JSW Steel -Catalysts on the cards :target: Rs1,200 :Macquarie Research,

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JSW Steel
Catalysts on the cards
Event
 4Q results poised to be best ever: We believe that JSW is well on track to
deliver its best results in Q4, and that there are a few more catalysts to watch
out for. Our earnings estimates stand 12% above the street without any
upsides from Chile iron ore and US coking coal. We believe that the stock has
already bottomed out and is interestingly poised. Maintain Outperform.

Impact
 Steel market - prices down but now trading at a discount to global
prices: Indian HRC prices are now at an 8% discount to the global average
against an average 4% premium seen over the last 3yrs. HRC prices are
quoting at US$767/t down from the peak of US$800/t. Demand has
stagnated dramatically in March for flat steel and the company might reduce
the price by US$20/t for flat, though its competitors are still holding on.
However, long steel has seen some revival in demand, as many customers
rushed to buy before the year end.
 Cost outlook to rise but margins still to be higher than consensus:
JSW’s cost of production is around US$510/t. It is expecting a US$10/t
increase in iron ore prices and US$45/t increase due to coking coal prices
increases for Q1FY12. However, even with the reduced steel price, JSW
should still do US$190/t in Q1FY12 against our full year assumption of
US$170/t.
 Ispat - cost reduction under focus: JSW is targeting to reduce costs at
Ispat from US$670/t to US$625/t by supplying cheaper power from JSW
Energy (at Rs4.50/unit) and cheaper iron ore fines from Bellary. Hence, even
after a decline in steel prices and increased costs, Ispat will do US$100-110/t
margin against our full year assumption of US$94/t.
 Chile iron ore - first shipment ready to sail: JSW has booked its first
shipment of 45kt to be despatched around 15th April at a CIF price of
US$169/t. Its cost is US$60/t fob + freight cost of US$40/t. JSW plans to do a
minimum of 600kt but depending on port availability can do 1mnt in FY12.
This has the potential to add US$45m to EBITDA in FY12.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs1,200.00 based on a Sum of Parts methodology.
 Catalyst: 4QFY11 earnings
Action and recommendation
 Maintain Outperform: JSW has significantly de-leveraged itself and its raw
material initiatives are looking to come together. The stock has recovered
10% from the recent bottom but is still 30% below the peak and is trading at
attractive valuation of 8x PER and just 1.1x P/B.