Jsw Steel : Conference call takeaways; cutting estimates HSBC

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Jsw Steel Ltd (JSTL)
N(V): Conference call takeaways; cutting estimates
 Operating rates down to c65-70%; We expect some mining
relief on next Supreme Court hearing scheduled on 5 August
 Cut EBITDA estimates by c28% and 13% for FY12/13e as
lower production and higher iron ore costs will likely hurt
earnings
 Maintain N(V) rating with revised TP of INR720 (from INR950)


Production rates down to c65-70%; we look for relief in next Supreme Court hearing
 Following the Supreme Court ban on mining in Bellary region in Karnataka, JSTL’s plant
utilization has fallen to c65-70% as ore availability is limited (ore inventory of c3-4mt, or
for two weeks). JSTL has currently shut Blast Furnace (BF)#1 and BF#2 (cumulative
c2.2mt or c20% of capacity) and is currently operating BF#3 and fully ramped up BF#4.
 Next Supreme Court hearing is scheduled on 5th August; we expect that legitimate
mining operations may be given go ahead to start mining given that it is a contractual
right and employment depends on it.
 JSTL sources c65% iron ore requirements from spot markets (besides c2.2mt from
VMPL and c2mt from NMDC), which, if replaced by ore from Orissa could increase
transportation costs by cUSD20-25/t (distance c1,600kms). We have ruled out Goa
ore as grades are too low to be used at JSTL’s operations.
Denies wrongdoing as alleged by the Lokayukta report
 The Lokayukta reported alleged that JSTL overpaid for a piece of land that it bought from
CM’s family and donated to Prerna Education Trust – which is run by CM’s family.
 JSTL wrote to stock exchanges that it has done all transactions in a legally compliant
manner and will respond to authorities after detailed examination of the said report.
Cut EBITDA estimates by 28%/13% in FY12e/13e; cut TP to INR720 and retain N(V)
 We now assume production to be lower by 20% in FY12e and 8% in FY13e.
 We assume iron ore costs for the spot iron ore purchases to be higher by US$23/t in FY12.
 We cut EBITDA by 28%/13% by FY12/13e and reduce TP to INR720/sh (vs INR950
earlier) based on FY13e EV/EBITDA (earlier FY12e) of 5.5x; retain Neutral and await
clarity on a) iron ore sourcing arrangements and b) sustainable production levels. Higher
(lower) than expected steel prices & lower (higher) than expected raw material prices
form upside (downside) risks to our earnings estimates. Other key risks include timely
commissioning of raw material projects and turnaround of ISPAT.