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JSW Steel
Fast growth
Event
JSW is one of India's fastest-growing steel companies, and will expand its
capacity to 14mt by March 2011. It is one of the largest exporters of
galvanized products from India, with presence in over 50 countries across the
world. The company also owns a 1.2mt plate and a 0.55mt pipe mill in US.
More growth in the offing. The company has recently acquired Ispat
Industries with a capacity of 3mtpa, and is also looking at setting up a
greenfield project of 4.5mt capacity in West Bengal. We are expecting another
2mtpa brown field expansion through the de-bottlenecking of its Vijaynagar
facility.
Impact
Margins to improve in FY12: We expect JSW’s India operations to earn
EBITDA of US$163 per tonne in FY12, as compared to $140 per tonne
reported in 3Q FY11. Its operations are not integrated for raw materials, which
exposes the company’s margins to fluctuations in raw material prices.
However, we believe that its margins will be helped by better product mix and
cost efficiency. Also, JSW expects to turn around the Ispat operations and this
would also add to earnings.
Margins to be helped by better product mix and cost efficiency: JSW has
commissioned a hot strip mill (HSM) and blooming mill in 2010, which would
reduce the proportion of semis from the current 24% and improve realisation.
Its iron ore beneficiation plant has been commissioned and should allow it to
reduce iron ore costs by using lower-grade ore. It has also commissioned two
coke oven batteries in the last quarter, which will also reduce costs.
Raw material integration is the key: JSW has acquired US-based coking
assets with indicated resources of 123mt of semi soft, high vol quality, but is
waiting for permits to ramp up capacity. The company is also starting 1mtpa
iron ore production in Chile; though it will sell this to Chinese markets, the
Chile production will act as a hedge.
Action and recommendation
JSW will see its leverage go up and it also remains vulnerable to sharp rises
to raw material prices. However, we believe this is already discounted in the
recent correction in the stock price and now it appears ripe for entry.
We continue to like JSW Steel for its low-cost structure and excellent growth
profile. The current stock price values the business at 7.5x 2012E earnings.
JSW Steel Aide Memoire
Operational Issues
1. What is the status of your expansion plans? What are the new capacities you are installing and when do you expect these
to start commissioning?
2. What are your expectations on cost of production? Any measures taken to reduce costs substantially? Any risk factors
beyond the control of the company?
3. How is your product mix changing with your expansion plans and can you quantify the benefit you see from this?
4. Has there been any improvement in the demand scenario in US? What is the breakeven level of utilization for the US
facility?
5. How is the integration of Ispat going on? Do you have any more liabilities on Ispat’s book (like STC’s recent claim)?
6. What is the volume guidance for FY12 and FY13?
7. What is your expectation of raw material contracts for FY12? How do you handle the leftover contracted raw material
quantities? Do your contracts allow forgoing them without any penalty?
Financing
1. Describe your capex plans and their funding arrangements. Is there a possibility of further equity dilution?
2. On the West Bengal steel project: How will you finance this capex?
3. What are your plans for capex in Ispat facilities? How will you fund these? How much in the way loans do you have due in
the next year? How is the refinancing of Ispat’s loan coming along?
Strategic Issues
1. What are the growth options for JSW Steel? What can we expect over the next five years?
2. How do you see yourself competing with other steel companies which are fully integrated for iron ore (JSW has 17%
captive)?
3. What is the level of raw material security you are comfortable with? What are the initiatives you are taking on the raw
material front and what can we expect in the next five years? We have heard of your coal mine acquisition in the US. Do
the mines there have very thin seams, which make mining costly and difficult? Do these mines have enough permits? Will
they be difficult to obtain given the recent accident in the Massey Energy mine?
4. What plans do you have for the Chile iron ore mine?
5. Do you plan to sell your US facility?
6. We have heard that Arcelor Mittal has started construction of a steel plant in Karnataka. How does this affect your plant in
terms of iron ore sourcing and market share?
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel
Fast growth
Event
JSW is one of India's fastest-growing steel companies, and will expand its
capacity to 14mt by March 2011. It is one of the largest exporters of
galvanized products from India, with presence in over 50 countries across the
world. The company also owns a 1.2mt plate and a 0.55mt pipe mill in US.
More growth in the offing. The company has recently acquired Ispat
Industries with a capacity of 3mtpa, and is also looking at setting up a
greenfield project of 4.5mt capacity in West Bengal. We are expecting another
2mtpa brown field expansion through the de-bottlenecking of its Vijaynagar
facility.
Impact
Margins to improve in FY12: We expect JSW’s India operations to earn
EBITDA of US$163 per tonne in FY12, as compared to $140 per tonne
reported in 3Q FY11. Its operations are not integrated for raw materials, which
exposes the company’s margins to fluctuations in raw material prices.
However, we believe that its margins will be helped by better product mix and
cost efficiency. Also, JSW expects to turn around the Ispat operations and this
would also add to earnings.
Margins to be helped by better product mix and cost efficiency: JSW has
commissioned a hot strip mill (HSM) and blooming mill in 2010, which would
reduce the proportion of semis from the current 24% and improve realisation.
Its iron ore beneficiation plant has been commissioned and should allow it to
reduce iron ore costs by using lower-grade ore. It has also commissioned two
coke oven batteries in the last quarter, which will also reduce costs.
Raw material integration is the key: JSW has acquired US-based coking
assets with indicated resources of 123mt of semi soft, high vol quality, but is
waiting for permits to ramp up capacity. The company is also starting 1mtpa
iron ore production in Chile; though it will sell this to Chinese markets, the
Chile production will act as a hedge.
Action and recommendation
JSW will see its leverage go up and it also remains vulnerable to sharp rises
to raw material prices. However, we believe this is already discounted in the
recent correction in the stock price and now it appears ripe for entry.
We continue to like JSW Steel for its low-cost structure and excellent growth
profile. The current stock price values the business at 7.5x 2012E earnings.
JSW Steel Aide Memoire
Operational Issues
1. What is the status of your expansion plans? What are the new capacities you are installing and when do you expect these
to start commissioning?
2. What are your expectations on cost of production? Any measures taken to reduce costs substantially? Any risk factors
beyond the control of the company?
3. How is your product mix changing with your expansion plans and can you quantify the benefit you see from this?
4. Has there been any improvement in the demand scenario in US? What is the breakeven level of utilization for the US
facility?
5. How is the integration of Ispat going on? Do you have any more liabilities on Ispat’s book (like STC’s recent claim)?
6. What is the volume guidance for FY12 and FY13?
7. What is your expectation of raw material contracts for FY12? How do you handle the leftover contracted raw material
quantities? Do your contracts allow forgoing them without any penalty?
Financing
1. Describe your capex plans and their funding arrangements. Is there a possibility of further equity dilution?
2. On the West Bengal steel project: How will you finance this capex?
3. What are your plans for capex in Ispat facilities? How will you fund these? How much in the way loans do you have due in
the next year? How is the refinancing of Ispat’s loan coming along?
Strategic Issues
1. What are the growth options for JSW Steel? What can we expect over the next five years?
2. How do you see yourself competing with other steel companies which are fully integrated for iron ore (JSW has 17%
captive)?
3. What is the level of raw material security you are comfortable with? What are the initiatives you are taking on the raw
material front and what can we expect in the next five years? We have heard of your coal mine acquisition in the US. Do
the mines there have very thin seams, which make mining costly and difficult? Do these mines have enough permits? Will
they be difficult to obtain given the recent accident in the Massey Energy mine?
4. What plans do you have for the Chile iron ore mine?
5. Do you plan to sell your US facility?
6. We have heard that Arcelor Mittal has started construction of a steel plant in Karnataka. How does this affect your plant in
terms of iron ore sourcing and market share?
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