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JSW Steel
Decent results in difficult times
Event
In line results: JSW Steel reported 2QFY12 results which were slightly ahead
of our estimate on operating profits, driven by better volumes, but were pulled
back by a larger than expected foreign currency loss. Management has
lowered volume guidance by 13% to 7.5mnt given the uncertainty in sourcing
iron ore and is now marginally ahead of our estimate of 7.3mnt. We expect
another difficult quarter before things return to some normalcy. We
recommend waiting for dips to buy. Maintain Outperform.
Impact
Subdued 2QFY12 earnings: Net sales at Rs76bn were up 33% YoY, led by
a volume increase of 19% and realisation increase of 12% YoY. EBITDA
margin was at US$151/t, with EBITDA at Rs12.9bn, up 39% YoY. Net profit at
Rs1.27bn was in line with our estimate and down 71% YoY due to Rs5bn of
mark to market currency losses.
Iron ore – worries continue: JSW Steel was able to source 2mnt in the eauction
but is yet to increase its capacity utilisation meaningfully from the lows
of 30% that it hit in early Oct. Logistics has been a key challenge as
movement of trucks is restricted during the night. Also yet to be seen is how
the 17% increase in iron ore fines prices by NMDC for the current quarter
impacts the e-auction pricing.
FY13 under radar: With FY12 largely being washed out, investors are looking
forward to a restart of iron ore mines to become comfortable about a return to
normal operations in FY13. Press reports suggest that the initial environment
impact assessment report is ready but the contents are not yet known. In all
possibility, limited mining might be allowed but iron ore prices domestically
might move up from US$60/t currently even if global prices correct.
Focus on new markets and products a good strategy: JSW has increased
its focus on JSW Shoppe to capture rural Indian demand. The newly
announced JV for putting up service centre in North India and new product
approvals with auto majors sound like a good strategy, particularly in a very
weak demand environment both globally and domestically.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs800.00 based on a Sum of Parts methodology.
Catalyst: Increase in production, iron ore and coking coal sales.
Action and recommendation
Buy on dips: Given the uncertainty both in near- and medium-term, we see
limited catalysts and the stock might drift along with the market. However,
value is emerging and we recommend accumulating on dips.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel
Decent results in difficult times
Event
In line results: JSW Steel reported 2QFY12 results which were slightly ahead
of our estimate on operating profits, driven by better volumes, but were pulled
back by a larger than expected foreign currency loss. Management has
lowered volume guidance by 13% to 7.5mnt given the uncertainty in sourcing
iron ore and is now marginally ahead of our estimate of 7.3mnt. We expect
another difficult quarter before things return to some normalcy. We
recommend waiting for dips to buy. Maintain Outperform.
Impact
Subdued 2QFY12 earnings: Net sales at Rs76bn were up 33% YoY, led by
a volume increase of 19% and realisation increase of 12% YoY. EBITDA
margin was at US$151/t, with EBITDA at Rs12.9bn, up 39% YoY. Net profit at
Rs1.27bn was in line with our estimate and down 71% YoY due to Rs5bn of
mark to market currency losses.
Iron ore – worries continue: JSW Steel was able to source 2mnt in the eauction
but is yet to increase its capacity utilisation meaningfully from the lows
of 30% that it hit in early Oct. Logistics has been a key challenge as
movement of trucks is restricted during the night. Also yet to be seen is how
the 17% increase in iron ore fines prices by NMDC for the current quarter
impacts the e-auction pricing.
FY13 under radar: With FY12 largely being washed out, investors are looking
forward to a restart of iron ore mines to become comfortable about a return to
normal operations in FY13. Press reports suggest that the initial environment
impact assessment report is ready but the contents are not yet known. In all
possibility, limited mining might be allowed but iron ore prices domestically
might move up from US$60/t currently even if global prices correct.
Focus on new markets and products a good strategy: JSW has increased
its focus on JSW Shoppe to capture rural Indian demand. The newly
announced JV for putting up service centre in North India and new product
approvals with auto majors sound like a good strategy, particularly in a very
weak demand environment both globally and domestically.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs800.00 based on a Sum of Parts methodology.
Catalyst: Increase in production, iron ore and coking coal sales.
Action and recommendation
Buy on dips: Given the uncertainty both in near- and medium-term, we see
limited catalysts and the stock might drift along with the market. However,
value is emerging and we recommend accumulating on dips.
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