Buy JSW Steel -Highest volume growth: Motilal Oswal

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Highest volume growth
 JSW Steel boasts of the highest volume growth in the country, with 42% growth in
FY12 and a further 12% growth in FY13. It has demonstrated superior project
execution skills, growing its capacity 6x to 10mtpa during the decade (ending
March 2011) through brownfield expansions at Vijaynagar. With the acquisition of
Ispat Industries and Salem Steel, it now controls 14mtpa of capacity, i.e. none
less the SAIL. The growth momentum is likely to continue over the next 3-5
years, with a strong pipeline of projects in Karnataka and West Bengal.
 In West Bengal, JSW Steel is undertaking a 4.5mtpa greenfield steel project at a
capex of Rs160b to be executed over four years. Coking coal blocks of Kulti,
Sitarampur and Rohne have already been allotted. Iron ore will be sourced through
slurry pipelines from Orissa/Jharkhand.
 We expect the recently acquired Ispat Industries to cut costs. Refinancing debt
will enable it to save interest costs. Long-term supply agreements for power,
pellets and coke will help to reduce variable costs. Marketing synergies will help
to save on transportation costs. Ispat is an efficient producer, but suffers from
underinvestment, which can be overcome with planned capex of Rs39b over three
years.
 Temporary oversupply in India may force JSW Steel to take some hit on its historical
average EBITDA per ton. However, PBT per ton is still likely to trend upwards
because of low specific project costs. JSW Steel's spend on new capacity is
US$700/ton, against ~US$1,200/ton for Tata Steel and ~US$1,600/ton for SAIL.
PBT margin expansion and strong volume growth will drive bottomline growth.
 Consolidated net debt will decline, driven by rising cash flows and equity infusion,
despite capex and acquisition of equity in Ispat Industries. Debt-to-equity will
decline, freeing up capital for its West Bengal project. Rs59b of equity has been
infused i.e. Rs54b by JFE and Rs5.3b as advances from promoters towards issue
of warrants in FY11. Further Rs30b of equity is pending conversion - Rs15.9b
towards warrants, Rs11b towards FCCB and Rs3b by JFE. Even if pending

conversion lapses, the D/E ratio will still remain comfortable at 0.9x. Ispat Industries'
balance sheet will not be consolidated unless JSW Steel is able to raise its stake
from 41% currently to more than 50%. We expect Ispat to break even at PBT level.
 Overseas investment in Chilean iron ore mines and US coal mines too are expected
to generate cash flows in FY12. We expect production of 0.5mtpa each of iron ore
and coking coal in FY12, which is likely to double in FY13. We still do not expect the
US pipe and plate mill to turn around in the near term. We expect all subsidiaries
together to contribute Rs7.8b to consolidated EBITDA and Rs3.4b to consolidated
PAT in FY12.
 We expect EPS CAGR of 51% over FY11-13. RoE is likely to improve from 7.9% in
FY11 to 13.1% in FY12. The stock trades at attractive valuations of 8.3x FY12E EPS
and 1.1x FY12E BV. On EV/EBITDA, the stock trades at 5.4x FY12E and 4.4x
FY13E. We maintain Buy with a target price of Rs1,655 (EV/EBITDA of 6.5x FY13E).