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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.
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.
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