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JSW Steel (JSTL.BO)
Buy Equity Research
Ispat acquisition: Price correction overdone, execution is key; Buy
What's changed
Post the acquisition of Ispat Industries (45% stake) by JSW Steel in Dec 2010
for Rs22bn (implied EV: Rs142bn), JSW has underperformed its peers and
Sensex by 12%/17% on concerns over whether it can execute a turnaround
in Ispat which has been in the red in 4 of the last 5 years. While we note
that the concerns are partly justified, given the lack of integration and high
leverage, we think the stock price correction has more than priced them in.
Implications
In our view, JSW Steel, given its execution record/low conversion costs, has
the ability to bring an operation/financial turnaround in Ispat, which has a
3.3mn ton state-of-the art steel facility. We believe that JSW’s turnaround
strategy, governed by improved material sourcing mix, realigned marketing
strategy and low-cost debt refinancing, is in the right direction. While we
note that the price paid for Ispat on an EV/ton basis was $950/ton (i.e. below
replacement cost), its earnings based valuation is a function of the
extent/speed with which JSW can execute the turnaround. In our view it will
be a gradual process, with FY12 being the transition year and full benefits to
start flowing in FY13, the year Ispat should get back in the black.
Valuation
While we believe that the acquisition could be positive in the medium term, we
expect it to be earnings dilutive in FY12E. We revise our FY12E-FY13E EPS
by -4% to +4% to account for the acquisition (equity method). We prefer to
ascribe a 50% disc. to JSW’s equity investment in Ispat, till we start seeing
synergies flow through Ispat. Our new P/B-based 12-m target price of Rs1,151
(from Rs1,286 previously), still offers upside potential of 29%. We reiterate
our Buy rating as we believe the current price does not reflect JSW’s growth
trajectory (37% 3-yr EBITDA) and think any data point in the coming quarters
indicating the speed of Ispat’s turnaround could be a positive catalyst.
Key risks
Slower-than-expected turnaround in Ispat; higher raw material costs.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel (JSTL.BO)
Buy Equity Research
Ispat acquisition: Price correction overdone, execution is key; Buy
What's changed
Post the acquisition of Ispat Industries (45% stake) by JSW Steel in Dec 2010
for Rs22bn (implied EV: Rs142bn), JSW has underperformed its peers and
Sensex by 12%/17% on concerns over whether it can execute a turnaround
in Ispat which has been in the red in 4 of the last 5 years. While we note
that the concerns are partly justified, given the lack of integration and high
leverage, we think the stock price correction has more than priced them in.
Implications
In our view, JSW Steel, given its execution record/low conversion costs, has
the ability to bring an operation/financial turnaround in Ispat, which has a
3.3mn ton state-of-the art steel facility. We believe that JSW’s turnaround
strategy, governed by improved material sourcing mix, realigned marketing
strategy and low-cost debt refinancing, is in the right direction. While we
note that the price paid for Ispat on an EV/ton basis was $950/ton (i.e. below
replacement cost), its earnings based valuation is a function of the
extent/speed with which JSW can execute the turnaround. In our view it will
be a gradual process, with FY12 being the transition year and full benefits to
start flowing in FY13, the year Ispat should get back in the black.
Valuation
While we believe that the acquisition could be positive in the medium term, we
expect it to be earnings dilutive in FY12E. We revise our FY12E-FY13E EPS
by -4% to +4% to account for the acquisition (equity method). We prefer to
ascribe a 50% disc. to JSW’s equity investment in Ispat, till we start seeing
synergies flow through Ispat. Our new P/B-based 12-m target price of Rs1,151
(from Rs1,286 previously), still offers upside potential of 29%. We reiterate
our Buy rating as we believe the current price does not reflect JSW’s growth
trajectory (37% 3-yr EBITDA) and think any data point in the coming quarters
indicating the speed of Ispat’s turnaround could be a positive catalyst.
Key risks
Slower-than-expected turnaround in Ispat; higher raw material costs.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
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