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JSW Steel (JSTL)
Metals & Mining
Uncertain outlook may override a strong quarter. JSW Steel reported 2QFY12
standalone EBITDA of Rs13 bn (-7%qoq). JSW handsomely beat our profitability (27%
beat) estimate on the back of (1) lower-than-expected raw material cost increase and
(2) decline in staff costs. Nonetheless, core issues of iron ore sourcing and costs,
production ramp-up and sustainable decline in profitability will weigh on performance.
Cut EBITDA estimate by 3-7% for FY2012-14E and TP to Rs560 (Rs660 earlier). SELL.
Surprises on all counts
JSW’s reported standalone EBITDA of Rs13 bn (-7% qoq, +30.6% yoy) was 27% ahead of our
estimate driven by (1) profitability of US$150/ tonne versus our number of US$130/ tonne and (2)
10% volume beat at 1.88 mn tonnes of sales (+9.8% qoq, 18.9% yoy). JSW reported forex loss of
Rs5.1 bn as an exceptional item; forex loss relates to (1) acceptances and (2) losses on LCs for
coking coal purchase. Net income of Rs1.3 bn was 31.6% lower than our estimate.
Raw material costs do not increase as much and partly drives positive earnings surprise
We are surprised with JSW’s profitability number considering (1) realization declined 1.7% qoq to
Rs40,516/ tonne and (2) iron ore cost increased by Rs800/ tonne qoq and the company consumed
US$315/ tonne coking coal for full quarter. Raw material cost/ tonne increased by Rs1,530 qoq
(which captures iron ore cost increase). The company may have used efficient blending of coking
coal to overcome the impact of increase in coking coal cost.
Cut in volume guidance is not a surprise
JSW cut FY2012E crude steel production guidance by 14% and for steel deliveries by 13% to 7.5
mn and 7.8 mn tonnes, respectively. Cut in guidance is not a surprise. However, the revised
guidance may be a tad aggressive given that it implies crude steel production of 4.1 mn tonnes in
2H (up from 3.4 mn tonnes in 1H). Note that infrastructural and procedural bottlenecks have led
to delay in receipt of iron ore despite JSW purchasing 2.1 mn tonnes iron ore through auction at
an average rate of Rs3,300/ tonne. As a result, JSW has not ramped up capacity utilization of the
Vijaynagar steel plant.
Relief unlikely in the near term with macro headwinds an additional concern; SELL
Strong 2QFY12 performance notwithstanding, performance over the next couple of quarters will
remain weak. Slowdown, sharp decline in steel prices in China in the past week, domestic
overcapacity, the mining ban in Karnataka and elevated raw material costs will weigh on margins
and performance. We revise our TP to Rs560 (Rs660 earlier) based on end-2013E financials.
Maintain our SELL rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel (JSTL)
Metals & Mining
Uncertain outlook may override a strong quarter. JSW Steel reported 2QFY12
standalone EBITDA of Rs13 bn (-7%qoq). JSW handsomely beat our profitability (27%
beat) estimate on the back of (1) lower-than-expected raw material cost increase and
(2) decline in staff costs. Nonetheless, core issues of iron ore sourcing and costs,
production ramp-up and sustainable decline in profitability will weigh on performance.
Cut EBITDA estimate by 3-7% for FY2012-14E and TP to Rs560 (Rs660 earlier). SELL.
Surprises on all counts
JSW’s reported standalone EBITDA of Rs13 bn (-7% qoq, +30.6% yoy) was 27% ahead of our
estimate driven by (1) profitability of US$150/ tonne versus our number of US$130/ tonne and (2)
10% volume beat at 1.88 mn tonnes of sales (+9.8% qoq, 18.9% yoy). JSW reported forex loss of
Rs5.1 bn as an exceptional item; forex loss relates to (1) acceptances and (2) losses on LCs for
coking coal purchase. Net income of Rs1.3 bn was 31.6% lower than our estimate.
Raw material costs do not increase as much and partly drives positive earnings surprise
We are surprised with JSW’s profitability number considering (1) realization declined 1.7% qoq to
Rs40,516/ tonne and (2) iron ore cost increased by Rs800/ tonne qoq and the company consumed
US$315/ tonne coking coal for full quarter. Raw material cost/ tonne increased by Rs1,530 qoq
(which captures iron ore cost increase). The company may have used efficient blending of coking
coal to overcome the impact of increase in coking coal cost.
Cut in volume guidance is not a surprise
JSW cut FY2012E crude steel production guidance by 14% and for steel deliveries by 13% to 7.5
mn and 7.8 mn tonnes, respectively. Cut in guidance is not a surprise. However, the revised
guidance may be a tad aggressive given that it implies crude steel production of 4.1 mn tonnes in
2H (up from 3.4 mn tonnes in 1H). Note that infrastructural and procedural bottlenecks have led
to delay in receipt of iron ore despite JSW purchasing 2.1 mn tonnes iron ore through auction at
an average rate of Rs3,300/ tonne. As a result, JSW has not ramped up capacity utilization of the
Vijaynagar steel plant.
Relief unlikely in the near term with macro headwinds an additional concern; SELL
Strong 2QFY12 performance notwithstanding, performance over the next couple of quarters will
remain weak. Slowdown, sharp decline in steel prices in China in the past week, domestic
overcapacity, the mining ban in Karnataka and elevated raw material costs will weigh on margins
and performance. We revise our TP to Rs560 (Rs660 earlier) based on end-2013E financials.
Maintain our SELL rating.
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