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JSW Steel (JSTL.BO): Buy
We like the long-term structural growth story unfolding at JSW, and believe that the
current valuations (post the recent underperformance) do not reflect the strong
fundamentals over the medium to long term. JSW’s stock price performance has been hit
by regulatory issues in Karnataka state driving an iron ore mining ban and the resultant
drop in utilizations.
The company expects that supplies of iron ore procured through the e-auction route should
normalize in the coming weeks, with the streamlining of the process for the issue of
transportation permits. This may drive the utilizations upwards (from lows of 30% a few
weeks ago). Moreover, the Supreme Court of India-appointed study of environmental
degradation in Karnataka should be complete by November. There is a possibility that this
may be followed by a phased reopening of mines where no violations were observed by
the Central Empowered Committee (CEC) of the Supreme Court.
For FY12E, we assume 7.7 mn tonne steel sales volume (with phased improvement in
utilizations in 3Q and 4Q) and higher iron ore costs (due to e-auction purchases and
additional transportation costs and taxes). However, we believe that FY13E could be the
year of normalization (in utilizations, iron ore supplies and costs) for JSW Steel.
Therefore, we cut our FY12E EPS estimates by 36% and 7%/3% for FY13E/FY14E on lower
commodity prices. The stock trades at 0.7X FY13E P/B, below its mid-cycle of 1.3X and
sector average of 1.1X. We lower our 12-m P/B-based TP to Rs803 from Rs909, and retain
our Buy rating.
JSW’s steep growth trajectory is driven by strong volume growth, superior product mix,
low conversion costs and improving upstream integration.
Regulatory issues in Karnataka are likely to be an overhang in the near term and may
impact on operating costs for FY12E.
Key Catalysts
(1) Any pick-up in steel prices in the 2H-FY12 period: JSW’s earnings are highly leveraged
to prices — a 1% rise in steel prices would potentially increase FY12E EPS by 6.9%.
(2) Sector leading volume growth: could be crucial to its product mix and our volume
growth hypothesis.
(3) Raw material projects in Chile and US will commence supplies from FY12E, improving
upstream integration.
Key Risks
Key downside risks include weaker-than-expected steel prices and higher-than-expected
iron ore costs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel (JSTL.BO): Buy
We like the long-term structural growth story unfolding at JSW, and believe that the
current valuations (post the recent underperformance) do not reflect the strong
fundamentals over the medium to long term. JSW’s stock price performance has been hit
by regulatory issues in Karnataka state driving an iron ore mining ban and the resultant
drop in utilizations.
The company expects that supplies of iron ore procured through the e-auction route should
normalize in the coming weeks, with the streamlining of the process for the issue of
transportation permits. This may drive the utilizations upwards (from lows of 30% a few
weeks ago). Moreover, the Supreme Court of India-appointed study of environmental
degradation in Karnataka should be complete by November. There is a possibility that this
may be followed by a phased reopening of mines where no violations were observed by
the Central Empowered Committee (CEC) of the Supreme Court.
For FY12E, we assume 7.7 mn tonne steel sales volume (with phased improvement in
utilizations in 3Q and 4Q) and higher iron ore costs (due to e-auction purchases and
additional transportation costs and taxes). However, we believe that FY13E could be the
year of normalization (in utilizations, iron ore supplies and costs) for JSW Steel.
Therefore, we cut our FY12E EPS estimates by 36% and 7%/3% for FY13E/FY14E on lower
commodity prices. The stock trades at 0.7X FY13E P/B, below its mid-cycle of 1.3X and
sector average of 1.1X. We lower our 12-m P/B-based TP to Rs803 from Rs909, and retain
our Buy rating.
JSW’s steep growth trajectory is driven by strong volume growth, superior product mix,
low conversion costs and improving upstream integration.
Regulatory issues in Karnataka are likely to be an overhang in the near term and may
impact on operating costs for FY12E.
Key Catalysts
(1) Any pick-up in steel prices in the 2H-FY12 period: JSW’s earnings are highly leveraged
to prices — a 1% rise in steel prices would potentially increase FY12E EPS by 6.9%.
(2) Sector leading volume growth: could be crucial to its product mix and our volume
growth hypothesis.
(3) Raw material projects in Chile and US will commence supplies from FY12E, improving
upstream integration.
Key Risks
Key downside risks include weaker-than-expected steel prices and higher-than-expected
iron ore costs.
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