Buy JSW Steel -Weak quarter, recovery ahead; Anand Rathi

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JSW Steel
Weak quarter, recovery ahead; maintain Buy
JSW Steel’s 3QFY11 results were slightly below our estimates due
to lower-than-expected volume and realization and higher-thanexpected
costs. We change earnings and price target estimates.

 Revenue marginally below estimates. JSTL saw 25.8% yoy
revenue rise to `57.7bn, a tad below our estimates. Revenue
growth was on account of sales volume growth of 11.8% yoy to
1.59m tons and average realization growth of 12.5% yoy. But,
both volume and realization were slightly below our estimates.
 Cost pressure hits margin. JSTL’s EBITDA dipped 11.8% yoy
to `9.6bn on higher iron-ore and coking-coal costs. Higher staff
costs and other expenses yoy also impacted EBITDA margin,
which was down 710bps to 16.7%. EBITDA/ton stood at
US$132/ton, up from US$128/ton in 2QFY11.
 Standalone net profit down ~26%. Despite revenue growth of
~26% yoy, net profit dropped 26% to `3.8bn due to margin
erosion and higher depreciation. Other income, which was down
66% yoy, and depreciation, up ~21%, also led to decline in profits
yoy. Net profit was below our expectations of `4bn.
 Change in earnings. We cut our earnings 6% & 5% for FY11e
& FY12e respectively, factoring in lower volume and higher costs.
 Valuation and risks. At CMP of `898, the stock trades at PE of
8.3x and EV/E of 5.1x FY12e. Besides earnings cut, we
marginally trim our price target 3% to `1,118 from `1,154; Buy.
Key risks: Delay in expansions; higher raw material costs.