JSW Steel -Deleveraged and growing \::Macquarie Research

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


JSW Steel
Deleveraged and growing
Event
 Results above consensus: JSW Steel reported very strong earnings for
the quarter, 17% higher than the consensus estimate, led by good sales
volume and higher-than-expected margins. We maintain our earnings
estimates and target price and continue to like the company’s growth profile.
We believe that stock has already bottomed and is interestingly poised here.
Maintain Outperform.
Impact
 Strong 4Q FY11 results: Standalone sales at Rs70.3bn were up 36% YoY,
owing to 19% higher realisation with better product mix and 14% higher
volumes. This also helped margins, and the company reported EBITDA/t of
US$201, versus our estimate of US$200/t and an excellent improvement from
US$135/t last quarter. Net profit at Rs8.3bn was up 16% YoY and above the
Rs3.8bn reported in 3Q.
 Mining subsidiaries to deliver: JSW despatched its first shipment of iron ore
from its mine in Chile in April and looks to be well on track to achieve 1mnt of
production this year, which could potentially add US$60–70mn to earnings.
JSW has also received permits for its coking coal mines in the US and is
expecting to produce 500kt this year, which could mean an additional profit of
US$70mn. The street, including Macquarie, has not built this into its numbers.
 Low intensity capex: JSW has announced the setting up of 2mt of capacity
in Vijaynagar that will entail capex of $600mn, or ~$300/t. JSW is also setting
up a 2.3mt CRM mill, commissioning its 3.2 mt brown field expansion and
planning a West Bengal project. We believe that with recent deleveraging and
with a cash flow of around $1.2bn per annum, JSW can actually do 2mnt
without breaching 1:1 debt equity and can concentrate on growth.
 US pipe operations– will FY12 be better?: These operations reported
EBITDA of US$14.7mn in FY11 as compared to a loss of US$40.9mn in
FY10. We are estimating EBITDA of US$60mn in FY12, assuming upside
from current levels as utilisation goes up. Although the facility continues to
see a very low capacity utilisation of 10%, we hope that a recovery in US
markets and rising oil prices should increase demand for pipes.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs1,200.00 based on a Sum of Parts methodology.
 Catalyst: Commissioning of its 3.2mt expansion.
Action and recommendation
 Maintain Outperform: The shares of JSW Steel have corrected almost 30%
from their peak, while the company’s business outlook has improved. We
think earnings upgrades are probable, as consensus remains 25% below our
estimates, and should drive a rerating.