonne in Q1FY12 and 1 mn tonne for

FY12E

§ The cost of production of beneficiated iron ore (62%) remains at US$62/ tonne

US coking coal mines: guidance maintained

§ The company is waiting for the final level approval to start mining in US

§ Production guidance stands at 1 mn tonne for FY12E. The FoB cost is likely to be

~US$100/ tonne with freight cost at US$40/ tonne

Coking coal supply: company is well covered till March

§ We understand from the company that the impact of Australian floods situation would not

have any impact on its raw material costs, as it has booked its quantity well in advance

and thus is covered fully for the Q4FY11 and partially for Q1FY12

3.2 mtpa expansion on track

§ The company has reiterated commissioning of 3.2 mtpa brownfield project at Vijaynagar

§ JSW has already started its ladle heating furnace-3, converter-3 and caster-4 facilities

under the expansion project

§ Implementation of another 300 MW captive power plant would be commissioned in FY12

in addition to 300 MW CPP that was commissioned in Q2Fy11

CRM complex: new capex proposed

§ With an aim to improve its present in the niche and value added segment of the market,

the company has proposed to set up a 2.3 mtpa cold rolling mill complex in two phases

at Vijaynagar by FY15E

§ Total investment in this project is Rs 40.25 bn to be funded in the d/e 2 :1 with amount

from internal accruals and debt at Rs 13.5 bn and Rs 26.75 bn respectively

Sales through Shoppe increased

§ Sales through JSW Shoppe increased 94% YoY to 0.34 mn tonne during the quarter of

which value added flat products constitute 43%

Ispat Industries: completion of preferential allotment

§ Preferential allotment of 108.66 mn equity Shares to JSW completed on January 24,

2011 following total investment of Rs 2,157 crores. JSW has already paid Rs 5 bn in this

regard and rest Rs 16.57 bn would be paid going forward

§ The company got approval from the Ispat shareholders, CDR lenders and stock

exchanges. It is now awaiting for the necessary approval from SEBI to complete the

open offer formalities

§ Meanwhile the Dolvi plant has been restarted and is operating at close to its rated

capacity. In the month of December it has produced ~0.2 mn tonne

Balance sheet: D/ E at comfortable level

§ The company has a net debt of Rs 121.47 bn and total cash of Rs 21.45 bn with Rs

16.75 remaining in FDs and MFs

§ The consolidated D/E remains at 0.74. The company has repaid Rs 7 bn and prepaid Rs

4 bn of debt during the quarter

Outlook and Valuation

Due to lower backward integration JSW has been vulnerable to the rise in raw material

prices. However, with the US coking coal coming in and wit the commissioning of sinter

plant, beneficiation units, coke oven batteries and 300 MW CPP we believe the company

would be able to offset major part of rise in raw material prices in FY12E. Higher

realizations and lower blended cost of coking coal due to carry over quantity priced at

US$209/ tonne we expect the company to post better margins in Q4FY11. At this point we

would like to wait for the actual numbers from Chile iron ore and US coking coal mines

before factoring in that into our estimates.

Valuation

At the CMP of Rs 903, the stock is trading at 8.5x FY12E EPS and 5.4x FY12E EV/

EBITDA. Factoring in the recent concerns on the raw material price rise and better

integration we value the company 6xFY12 EV/ EBITDA to arrive at a target price of Rs

1060/ share, which provides 17% upside to the CMP. We assign ACCUMULATE rating on

the stock.