JSW Steel --IS (on) PAT(h) :: Macquarie Research

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JSW Steel
IS (on) PAT(h)
Event
 Ispat (JSW’s 49% subsidiary) turns profitable: Ispat Industries reported its
3Q results with a profit of Rs702 mn, compared to accumulated losses of
Rs7.4bn that it registered in the first 6 months of the year. Against Street
expectation of turnaround after 1-2yrs, we view this excellent performance as
a key catalyst for JSW. We also believe that JSW is well on track for
delivering its best results in Q4, and have a few more catalysts to watch for.
JSW is our top pick among pure steel companies. Maintain Outperform.

Impact
 Strong recovery for 3QFY11: Ispat reported net sales of Rs26.5bn for the
quarter, up 13% YoY, helped by an increase in steel realisations. The
company reported EBITDA of Rs 3.32bn, which though down YoY, was higher
than a loss of Rs1.5bn last quarter. The company recorded EBITDA/t of $95/t
compared to a loss of $49/t reported last quarter. Net profit was helped to
some extent by higher other income.
 Ispat – some headwinds but has enough opportunities too: Ispat is facing
issues with gas supplies having been reduced to just 20% of its original
commitment. Also higher coking coal prices from this quarter means the cost
of production will see an increase of around US$40/t. To compensate, Ispat is
looking to source cheaper power from JSW Energy at Rs4.50/unit (current
cost is Rs5.80/unit) and cheaper iron ore fines from Bellary. Overall, we
believe that the company remains on track to achieve our full-year assumption
of US$94/t.
 JSW – additional catalysts on anvil: JSW despatched its first shipment of
iron ore from its mine in Chile in April and looks well on track to achieve 1mnt
of production this year. This could potentially add US$60-70mn to earnings
this year. JSW is also on the verge of getting permits for its coking coal mines
in US and is still looking to achieve 750kt of production this year, which could
mean an additional profit of US$100mn or so. We and the Street have not
built these into our numbers and thus earnings upgrades could be around the
corner.
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 on May 16
Action and recommendation
Maintain Outperform: JSW Steel stock has corrected almost 30% from the
peak while its business outlook has improved. We think JSW with its attractive
valuations remains the best pure steel company under our coverage. We think
earnings upgrades could lead to re-rating of the stock.