JSW Steel -Opportunity in IT : Macquarie Research

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JSW Steel
Opportunity in IT
Event
 Income tax raid on JSW gives an opportunity: NDTV reports on an income
tax (IT) raid have created nervousness in the stock. We believe that JSW is a
professionally run company and we don’t think anything major will come out of
this inquiry. The business outlook has improved for JSW and we believe it is a
good pick given these declines. We maintain our Outperform with a target
price of Rs1,200.

Impact
 Income tax raid – reasons don’t look too convincing: NDTV reports
suggest that the project costs have been overstated for taking benefits. This it
is hard for us to believe given that JSW has one of the lowest cost per ton of
capacity.
 Key beneficiary of iron ore export tax: JSW steel buys 85% of its iron ore
requirement of which 50% is on a spot basis. The recent increase in the
export tax and also a 15% fall in spot iron ore prices globally will help JSW
reduce its costs of production and compensate for higher coking coal prices.
 Competitive advantage of Ispat Industries increases: The coking coal
prices for Q1FY12 are now set at US$330/t, a substantial 46% above last
quarter. Ispat Industries, who produces 50% of its steel through the gasbased
DRI process, actually sees a strong increase in its competitive
advantage due to a lower use of coking coal. We believe this advantage is
around US$30/t of steel.
 Analysts not building in upside from US coking coal mines and Chile
iron ore: While the company is making steady progress and is confident in
doing 500kt of coking coal production at an fob cost of US$100/t and 1mnt of
iron at an fob cost of US$60/t. This has the potential to add 7-8% at EBITDA.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs1,200.00 based on a Sum of Parts methodology.
 Catalyst: Clarity on mine production from its US coking coal mine and Chile
iron ore mine.
Action and recommendation
 Maintain Outperform: Global steel production is now operating at 90%
capacity utilisation and with slightly softening raw material prices, we believe
that steel margins are likely to expand. We think JSW represents the best
opportunity here as it has already consolidated its balance sheet, is seeing a
50% increase in volume, and is also likely to improve raw material integration.
At a 7.5x PER, it looks very attractively poised.