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JSW Steel
Headwinds from mining ban
persist
„2Q PAT below expectation on Fx losses, Maintain U/P
Standalone PAT declined 71%QoQ to Rs1.27bn well below our Rs3.5bn est. This
was due to Rs5.1bn of MTM Fx losses on buyer’s credit on coking coal imports
(operational losses in our view). EBITDA (pre Fx losses) was 14% ahead of our est.
due to lower than expected input costs & employee costs. JSW is operating at ~60-
70% utilizations due to a mining ban. Also, the full impact of the mining ban on costs
should come thru in Dec Q. We remain cautious due to softer domestic steel outlook
& risks to margins and volumes near term due to Karnataka mining ban.
EBITDA (pre Fx losses) better than expected
Volumes grew 10%QoQ to 1.88mt (3% ahead). EBIDTA/t (pre Fx losses) was
US$151/t (-US$31/t QoQ) & US$93/t incl. Fx losses (BofAMLe US$137/t). ASP was
in line (-2%QoQ) but input cost/t surprisingly increased only US$23/t QoQ in 2Q
despite ~US$18/t (~US$32/t of steel) increase in iron ore costs due to mining ban.
Also, the full impact of higher coking coal cost was expected to come thru in 2Q.
Vol. guidance lowered on mining ban as expected
JSW is guiding to production vols. of 7.5mt (8.75mt earlier) & sales vols. of 7.8mt
(9mt earlier) in FY12 inline with our est. of 7.5mt sales in FY12. JSW needs ~50kt
of ore (high grade) per day. It has sourced 2mt (40 days of requirement) of ore
thru e-auction at ~Rs3500/t (Rs2700/t pre ban). Delivery has been delayed due to
procedural/ logistic issues but JSW expects this to be resolved.
Margin outlook remains tough
The Supreme Court had imposed a partial mining ban in Karnataka in Aug & a full
mining ban in Sept. Hence, the full cost impact of the mining ban should come
thru in 3Q. Lower coking coal costs could offer some relief. Supreme Court will
review the ban after an Environmental audit report is submitted (by Nov 6th) which
remains the key. We expect some mines to restart eventually, but the timing
remains uncertain.
2Q FY12 Results highlights
Results
„ 2Q PAT below expectation on Forex losses: Standalone PAT declined
71%QoQ to Rs1.27bn. This was well below our Rs3.5bn estimates due to
Rs5.1bn of MTM Fx losses on buyer’s credit on coking coal imports. These
losses are unlikely to reverse (are likely to be realized) if INR sustains at
current levels.
„ EBITDA (pre Fx losses) better than expected: Volumes grew 10%QoQ to
1.88mt (3% ahead). This included ~0.15mt of volumes in transfer from Ispat.
EBIDTA/t (pre Fx losses) was US$151/t (-US$31/t QoQ) & US$93/t incl. Fx
losses (BoFAMLe US$137/t). ASP was in line (-2%QoQ). However, the
increase in input cost/t is surprisingly low at US$23/t QoQ in 2Q. This is
despite a ~US$18/t (~US$32/t of steel) increase in iron ore costs during the
quarter as per JSW. Also, the full impact of the higher coking coal cost was
expected to come thru in 2Q. To put this in perspective – input cost per ton
has increased by ~US$39/t (since 4QFY11) despite an over US$100/t
increase in coking coal prices. We note that better efficiency at new units
may have contributed to lower costs partially. Employee cost decreased
17%QoQ due to absence of provisions related to gratuity and leave
encashment reported in 1Q.
Other Key takeaways
„ Capacity utilizations are ~60-70% due to mining ban: JSW Steel’s
production was hit to the tune of 0.45mt due to Karnataka mining ban during
the quarter. JSW currently has 2mt of inventory (40 days of requirement).
„ Volume guidance cut to 7.8mn tons for FY12e: JSW has cut its steel
production guidance for FY12 by 14% to 7.5mn tons and for sales by 13% to
7.8mn tons. We currently forecast steel volumes of 7.5mn tons in FY12 and
8.8mn tons in FY13. Our forecasts assume the Karnataka mining ban is
resolved before FY13. There are downside risks to our volumes and
EBIDTA/t estimates if current mining ban continues.
„ E-auction offers some relief, but delivery is an issue: JSW has acquired
2.08mt of ore thru e-auction, which is equal to ~ 40 days of consumption as
per the company. Delivery of the e-auction ore has been delayed by
procedural and logistics issues. JSW mentioned that iron ore procurement
costs thru e-auction is around Rs3500/t (Rs2700/t) during the quarter.
„ Mining ban update: Environmental Audit report on Karnataka is expected to
be submitted to Supreme Court by November 2011. Supreme Court will
review the ban after the environmental audit/survey ordered by it is
completed. We expect some of the mines to restart in 4QFY12, but timing
remains uncertain.
„ Net Debt: JSW Standalone net debt was US$2.5bn (vs. US$2.2bn as on
June Q). Standalone net gearing was ~0.7x as on September Q. We forecast
consolidated net gearing of 1.2x in FY12.
Table : Karnataka mining ban developments
Dates Event
6-May-11 SC orders resurvey of 99 mines in Bellary within two months due to illegal mining allegations
29-Jul-11 SC imposes iron ore mining ban in Bellary (~80% of Karnataka’s iron ore output)
5-Aug-11 SC allows NMDC to mine up to 12mtpa of ore at two Bellary mines
26-Aug-11 SC extends mining ban to Chitradurga & Tumkur (16% of Karnataka’s iron ore output)
2-Sep-11 SC allows monthly auction of 1.5 mt of iron ore stocks in Karnataka to provide relief to steel units
14-Sep-11 First round E-auction: 272kt sold vs. 396kt iron ore offered
23-Sep-11 SC orders NMDC to sell iron ore from its Karnataka mines through e-auction route only
29-Sep-11 Around 1.1 mt of iron ore auctioned in second round
Oct-2011 4 mt to be auctioned in Oct; JSW secured 2.08mt (~ 40 days of consumption) till Oct 22 in auctions
Environmental appraisal report to be submitted on 6-Nov-2011
Source: BofAML Research
Price objective basis & risk
JSW Steel (XJWJF)
Our PO of Rs 621 is based on our NPV valuation. This assumes a WACC of
12.5% and a perpetuity growth of 0%. At our PO, JSW will trade at 6.2x FY12
EBITDA and 10.6x FY12 EPS. Our model assumes volumes of 7.50mt in FY12E
and 8.75mt in FY13E. Our domestic HRC price assumptions are Rs34,075/t in
FY12E and Rs32,894/t in FY13E.
Downside risks are lower-than-expected steel prices and volumes, and higher
input costs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel
Headwinds from mining ban
persist
„2Q PAT below expectation on Fx losses, Maintain U/P
Standalone PAT declined 71%QoQ to Rs1.27bn well below our Rs3.5bn est. This
was due to Rs5.1bn of MTM Fx losses on buyer’s credit on coking coal imports
(operational losses in our view). EBITDA (pre Fx losses) was 14% ahead of our est.
due to lower than expected input costs & employee costs. JSW is operating at ~60-
70% utilizations due to a mining ban. Also, the full impact of the mining ban on costs
should come thru in Dec Q. We remain cautious due to softer domestic steel outlook
& risks to margins and volumes near term due to Karnataka mining ban.
EBITDA (pre Fx losses) better than expected
Volumes grew 10%QoQ to 1.88mt (3% ahead). EBIDTA/t (pre Fx losses) was
US$151/t (-US$31/t QoQ) & US$93/t incl. Fx losses (BofAMLe US$137/t). ASP was
in line (-2%QoQ) but input cost/t surprisingly increased only US$23/t QoQ in 2Q
despite ~US$18/t (~US$32/t of steel) increase in iron ore costs due to mining ban.
Also, the full impact of higher coking coal cost was expected to come thru in 2Q.
Vol. guidance lowered on mining ban as expected
JSW is guiding to production vols. of 7.5mt (8.75mt earlier) & sales vols. of 7.8mt
(9mt earlier) in FY12 inline with our est. of 7.5mt sales in FY12. JSW needs ~50kt
of ore (high grade) per day. It has sourced 2mt (40 days of requirement) of ore
thru e-auction at ~Rs3500/t (Rs2700/t pre ban). Delivery has been delayed due to
procedural/ logistic issues but JSW expects this to be resolved.
Margin outlook remains tough
The Supreme Court had imposed a partial mining ban in Karnataka in Aug & a full
mining ban in Sept. Hence, the full cost impact of the mining ban should come
thru in 3Q. Lower coking coal costs could offer some relief. Supreme Court will
review the ban after an Environmental audit report is submitted (by Nov 6th) which
remains the key. We expect some mines to restart eventually, but the timing
remains uncertain.
2Q FY12 Results highlights
Results
„ 2Q PAT below expectation on Forex losses: Standalone PAT declined
71%QoQ to Rs1.27bn. This was well below our Rs3.5bn estimates due to
Rs5.1bn of MTM Fx losses on buyer’s credit on coking coal imports. These
losses are unlikely to reverse (are likely to be realized) if INR sustains at
current levels.
„ EBITDA (pre Fx losses) better than expected: Volumes grew 10%QoQ to
1.88mt (3% ahead). This included ~0.15mt of volumes in transfer from Ispat.
EBIDTA/t (pre Fx losses) was US$151/t (-US$31/t QoQ) & US$93/t incl. Fx
losses (BoFAMLe US$137/t). ASP was in line (-2%QoQ). However, the
increase in input cost/t is surprisingly low at US$23/t QoQ in 2Q. This is
despite a ~US$18/t (~US$32/t of steel) increase in iron ore costs during the
quarter as per JSW. Also, the full impact of the higher coking coal cost was
expected to come thru in 2Q. To put this in perspective – input cost per ton
has increased by ~US$39/t (since 4QFY11) despite an over US$100/t
increase in coking coal prices. We note that better efficiency at new units
may have contributed to lower costs partially. Employee cost decreased
17%QoQ due to absence of provisions related to gratuity and leave
encashment reported in 1Q.
Other Key takeaways
„ Capacity utilizations are ~60-70% due to mining ban: JSW Steel’s
production was hit to the tune of 0.45mt due to Karnataka mining ban during
the quarter. JSW currently has 2mt of inventory (40 days of requirement).
„ Volume guidance cut to 7.8mn tons for FY12e: JSW has cut its steel
production guidance for FY12 by 14% to 7.5mn tons and for sales by 13% to
7.8mn tons. We currently forecast steel volumes of 7.5mn tons in FY12 and
8.8mn tons in FY13. Our forecasts assume the Karnataka mining ban is
resolved before FY13. There are downside risks to our volumes and
EBIDTA/t estimates if current mining ban continues.
„ E-auction offers some relief, but delivery is an issue: JSW has acquired
2.08mt of ore thru e-auction, which is equal to ~ 40 days of consumption as
per the company. Delivery of the e-auction ore has been delayed by
procedural and logistics issues. JSW mentioned that iron ore procurement
costs thru e-auction is around Rs3500/t (Rs2700/t) during the quarter.
„ Mining ban update: Environmental Audit report on Karnataka is expected to
be submitted to Supreme Court by November 2011. Supreme Court will
review the ban after the environmental audit/survey ordered by it is
completed. We expect some of the mines to restart in 4QFY12, but timing
remains uncertain.
„ Net Debt: JSW Standalone net debt was US$2.5bn (vs. US$2.2bn as on
June Q). Standalone net gearing was ~0.7x as on September Q. We forecast
consolidated net gearing of 1.2x in FY12.
Table : Karnataka mining ban developments
Dates Event
6-May-11 SC orders resurvey of 99 mines in Bellary within two months due to illegal mining allegations
29-Jul-11 SC imposes iron ore mining ban in Bellary (~80% of Karnataka’s iron ore output)
5-Aug-11 SC allows NMDC to mine up to 12mtpa of ore at two Bellary mines
26-Aug-11 SC extends mining ban to Chitradurga & Tumkur (16% of Karnataka’s iron ore output)
2-Sep-11 SC allows monthly auction of 1.5 mt of iron ore stocks in Karnataka to provide relief to steel units
14-Sep-11 First round E-auction: 272kt sold vs. 396kt iron ore offered
23-Sep-11 SC orders NMDC to sell iron ore from its Karnataka mines through e-auction route only
29-Sep-11 Around 1.1 mt of iron ore auctioned in second round
Oct-2011 4 mt to be auctioned in Oct; JSW secured 2.08mt (~ 40 days of consumption) till Oct 22 in auctions
Environmental appraisal report to be submitted on 6-Nov-2011
Source: BofAML Research
Price objective basis & risk
JSW Steel (XJWJF)
Our PO of Rs 621 is based on our NPV valuation. This assumes a WACC of
12.5% and a perpetuity growth of 0%. At our PO, JSW will trade at 6.2x FY12
EBITDA and 10.6x FY12 EPS. Our model assumes volumes of 7.50mt in FY12E
and 8.75mt in FY13E. Our domestic HRC price assumptions are Rs34,075/t in
FY12E and Rs32,894/t in FY13E.
Downside risks are lower-than-expected steel prices and volumes, and higher
input costs.
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