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JSW Steel
4Q results stronger than
expected
„4Q results beat, near term headwinds, but maintain Buy
Standalone PAT grew 118%QoQ to Rs8.3bn vs. our est. of Rs6.3bn led by higher
ASP & stronger vols. due to transfer of steel from Ispat to JSW for re-rolling. Ispat
also reported better than expected 4Q results last week. We think margins have
peaked in 4Q and expect headwinds from lower steel prices & higher coal costs
near term. Cost savings may cushion impact partially. We remain positive medium
term as we expect 23% vol. CAGR over to drive 37% EPS CAGR over FY11-13e.
EBITDA up 64%QoQ led by stronger volumes and ASP
Vols. grew 8.8%QoQ to 1.73mt (BoFAMLe 1.6mt), but this includes ~0.1mt (net)
transferred from Ispat for re rolling. EBITDA/t was US$201/t (+US$67/tQoQ). Adj.
for lower EBITDA/t on re-rolling, we est. EBITDA on own output was likely higher
at ~US$210/t. ASP grew 12%QoQ (2% ahead). US plates & pipes subs. remained
weak with EBITDA of US$4.6mn (3Q US$1.6mn) led by low utilizations (10%).
Ispat 4Q EBITDA surprised positively, but challenges remain
EBITDA was Rs3.3bn (loss of Rs1.6bn). Utilizations were 88% & EBITDA/t was
US$101/t (FY12 guidance Rs4000/t). While encouraging, 4Q does not represent
normalized margins in our view. Steel prices have fallen & coal costs should
increase in 1QFY12. Ispat is facing gas supply issues which may hurt output.
However, gains from cost saving initiatives & synergies are likely to come thru
over next few qtrs. We currently forecast EBITDA/t of US$68/t in FY12e.
Key takeaways from the management meet
JSW expects higher coal costs (+US$105/t QoQ) to kick in post May as it had low
cost inventory (~2mnths). 3.2mt blast furnace is expected to be started in June Q.
(Mar 2011 earlier). JSW expects steel sales of 9mt (incl. Ispat transfers) in FY12e.
It also announced plans for 2mt EAF based steel expansion by June13 (capex
US$0.6bn). Shipments from Chile mine has started. Net gearing was 0.9x as 4Q
Results Highlights
„ 4Q FY11 results stronger than expected: Standalone PAT grew 118%QoQ
to Rs8.3bn vs. our est. of Rs6.3bn led by higher ASP & stronger volumes.
Standalone EBITDA was Rs15.8bn up 64%QoQ. Consolidated PAT
(including Ispat) was Rs7.9bn up 172%QoQ.
„ Volumes higher than expected due to transfers from Ispat: Steel
volumes were 1.73mt up 9%QoQ, ahead of our 1.6mt forecast. This was led
by transfer of semis/HRC (~1mt net) from Ispat’s Dolvi plant in Maharashtra
(instead of transferring HRC from JSW’s upstream unit in Vijaynagar) to JSW
Steel’s downstream facility at Vasind, Maharashtra in order to optimize
freight costs.
„ 4Q EBITDA/t was US$201/t up US$67/t QoQ: ASP grew 12%QoQ, 2%
ahead of our estimate. Costs increased 4%QoQ as expected. JSW EBITDA/t
of US$201/t reflected EBITDA from own steel production and lower EBITDA/t
on rerolling of steel transferred from Ispat. Assuming ~US$65/t margin on
rerolling, we estimate margins on own production was ~ US$210/t.
„ Ispat 4Q Results: 4Q EBITDA was Rs3.3bn (loss of Rs1.6bn), excluding
gains from prepayment of deferred VAT liability. Utilizations were 88% &
EBITDA/t was US$101/t (FY12 guidance Rs4000/t). Interest expenses
declined 31%QoQ to Rs1.88bn. Mgmt clarified that this included ~Rs350mn
of one time interest adjustments related to conversion of debt into equity.
Thus the normalized levels are ~Rs2.2-Rs2.3bn at present. JSW expects
further reduction in interest expense post refinancing of high cost debt.
Outlook
„ Sales guidance of 9mt in FY12: Sales volume guidance of 9mn tons in
FY12: JSW is guiding to crude steel production of 8.75mt (+36%YoY) in
FY12 and steel sales of 9mt (48%Yoy). This includes sales of re-rolled steel
transferred from Ispat. We currently forecast sales volumes of 8.35mt in
FY12e and 9.25mt in FY13e.
„ Higher coal cost to come thru post May: JSW has low cost carry forward
coking coal inventory of ~1.5 -2months. Hence it expects impact of higher
coal prices (+US$105/t) to start hitting P&L June onwards.
„ Cost savings from beneficiation and sinter expansion: JSW has
commissioned ~10mt of beneficiation capacity (7mtpa since Dec 10). This
has lowered iron ore procurement costs. It also expects to save costs thru
higher usage of cheaper fines instead of expensive lumps post
commissioning of the sinter plant in 1QFY12.
„ Ispat – full impact of cost savings initiative is yet to come thru: JSW
has made some progress in improving efficiencies, but full impact is likely to
come thru only over next few quarters.
Projects Update
„ 3.2mtpa expansion to be commissioned by June: JSW has
commissioned phase 5.75mt sinter plant and expects to commission 2.4mtpa
sinter plant in 1Q FY12. Also commissioning of casters/converters at steel
melting shop has been completed. However 3.2mtpa blast furnace is
expected to be completed in 1QFY12.
„ JSW announced 2mtpa EAF based brown field expansion at Vijaynagar:
Proposed capex is Rs26.95bn (~US$0.6bn). Expansion capacity cost of
US$300/t appears attractive compared to green field projects (expansion
cost US$800-1000/t). It plans to fund this by debt and equity in the ratio of
2:1.
„ JSW Bengal Project: Preliminary work has started. Development of mining
plan for coking coal and thermal coal is in progress. Expected capex in FY12
will be small (~Rs6.5bn).
„ Chile mines update: First shipments from Chile iron ore mine has started.
FoB Costs are ~US$68/t. Our current forecasts assume 1mt of iron ore
volumes from Chile in FY12.
„ US coking coal mines update: It has recently received all the permits
required for US coking coal mine. It expects to award the mining contract
over next few months. JSW is guiding to 0.75mt of coal production in FY12e.
We do not assume any coal sales in our model.
Capex and Balance Sheet
„ Capex of US$1.7bn in FY12e (excluding JSW Bengal): It expects to fund
~US$1.1bn of the proposed capex thru debt. JSW net debt was US$3.6bn
(including acceptances) and net gearing was 0.95x as on March 2011.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel
4Q results stronger than
expected
„4Q results beat, near term headwinds, but maintain Buy
Standalone PAT grew 118%QoQ to Rs8.3bn vs. our est. of Rs6.3bn led by higher
ASP & stronger vols. due to transfer of steel from Ispat to JSW for re-rolling. Ispat
also reported better than expected 4Q results last week. We think margins have
peaked in 4Q and expect headwinds from lower steel prices & higher coal costs
near term. Cost savings may cushion impact partially. We remain positive medium
term as we expect 23% vol. CAGR over to drive 37% EPS CAGR over FY11-13e.
EBITDA up 64%QoQ led by stronger volumes and ASP
Vols. grew 8.8%QoQ to 1.73mt (BoFAMLe 1.6mt), but this includes ~0.1mt (net)
transferred from Ispat for re rolling. EBITDA/t was US$201/t (+US$67/tQoQ). Adj.
for lower EBITDA/t on re-rolling, we est. EBITDA on own output was likely higher
at ~US$210/t. ASP grew 12%QoQ (2% ahead). US plates & pipes subs. remained
weak with EBITDA of US$4.6mn (3Q US$1.6mn) led by low utilizations (10%).
Ispat 4Q EBITDA surprised positively, but challenges remain
EBITDA was Rs3.3bn (loss of Rs1.6bn). Utilizations were 88% & EBITDA/t was
US$101/t (FY12 guidance Rs4000/t). While encouraging, 4Q does not represent
normalized margins in our view. Steel prices have fallen & coal costs should
increase in 1QFY12. Ispat is facing gas supply issues which may hurt output.
However, gains from cost saving initiatives & synergies are likely to come thru
over next few qtrs. We currently forecast EBITDA/t of US$68/t in FY12e.
Key takeaways from the management meet
JSW expects higher coal costs (+US$105/t QoQ) to kick in post May as it had low
cost inventory (~2mnths). 3.2mt blast furnace is expected to be started in June Q.
(Mar 2011 earlier). JSW expects steel sales of 9mt (incl. Ispat transfers) in FY12e.
It also announced plans for 2mt EAF based steel expansion by June13 (capex
US$0.6bn). Shipments from Chile mine has started. Net gearing was 0.9x as 4Q
Results Highlights
„ 4Q FY11 results stronger than expected: Standalone PAT grew 118%QoQ
to Rs8.3bn vs. our est. of Rs6.3bn led by higher ASP & stronger volumes.
Standalone EBITDA was Rs15.8bn up 64%QoQ. Consolidated PAT
(including Ispat) was Rs7.9bn up 172%QoQ.
„ Volumes higher than expected due to transfers from Ispat: Steel
volumes were 1.73mt up 9%QoQ, ahead of our 1.6mt forecast. This was led
by transfer of semis/HRC (~1mt net) from Ispat’s Dolvi plant in Maharashtra
(instead of transferring HRC from JSW’s upstream unit in Vijaynagar) to JSW
Steel’s downstream facility at Vasind, Maharashtra in order to optimize
freight costs.
„ 4Q EBITDA/t was US$201/t up US$67/t QoQ: ASP grew 12%QoQ, 2%
ahead of our estimate. Costs increased 4%QoQ as expected. JSW EBITDA/t
of US$201/t reflected EBITDA from own steel production and lower EBITDA/t
on rerolling of steel transferred from Ispat. Assuming ~US$65/t margin on
rerolling, we estimate margins on own production was ~ US$210/t.
„ Ispat 4Q Results: 4Q EBITDA was Rs3.3bn (loss of Rs1.6bn), excluding
gains from prepayment of deferred VAT liability. Utilizations were 88% &
EBITDA/t was US$101/t (FY12 guidance Rs4000/t). Interest expenses
declined 31%QoQ to Rs1.88bn. Mgmt clarified that this included ~Rs350mn
of one time interest adjustments related to conversion of debt into equity.
Thus the normalized levels are ~Rs2.2-Rs2.3bn at present. JSW expects
further reduction in interest expense post refinancing of high cost debt.
Outlook
„ Sales guidance of 9mt in FY12: Sales volume guidance of 9mn tons in
FY12: JSW is guiding to crude steel production of 8.75mt (+36%YoY) in
FY12 and steel sales of 9mt (48%Yoy). This includes sales of re-rolled steel
transferred from Ispat. We currently forecast sales volumes of 8.35mt in
FY12e and 9.25mt in FY13e.
„ Higher coal cost to come thru post May: JSW has low cost carry forward
coking coal inventory of ~1.5 -2months. Hence it expects impact of higher
coal prices (+US$105/t) to start hitting P&L June onwards.
„ Cost savings from beneficiation and sinter expansion: JSW has
commissioned ~10mt of beneficiation capacity (7mtpa since Dec 10). This
has lowered iron ore procurement costs. It also expects to save costs thru
higher usage of cheaper fines instead of expensive lumps post
commissioning of the sinter plant in 1QFY12.
„ Ispat – full impact of cost savings initiative is yet to come thru: JSW
has made some progress in improving efficiencies, but full impact is likely to
come thru only over next few quarters.
Projects Update
„ 3.2mtpa expansion to be commissioned by June: JSW has
commissioned phase 5.75mt sinter plant and expects to commission 2.4mtpa
sinter plant in 1Q FY12. Also commissioning of casters/converters at steel
melting shop has been completed. However 3.2mtpa blast furnace is
expected to be completed in 1QFY12.
„ JSW announced 2mtpa EAF based brown field expansion at Vijaynagar:
Proposed capex is Rs26.95bn (~US$0.6bn). Expansion capacity cost of
US$300/t appears attractive compared to green field projects (expansion
cost US$800-1000/t). It plans to fund this by debt and equity in the ratio of
2:1.
„ JSW Bengal Project: Preliminary work has started. Development of mining
plan for coking coal and thermal coal is in progress. Expected capex in FY12
will be small (~Rs6.5bn).
„ Chile mines update: First shipments from Chile iron ore mine has started.
FoB Costs are ~US$68/t. Our current forecasts assume 1mt of iron ore
volumes from Chile in FY12.
„ US coking coal mines update: It has recently received all the permits
required for US coking coal mine. It expects to award the mining contract
over next few months. JSW is guiding to 0.75mt of coal production in FY12e.
We do not assume any coal sales in our model.
Capex and Balance Sheet
„ Capex of US$1.7bn in FY12e (excluding JSW Bengal): It expects to fund
~US$1.1bn of the proposed capex thru debt. JSW net debt was US$3.6bn
(including acceptances) and net gearing was 0.95x as on March 2011.
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