JSW Steel -- Delivers against odds :: Macquarie Research

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JSW Steel
Delivers against odds
Event
 Results well above consensus: JSW Steel reported earnings slightly ahead of
our 10% above consensus estimate on operating profits. Against all scepticism,
JSW has delivered a strong margin of $178/t on a standalone basis, even with
pressure on steel prices and an increase in iron ore and coking coal costs. We
expect earnings upgrades to drive the stock, maintain Outperform.
Impact
 Strong 1QFY12 earnings: Net sales at Rs70.6bn were up 52% YoY, led by a
volume increase of 44% and realisation increase of 6% YoY. EBITDA margin
was at $178/t with EBITDA at Rs13.9bn, up 39% YoY. Net profit at Rs5.78bn
was in line with our estimate and up 65% YoY.
 Consensus estimates to see upgrades: On a standalone basis, JSW has done
Rs25/sh of EPS in Q1. The run rate will improve given the increase in capacity by
50%, and increased contribution with the start of mining operations in Chile and
US, both of which are profitable. We are building in Rs121/sh for the full year for
consolidated as compared to the street’s estimate of just Rs92/sh.
 Iron ore and coking coal mining operations start to contribute: As
expected JSW started its mining operations for iron ore in Chile and coking
coal in the US. It is targeting 1mnt of iron ore and 350kt of coking coal n
FY12. Already it has reported a net profit of US$7mn in this quarter from this.
 Blast furnace trial commenced: JSW has commissioned facilities related to the
3.2mtpa expansion with its blast furnace commissioned in July. It is currently
producing at 5000tons per day and should reach 8500tpd as it ramps up and
expects full year production at 8.5mtpa. JSW has tied up a higher proportion of
sales under volume contracts and is confident in selling additional production.
 Worries on Karnataka placated: JSW has tie ups with NMDC and VMPL
meeting 50% of requirements, and the rest is bought on the spot from Bellary
mines which have already been cleared. The company might have to incur
higher costs of Rs200-250/t on freight if sourced from Chitradurga, but this will
be partially offset by low grade being sourced from here.
Earnings and target price revision
 We have made marginal (-2 to 5%) changes to estimates. Also, we now
account for Ispat Industries as an associate rather than full consolidation and
are introducing FY14 estimates.
Price catalyst
 12-month price target: Rs1,229.00 based on a Sum of Parts methodology.
 Catalyst: Increase in production, iron ore and coking coal sales
Action and recommendation
 Top steel pick: JSW remains our preferred play among pure steel
companies. We think it has deleveraged itself and is now well on track to gain
from increased capacity and improving raw material integration.