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JSW Steel
▲ Neutral Previous: Underweight; JSTL.BO, JSTL IN
Upgrading to Neutral - Tough steel market, but valuations turning supportive
• Tough steel market ahead, recent 34% stock price decline, pricing in
earnings risk: We upgrade JSW to Neutral from Underweight and a revised
March-12 PT of Rs910 (earlier Rs1000). We incorporate the recent Ispat
acquisition, new debt and new equity infusion and cut our FY11-13E EPS by
19-27% driven by a) lower EBITDA/MT and b) Ispat acquisition. While JSTL
was a relative outperformer for most part of 2010, driven by balance sheet deleveraging
(stake sale to JFE), the stock has come off ~34% since Oct-2010 as
the JFE event played out and the domestic steel market got progressively
tougher (driven by over capacity and weakening demand). We believe current
valuations at 6.5x/5.7x FY12/13E EV/EBITDA limit absolute downside from
here but are not compelling enough for a strong buy case, especially in the
context of a tough flat steel market in India.
• March to be a good quarter, with margin pressure returning thereafter:
We expect March-11E EBITDA/MT of $177/MT and FY12E EBITDA/MT at
$162/MT v/s FY11E EBITDA/MT at $164/MT (YTD EBITDA/MT $154/MT).
While our FY12-13 estimates are ~30-23% below Bloomberg consensus, given
that domestic demand is not picking up and raw material cost pressures are
likely to sustain (JSTL is non integrated), we see downside risks to consensus.
• Capex plan continues- Long-term positive given capacity build out in a
growing economy, near-term increase in leverage negative: In addition to
the ISPAT acquisition, which as per our calculations adds net Rs50bn of
effective debt to JSTL, it also announced Rs40bn capex on new CRM complex
and plans to start work on the Rs160bn Bengal Expansion in FY12E. JSW’s
domestic capex execution has been impressive and the new round of capex
places JSW well in a growing economy like India (where industry would likely
face capacity issues again after ~3 years); however, the new bunch of expansion
projects would likely result in leverage remaining relatively high and the current
expansion would likely not be very profitable in the near term (surplus capacity
currently in India).
• Key risks for re-rating/de-rating: Sharp improvement in domestic steel
demand, which would allow Indian mills to capture the global price increase,
ramp up of production/exports from US coking coal acquisition/ Chilean iron
ore project and pick up in US mill profitability, are the key upside risks.
Inability to pass on the entire cost increase and further increase in leverage are
the key downside risks to our estimates and PT.
Price target and valuation analysis
JSW Steel is part of the JSW Group, which
has interests in steel, power, port and
aluminum. JSW Steel is a fully-integrated
steel plant with facilities in Karnataka
(Southern India) and Maharashtra (Western
India). The upstream or steel manufacturing
plant is located in the Bellary-Hospet area of
Karnataka and Tamil Nadu. The facilities are
well connected with major ports and rail
heads. The company is also the only flat steel
producer in southern India. The location of
the company in one of the richest iron ore
belts in the country lowers the cost of iron
ore.
We upgrade JSW to Neutral from Underweight with a new March-12
PT of Rs910 (earlier Sep-11 PT of Rs1000). Our price target is based
on 5.7x FY13E EV/EBITDA. Our price target is based on 5.7x FY13E
EV/EBITDA, which is at a discount to Tata Steel’s India operations
(6.5x EV/EBITDA) given lack of raw material integration and balance
sheet. We reduce our target multiple modestly from 6.0x to 5.7x given
the Ispat acquisition which is significantly lower profitability.
Key upside risks to our target price and estimates are sharp
improvement in domestic steel demand (which would allow Indian
mills to capture the global price increase), ramp up of
production/exports from US coking coal acquisition/ Chilean iron ore
project, and pick up in US mill profitability. Inability to pass on the
entire cost increase, further increase in leverage and tightening
domestic liquidity environment, are the key downside risks to our
estimates and PT.
Valuations and Key Risks
We upgrade JSW to Neutral from Underweight with a revised March-12 PT of
Rs910 (earlier Sep-11 PT of Rs1000). Our price target is based on 5.7x FY13E
EV/EBITDA, which is at a discount to Tata Steel’s India operations (6.5x
EV/EBITDA) given lack of raw material integration and balance sheet. We reduce
our target multiple modestly from 6.0x to 5.7x given the Ispat acquisition which is
significantly lower profitability.
While JSTL was a relative out-performer for most part of 2010, driven by balance
sheet de-leveraging (stake sale to JFE), the stock has come off ~34% since Oct-2010
as the JFE event played out and the domestic steel market got progressively tougher
(driven by over capacity and weakening demand). We believe current valuations at
6.5x/5.7x FY12/13E JPM EV/EBITDA limits absolute downside from here.
Key upside risks to our target price and estimates are sharp improvement in domestic
steel demand (which would allow Indian mills to capture the global price increase),
ramp up of production/exports from US coking coal acquisition/ Chilean iron ore
project, and pick up in US mill profitability. Inability to pass on the entire cost
increase, further increase in leverage and tightening domestic liquidity environment,
are the key downside risks to our estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel
▲ Neutral Previous: Underweight; JSTL.BO, JSTL IN
Upgrading to Neutral - Tough steel market, but valuations turning supportive
• Tough steel market ahead, recent 34% stock price decline, pricing in
earnings risk: We upgrade JSW to Neutral from Underweight and a revised
March-12 PT of Rs910 (earlier Rs1000). We incorporate the recent Ispat
acquisition, new debt and new equity infusion and cut our FY11-13E EPS by
19-27% driven by a) lower EBITDA/MT and b) Ispat acquisition. While JSTL
was a relative outperformer for most part of 2010, driven by balance sheet deleveraging
(stake sale to JFE), the stock has come off ~34% since Oct-2010 as
the JFE event played out and the domestic steel market got progressively
tougher (driven by over capacity and weakening demand). We believe current
valuations at 6.5x/5.7x FY12/13E EV/EBITDA limit absolute downside from
here but are not compelling enough for a strong buy case, especially in the
context of a tough flat steel market in India.
• March to be a good quarter, with margin pressure returning thereafter:
We expect March-11E EBITDA/MT of $177/MT and FY12E EBITDA/MT at
$162/MT v/s FY11E EBITDA/MT at $164/MT (YTD EBITDA/MT $154/MT).
While our FY12-13 estimates are ~30-23% below Bloomberg consensus, given
that domestic demand is not picking up and raw material cost pressures are
likely to sustain (JSTL is non integrated), we see downside risks to consensus.
• Capex plan continues- Long-term positive given capacity build out in a
growing economy, near-term increase in leverage negative: In addition to
the ISPAT acquisition, which as per our calculations adds net Rs50bn of
effective debt to JSTL, it also announced Rs40bn capex on new CRM complex
and plans to start work on the Rs160bn Bengal Expansion in FY12E. JSW’s
domestic capex execution has been impressive and the new round of capex
places JSW well in a growing economy like India (where industry would likely
face capacity issues again after ~3 years); however, the new bunch of expansion
projects would likely result in leverage remaining relatively high and the current
expansion would likely not be very profitable in the near term (surplus capacity
currently in India).
• Key risks for re-rating/de-rating: Sharp improvement in domestic steel
demand, which would allow Indian mills to capture the global price increase,
ramp up of production/exports from US coking coal acquisition/ Chilean iron
ore project and pick up in US mill profitability, are the key upside risks.
Inability to pass on the entire cost increase and further increase in leverage are
the key downside risks to our estimates and PT.
Price target and valuation analysis
JSW Steel is part of the JSW Group, which
has interests in steel, power, port and
aluminum. JSW Steel is a fully-integrated
steel plant with facilities in Karnataka
(Southern India) and Maharashtra (Western
India). The upstream or steel manufacturing
plant is located in the Bellary-Hospet area of
Karnataka and Tamil Nadu. The facilities are
well connected with major ports and rail
heads. The company is also the only flat steel
producer in southern India. The location of
the company in one of the richest iron ore
belts in the country lowers the cost of iron
ore.
We upgrade JSW to Neutral from Underweight with a new March-12
PT of Rs910 (earlier Sep-11 PT of Rs1000). Our price target is based
on 5.7x FY13E EV/EBITDA. Our price target is based on 5.7x FY13E
EV/EBITDA, which is at a discount to Tata Steel’s India operations
(6.5x EV/EBITDA) given lack of raw material integration and balance
sheet. We reduce our target multiple modestly from 6.0x to 5.7x given
the Ispat acquisition which is significantly lower profitability.
Key upside risks to our target price and estimates are sharp
improvement in domestic steel demand (which would allow Indian
mills to capture the global price increase), ramp up of
production/exports from US coking coal acquisition/ Chilean iron ore
project, and pick up in US mill profitability. Inability to pass on the
entire cost increase, further increase in leverage and tightening
domestic liquidity environment, are the key downside risks to our
estimates and PT.
Valuations and Key Risks
We upgrade JSW to Neutral from Underweight with a revised March-12 PT of
Rs910 (earlier Sep-11 PT of Rs1000). Our price target is based on 5.7x FY13E
EV/EBITDA, which is at a discount to Tata Steel’s India operations (6.5x
EV/EBITDA) given lack of raw material integration and balance sheet. We reduce
our target multiple modestly from 6.0x to 5.7x given the Ispat acquisition which is
significantly lower profitability.
While JSTL was a relative out-performer for most part of 2010, driven by balance
sheet de-leveraging (stake sale to JFE), the stock has come off ~34% since Oct-2010
as the JFE event played out and the domestic steel market got progressively tougher
(driven by over capacity and weakening demand). We believe current valuations at
6.5x/5.7x FY12/13E JPM EV/EBITDA limits absolute downside from here.
Key upside risks to our target price and estimates are sharp improvement in domestic
steel demand (which would allow Indian mills to capture the global price increase),
ramp up of production/exports from US coking coal acquisition/ Chilean iron ore
project, and pick up in US mill profitability. Inability to pass on the entire cost
increase, further increase in leverage and tightening domestic liquidity environment,
are the key downside risks to our estimates.
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