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Value from a Medium to Long term, but next 12 months to be
tough: We believe JSW offers value to investors with a longer
investment horizon (stock is trading below book value at 0.8x FY13E)
as the company is sitting with capacity in a country where steel capacity
build out in particular tends to be very long gestation given land
acquisition problems. However, in the near term, we do not expect the
demand environment to improve materially from here, and believe JSW
would need to focus on export markets in order to achieve higher
utilization rates. Given the state of global steel markets, we believe
export margins are likely to remain on the lower side, compared to
domestic margins. JSW is also predominantly a FLAT steel producer, a
segment which we see remaining under pressure. We adjust our FY12-
13E consolidated (including ISPAT) EPS estimates by -14/+3%, and
maintain our Sept-12 PT of Rs800.
Iron ore sourcing issues- Not much clarity as of now: We expect
average iron ore costs to increase, and while as of now we build in
Rs500/MT increase (+20% y/y), we admit that this number could
increase significantly higher from these levels. We await the auction
results to gauge the cost impact. For JSW, higher availability of iron ore
via the auction route could allow it to replace the ore transported from
outside Karnataka, but it would depend on the quantity/price of auction
iron ore.
ISPAT (NR) acquisition unlikely to turn around any time soon: We
believe weak demand environment combined with continued higher iron
ore and scrap costs are likely to result in ISPAT being loss making at the
PAT level both in FY12/13E.
Leverage/Capex issues: Post ISPAT acquisition, leverage has crept
back up to 1x. In our view, EBITDA/MT ~$150/MT should allow the
company to comfortably service debt and interest. We see stress
emerging if profitability drops below these levels next year. Key upside
risk is a resolution of iron ore issues while downside risk is decline in
domestic demand impacting margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Value from a Medium to Long term, but next 12 months to be
tough: We believe JSW offers value to investors with a longer
investment horizon (stock is trading below book value at 0.8x FY13E)
as the company is sitting with capacity in a country where steel capacity
build out in particular tends to be very long gestation given land
acquisition problems. However, in the near term, we do not expect the
demand environment to improve materially from here, and believe JSW
would need to focus on export markets in order to achieve higher
utilization rates. Given the state of global steel markets, we believe
export margins are likely to remain on the lower side, compared to
domestic margins. JSW is also predominantly a FLAT steel producer, a
segment which we see remaining under pressure. We adjust our FY12-
13E consolidated (including ISPAT) EPS estimates by -14/+3%, and
maintain our Sept-12 PT of Rs800.
Iron ore sourcing issues- Not much clarity as of now: We expect
average iron ore costs to increase, and while as of now we build in
Rs500/MT increase (+20% y/y), we admit that this number could
increase significantly higher from these levels. We await the auction
results to gauge the cost impact. For JSW, higher availability of iron ore
via the auction route could allow it to replace the ore transported from
outside Karnataka, but it would depend on the quantity/price of auction
iron ore.
ISPAT (NR) acquisition unlikely to turn around any time soon: We
believe weak demand environment combined with continued higher iron
ore and scrap costs are likely to result in ISPAT being loss making at the
PAT level both in FY12/13E.
Leverage/Capex issues: Post ISPAT acquisition, leverage has crept
back up to 1x. In our view, EBITDA/MT ~$150/MT should allow the
company to comfortably service debt and interest. We see stress
emerging if profitability drops below these levels next year. Key upside
risk is a resolution of iron ore issues while downside risk is decline in
domestic demand impacting margins.
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