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UBS Investment Research
JSW Steel
L ooking beyond the current weakness
Event: Mining ban disrupted iron ore supplies; e-auction sales increasing
(1) Though JSW’s iron ore supply and production has been disrupted, it has
increased iron ore purchases from the e-auction (1.98mt so far) which the market is
not factoring. In addition it is getting c8,000/t per day from NMDC Chattisgarh. 2)
Management is hopeful of running the plant at full capacity (11mt) utilisation by
Oct end. We are slightly more cautious & assume 6.9mt of sales in FY12 (JSW
produced 2.97mt in Apr-Aug) 3) Costs lower than est - JSW’s average cost in
auctions was Rs2,100/t while from NMDC was Rs4,780/t (incl Rs1,900 freight)
Impact: Lower near term utilisations; higher iron ore costs
Given supply disruptions we lower volume estimates for FY12/FY13 by 20%/9%
to 6.9/9.2mt (from 8.6/10.2mt). We factor in iron ore costs of Rs3,723/Rs4,280 /t
in FY12/13 (Rs2,858/t in FY11) as JSW is likely to buy some ore from Chattisgarh
(incurring transport cost). Hence, our EBITDA/t est decline from US$137/175 in
FY12/13 to US$119/151 and consol PAT declines by 57%/45%.
Action: Maintain Buy; trading significantly below replacement cost
Despite lowering earnings due to higher cost/lower volumes, we believe there is
value if we look beyond current earnings. JSW is trading significantly below
replacement cost (40% discount) - EV of US$7.2bn (market cap US$2.56bn/net
debt of US$4.1bn) vs replacement cost of US$11bn (11mt BF @ US$1000/t)
Valuation: Reduce price target to Rs700 on lower earnings
We value JSW on 6x FY13 EVEBITDA (from 6.7x to reflect higher earnings
volatility). We now don’t value investment in Ispat (earlier @Rs100/share of JSW)
Attractive at current levels
We continue to maintain our Buy on JSW Steel as we believe the concerns
on the Karnataka mining ban are priced in. We believe:
— 1) Though JSW’s iron ore supply and consequently production has been
disrupted, it has increased iron ore purchases from the e-auction (1.98mt
so far) which the market is not factoring. In addition it is getting c8,000/t
per day from NMDC Chattisgarh. Though management is expecting to
operate at full utilisation by Oct end we estimate JSW will sell around
6.9mt in FY12 (produced 2.97mt in Apr-Aug 2011) – still higher than
market estimates.
— 2) In addition, cost of iron ore purchases have been lower than market
estimates – average purchases from e-auction has been Rs2,100/t for fines
(<60% Fe) while those from NMDC Chattisgarh have been at Rs4,780/t
(63.5% Fe fines – incl base price of Rs2,880/t and freight of Rs1,900/t).
We have estimated JSW’s iron ore cost will increase 30% in FY12 to
Rs3,723/t and another 15% in FY13 to Rs4,280/t.
— We forecast standalone EBITDA/t of US$119/151 per tonne and sales
volumes of 6.9mt/9.2mt in FY12/13.
The stock offers high margin of safety at the current levels. It’s trading at
c40% discount to replacement cost - at US$1000 per tonne of capex
replacement cost for 11mt BF capacity will be cUS$11bn.
We haven’t valued earnings from Chile, US coal.
— JSW expects to sell 1mt of iron ore from Chile in FY12 – JSW generated
an EBITDA/t of US$61 in Q1 by selling 0.19mt of iron ore.
— JSW expects to sell 0.35mt/1mt of coal in FY12/13 from US mines and
expects an EBITDA/t of US$80.
Valuation
We continue to have a Buy rating on JSW Steel but lower our price target to
Rs700. We roll forward our earnings to use FY13 EBITDA as against
normalized FY12-13 EBITDA earlier. We value on FY13 EV/EBITDA multiple
of 6.0x. We lowered our target EV/EBITDA multiple to 6x from the earlier 6.7x
to reflect the higher uncertainty in earnings and regulatory overhangs.
Table 3: Price Target Derivation
Rs m
Target EV/EBITDA (x) 6.0
Target EBITDA FY13 62,746
Target EV 376,476
Net debt (standalone) -161,618
Net debt (others) -44,959
Target Market cap 169,899
Target price* 705*
Source: UBS estimates *Rounded off to Rs700
We don’t assign any value to investment made in JSW Ispat (cRs100 per share
of JSW on book value).
JSW Steel
JSW Steel, a flagship of the Sajjan Jindal group, is the fastest growing steel
company in India. It targets to increase crude steel capacity from 3.8m tonnes at
present to 10m tonnes by 2010.With the proposed integration of SISCOL
(Southern Iron and Steel Company Ltd), JSW will become the third largest steel
company in the country in terms of volume. It was the first Indian company to
operate steel making units in 1994 using the coal reduction (Corex) process. In
August 2007, JSW acquired a plates and pipes business in the US in order to
move into higher value-added steel products.
Statement of Risk
Our earnings estimates and valuation are subject to fluctuations based on global
and domestic steel prices and the prices of key raw materials such as coking coal,
which are difficult to predict.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
JSW Steel
L ooking beyond the current weakness
Event: Mining ban disrupted iron ore supplies; e-auction sales increasing
(1) Though JSW’s iron ore supply and production has been disrupted, it has
increased iron ore purchases from the e-auction (1.98mt so far) which the market is
not factoring. In addition it is getting c8,000/t per day from NMDC Chattisgarh. 2)
Management is hopeful of running the plant at full capacity (11mt) utilisation by
Oct end. We are slightly more cautious & assume 6.9mt of sales in FY12 (JSW
produced 2.97mt in Apr-Aug) 3) Costs lower than est - JSW’s average cost in
auctions was Rs2,100/t while from NMDC was Rs4,780/t (incl Rs1,900 freight)
Impact: Lower near term utilisations; higher iron ore costs
Given supply disruptions we lower volume estimates for FY12/FY13 by 20%/9%
to 6.9/9.2mt (from 8.6/10.2mt). We factor in iron ore costs of Rs3,723/Rs4,280 /t
in FY12/13 (Rs2,858/t in FY11) as JSW is likely to buy some ore from Chattisgarh
(incurring transport cost). Hence, our EBITDA/t est decline from US$137/175 in
FY12/13 to US$119/151 and consol PAT declines by 57%/45%.
Action: Maintain Buy; trading significantly below replacement cost
Despite lowering earnings due to higher cost/lower volumes, we believe there is
value if we look beyond current earnings. JSW is trading significantly below
replacement cost (40% discount) - EV of US$7.2bn (market cap US$2.56bn/net
debt of US$4.1bn) vs replacement cost of US$11bn (11mt BF @ US$1000/t)
Valuation: Reduce price target to Rs700 on lower earnings
We value JSW on 6x FY13 EVEBITDA (from 6.7x to reflect higher earnings
volatility). We now don’t value investment in Ispat (earlier @Rs100/share of JSW)
Attractive at current levels
We continue to maintain our Buy on JSW Steel as we believe the concerns
on the Karnataka mining ban are priced in. We believe:
— 1) Though JSW’s iron ore supply and consequently production has been
disrupted, it has increased iron ore purchases from the e-auction (1.98mt
so far) which the market is not factoring. In addition it is getting c8,000/t
per day from NMDC Chattisgarh. Though management is expecting to
operate at full utilisation by Oct end we estimate JSW will sell around
6.9mt in FY12 (produced 2.97mt in Apr-Aug 2011) – still higher than
market estimates.
— 2) In addition, cost of iron ore purchases have been lower than market
estimates – average purchases from e-auction has been Rs2,100/t for fines
(<60% Fe) while those from NMDC Chattisgarh have been at Rs4,780/t
(63.5% Fe fines – incl base price of Rs2,880/t and freight of Rs1,900/t).
We have estimated JSW’s iron ore cost will increase 30% in FY12 to
Rs3,723/t and another 15% in FY13 to Rs4,280/t.
— We forecast standalone EBITDA/t of US$119/151 per tonne and sales
volumes of 6.9mt/9.2mt in FY12/13.
The stock offers high margin of safety at the current levels. It’s trading at
c40% discount to replacement cost - at US$1000 per tonne of capex
replacement cost for 11mt BF capacity will be cUS$11bn.
We haven’t valued earnings from Chile, US coal.
— JSW expects to sell 1mt of iron ore from Chile in FY12 – JSW generated
an EBITDA/t of US$61 in Q1 by selling 0.19mt of iron ore.
— JSW expects to sell 0.35mt/1mt of coal in FY12/13 from US mines and
expects an EBITDA/t of US$80.
Valuation
We continue to have a Buy rating on JSW Steel but lower our price target to
Rs700. We roll forward our earnings to use FY13 EBITDA as against
normalized FY12-13 EBITDA earlier. We value on FY13 EV/EBITDA multiple
of 6.0x. We lowered our target EV/EBITDA multiple to 6x from the earlier 6.7x
to reflect the higher uncertainty in earnings and regulatory overhangs.
Table 3: Price Target Derivation
Rs m
Target EV/EBITDA (x) 6.0
Target EBITDA FY13 62,746
Target EV 376,476
Net debt (standalone) -161,618
Net debt (others) -44,959
Target Market cap 169,899
Target price* 705*
Source: UBS estimates *Rounded off to Rs700
We don’t assign any value to investment made in JSW Ispat (cRs100 per share
of JSW on book value).
JSW Steel
JSW Steel, a flagship of the Sajjan Jindal group, is the fastest growing steel
company in India. It targets to increase crude steel capacity from 3.8m tonnes at
present to 10m tonnes by 2010.With the proposed integration of SISCOL
(Southern Iron and Steel Company Ltd), JSW will become the third largest steel
company in the country in terms of volume. It was the first Indian company to
operate steel making units in 1994 using the coal reduction (Corex) process. In
August 2007, JSW acquired a plates and pipes business in the US in order to
move into higher value-added steel products.
Statement of Risk
Our earnings estimates and valuation are subject to fluctuations based on global
and domestic steel prices and the prices of key raw materials such as coking coal,
which are difficult to predict.
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