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Buoyant pricing helped JSW Steel post strong earnings for 4QFY11, which in our view is unlikely
to be repeated in the near term. We believe earnings growth from expansion is largely priced in,
and expect investor focus to shift to the resilience of margins in the high cost environment.
Maintain Sell, TP cut to Rs828.
Earnings beat estimates
JSW Steel reported strong earnings for 4QFY11, driven by buoyant steel prices during the
quarter and a relatively benign pricing environment. EBITDA/t at US$208 was above our estimate
of US$167. However, this performance is unlikely to be repeated any time soon as we see a
relatively mild steel pricing environment against the backdrop of cost increases. Ispat Industries
has also returned to profit and reported a significant turnaround in operations with EBITDA/t of
US$100t. However, Ispat is now facing issues in gas procurement, which could curtail output in
coming quarters. JSW has reported Ispat Industries as an associate, however have consolidated
its earnings as JSW Steel owns close to 50% of this entity.
Strategy of continuous capacity addition in the absence of raw materials is risky
JSW Steel is all set to commission its new 3mt blast furnace in June and also increase
dependency on outsourced raw materials, which are at significantly elevated levels. Management
has now shifted its focus to the acquisition of more raw material assets and an increase raw
material integration over the long term.
Valuations price in expansion. Maintain Sell, target price cut to Rs828
JSW Steel, owing to its low raw material integration profile, is particularly vulnerable to the recent
sharp spike in coking coal prices, which have risen from US$225/t at end-4QFY11 to US$330/t
today; this cost increase will flow through to margins in the coming quarters. Also, management
has highlighted that it will step up investments in the West Bengal project, thereby raising debt
levels. Management has, however, initiated several positive steps, such as i) reducing the
consumption of lumps, and ii) increasing sales of iron ore from Chile. We revise our FY12 and
FY13 EBITDA estimates by +2%/-1% as we factor in slightly higher realisations and raw material
price forecasts, and trim our target price to Rs828, in line with the multiples of JSW’s peer group
(Table 5). We await a better entry point into the stock in the coming quarters.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Buoyant pricing helped JSW Steel post strong earnings for 4QFY11, which in our view is unlikely
to be repeated in the near term. We believe earnings growth from expansion is largely priced in,
and expect investor focus to shift to the resilience of margins in the high cost environment.
Maintain Sell, TP cut to Rs828.
Earnings beat estimates
JSW Steel reported strong earnings for 4QFY11, driven by buoyant steel prices during the
quarter and a relatively benign pricing environment. EBITDA/t at US$208 was above our estimate
of US$167. However, this performance is unlikely to be repeated any time soon as we see a
relatively mild steel pricing environment against the backdrop of cost increases. Ispat Industries
has also returned to profit and reported a significant turnaround in operations with EBITDA/t of
US$100t. However, Ispat is now facing issues in gas procurement, which could curtail output in
coming quarters. JSW has reported Ispat Industries as an associate, however have consolidated
its earnings as JSW Steel owns close to 50% of this entity.
Strategy of continuous capacity addition in the absence of raw materials is risky
JSW Steel is all set to commission its new 3mt blast furnace in June and also increase
dependency on outsourced raw materials, which are at significantly elevated levels. Management
has now shifted its focus to the acquisition of more raw material assets and an increase raw
material integration over the long term.
Valuations price in expansion. Maintain Sell, target price cut to Rs828
JSW Steel, owing to its low raw material integration profile, is particularly vulnerable to the recent
sharp spike in coking coal prices, which have risen from US$225/t at end-4QFY11 to US$330/t
today; this cost increase will flow through to margins in the coming quarters. Also, management
has highlighted that it will step up investments in the West Bengal project, thereby raising debt
levels. Management has, however, initiated several positive steps, such as i) reducing the
consumption of lumps, and ii) increasing sales of iron ore from Chile. We revise our FY12 and
FY13 EBITDA estimates by +2%/-1% as we factor in slightly higher realisations and raw material
price forecasts, and trim our target price to Rs828, in line with the multiples of JSW’s peer group
(Table 5). We await a better entry point into the stock in the coming quarters.
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