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UBS Investment Research
JSW Steel
Q 2 better than expectations
Event: Volumes surprise on the upside, Operating expenses lower as well
JSW reported higher than expected Q2 PAT pre-ex of Rs4.9bn (-16%QoQ,
+9%YoY; UBS-e/consensus of Rs1.1bn/Rs2.5bn), and EBITDA of Rs12.9bn (-
7%QoQ, +39%YoY; UBS-e/consensus of Rs6.2bn/Rs10bn) driven by a) higher
volumes of 1.88 mt vs UBS-e of 1.56mt, while ASP was largely in line at
Rs40,516/t, b) lower than expected raw material cost of Rs26,250/t (+Rs1,532/t
QoQ) c) lower staff costs (lesser by Rs0.3bn over Q1FY12).
Impact: EBITDA/t higher than expected; Iron cost higher by Rs800/t QoQ
EBITDA/t was Rs6,850/t (-15%QoQ, +17%YoY) higher than UBS-e of Rs3,977/t
(UBS-e for FY12 is Rs5,364/t). Though the production was impacted by c450kt in
the quarter due to mining ban, sales were higher due to a) inventory liquidation
from Q1 b) re-rolling volumes of 0.18mt for JSW ISPAT. JSW incurred higher
iron ore cost of cRs800/t in the quarter due to increased purchases from the market.
Action: Stock price discounts the negatives, look beyond the current mess
The management has lowered FY12 sales guidance to 7.8mt vs 9mt earlier while
we forecast 6.9mt. 1H sales were 3.6mt. We believe a lot of the negative news is
already discounted by the current stock price. JSW is currently trading at attractive
valuations of FY13E EV/EBITDA / PB of 5x/0.7x. At an EV (FY12E) of
cUS$6bn, JSW is trading @40% discount to replacement value.
Valuation: Maintain Buy with a PT of Rs700
We value JSW on 6x FY13E EV/EBITDA. We don’t value investment in Ispat.
Key takeaways from the conference call
1. Exceptional Loss -Forex
There was an exceptional loss of Rs5.1bn in the P&L on account of rupee
depreciation vs USD. This is loss arising out of LCs (Letter of
Credits)/acceptances for coking coal import payments. This loss is notional
in nature and could reverse in the coming quarters if the rupee appreciates.
Similarly, loss of Rs5bn on the foreign currency loans due to rupee
depreciation has been capitalized.
Staff costs in Q1FY12 were high due to provisions of gratuity. Hence,
Q2FY12 staff costs have seen a 17% QoQ decline.
2. Guidance
The management has lowered FY12 sales volume guidance to 7.8mt vs the
earlier 9mt, due to the lower capacity utilizations owing to iron ore supply
constraints. JSW has sold c3.6mt in 1H, will have to sell c4.2mt in 2H to
meet 7.8mt guidance. However, we have been conservative and forecast
6.9mt sales for FY12.
3. Iron ore scenario in Karnataka
JSW has purchased 2.08mt in the 6 e-auctions conducted till date, while only
0.3mt has been shipped to its site. Bottlenecks relating to logistics are being
sorted and the despatches are expected to improve over the coming weeks.
The landed cost of iron ore that JSW has received till now from the e-auction
is Rs3,300/t.
The iron ore inventory sale of 1.5mt per month + NMDC sales of c1mt per
month is sufficient for the steel industry in the region. In fact, JSW is
favourably placed vis-à-vis the other e-auction participants as it is one of the
few players in the region that runs on iron ore fines and a large part (c70%)
of the 25mt inventory is fines.
The CEC report submitted to honourable SC, based on which the SC
temporarily banned iron ore mining in Karnataka has classified the mines in
the state into 3 categories:
— 14 mines with a cumulative capacity of c1.5mt per month have no
irregularities and JSW’s JV mine is a part of these
— 22 mines with a cumulative capacity of c2mtpa have been found to have
minor irregularities.
— The rest of the 50+ mines have major irregularities.
On 6th November 2011, when the CEC, state government and other
authorities submit the environmental impact assessment/rehabilitation &
reclamation reports to the SC, there is high likelihood that the first 2
categories of mines are allowed to operate, which would suffice the iron ore
requirement of the region including that of JSW.
4. Coke batteries running at full capacity despite low
steel utilization rates
JSW is currently operating its coke oven batteries at full capacity despite
very low blast furnace utilization, due to which there is coke inventory of
200 kt available. This strategy has helped avoid any force majeure on coking
coal purchases and the resultant penalties.
5. FY12 capex vis-à-vis guidance
Management had earlier guided for Rs80bn capex for FY12 while till date
only Rs20 bn has been spent, though the management has not admitted to
any slow down in the expansion plans – a) 10 to 12 mtpa b) 6mtpa green
field West Bengal project.
6. Overseas Businesses
US plate & pipe business- The capacity utilization has improved to 37%; the
slowdown in the plate segment, is being compensated by a strong pipe
business and the management expects improved performance over the
coming quarters.
Production at Chile iron ore mine was in line with that of last quarter at
c0.2mt.
7. Exports & Sales Mix
Exports were 18% of volumes in Q2, while sales through the retail venture -
JSW Shoppe increased 16% YoY to 372kt which is c25% of total domestic
sales.
8. Steel Price Outlook
JSW increased steel prices by c4% in October and expects that any softness
in global prices will not directly translate to India due to the depreciating
rupee.
9. Increase in stake by JFE & promoter warrants
JFE group currently holds 14.99% in JSW Steel and intends to increase it
further, however JSW board at this stage has not decided on allowing JFE to
increase its stake.
The promoters hold warrants that expire in Dec @Rs1,200/sh which in all
likelihood will be subscribed to, which should certainly act as a positive sign
for the stock price.
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
Q 2 better than expectations
Event: Volumes surprise on the upside, Operating expenses lower as well
JSW reported higher than expected Q2 PAT pre-ex of Rs4.9bn (-16%QoQ,
+9%YoY; UBS-e/consensus of Rs1.1bn/Rs2.5bn), and EBITDA of Rs12.9bn (-
7%QoQ, +39%YoY; UBS-e/consensus of Rs6.2bn/Rs10bn) driven by a) higher
volumes of 1.88 mt vs UBS-e of 1.56mt, while ASP was largely in line at
Rs40,516/t, b) lower than expected raw material cost of Rs26,250/t (+Rs1,532/t
QoQ) c) lower staff costs (lesser by Rs0.3bn over Q1FY12).
Impact: EBITDA/t higher than expected; Iron cost higher by Rs800/t QoQ
EBITDA/t was Rs6,850/t (-15%QoQ, +17%YoY) higher than UBS-e of Rs3,977/t
(UBS-e for FY12 is Rs5,364/t). Though the production was impacted by c450kt in
the quarter due to mining ban, sales were higher due to a) inventory liquidation
from Q1 b) re-rolling volumes of 0.18mt for JSW ISPAT. JSW incurred higher
iron ore cost of cRs800/t in the quarter due to increased purchases from the market.
Action: Stock price discounts the negatives, look beyond the current mess
The management has lowered FY12 sales guidance to 7.8mt vs 9mt earlier while
we forecast 6.9mt. 1H sales were 3.6mt. We believe a lot of the negative news is
already discounted by the current stock price. JSW is currently trading at attractive
valuations of FY13E EV/EBITDA / PB of 5x/0.7x. At an EV (FY12E) of
cUS$6bn, JSW is trading @40% discount to replacement value.
Valuation: Maintain Buy with a PT of Rs700
We value JSW on 6x FY13E EV/EBITDA. We don’t value investment in Ispat.
Key takeaways from the conference call
1. Exceptional Loss -Forex
There was an exceptional loss of Rs5.1bn in the P&L on account of rupee
depreciation vs USD. This is loss arising out of LCs (Letter of
Credits)/acceptances for coking coal import payments. This loss is notional
in nature and could reverse in the coming quarters if the rupee appreciates.
Similarly, loss of Rs5bn on the foreign currency loans due to rupee
depreciation has been capitalized.
Staff costs in Q1FY12 were high due to provisions of gratuity. Hence,
Q2FY12 staff costs have seen a 17% QoQ decline.
2. Guidance
The management has lowered FY12 sales volume guidance to 7.8mt vs the
earlier 9mt, due to the lower capacity utilizations owing to iron ore supply
constraints. JSW has sold c3.6mt in 1H, will have to sell c4.2mt in 2H to
meet 7.8mt guidance. However, we have been conservative and forecast
6.9mt sales for FY12.
3. Iron ore scenario in Karnataka
JSW has purchased 2.08mt in the 6 e-auctions conducted till date, while only
0.3mt has been shipped to its site. Bottlenecks relating to logistics are being
sorted and the despatches are expected to improve over the coming weeks.
The landed cost of iron ore that JSW has received till now from the e-auction
is Rs3,300/t.
The iron ore inventory sale of 1.5mt per month + NMDC sales of c1mt per
month is sufficient for the steel industry in the region. In fact, JSW is
favourably placed vis-à-vis the other e-auction participants as it is one of the
few players in the region that runs on iron ore fines and a large part (c70%)
of the 25mt inventory is fines.
The CEC report submitted to honourable SC, based on which the SC
temporarily banned iron ore mining in Karnataka has classified the mines in
the state into 3 categories:
— 14 mines with a cumulative capacity of c1.5mt per month have no
irregularities and JSW’s JV mine is a part of these
— 22 mines with a cumulative capacity of c2mtpa have been found to have
minor irregularities.
— The rest of the 50+ mines have major irregularities.
On 6th November 2011, when the CEC, state government and other
authorities submit the environmental impact assessment/rehabilitation &
reclamation reports to the SC, there is high likelihood that the first 2
categories of mines are allowed to operate, which would suffice the iron ore
requirement of the region including that of JSW.
4. Coke batteries running at full capacity despite low
steel utilization rates
JSW is currently operating its coke oven batteries at full capacity despite
very low blast furnace utilization, due to which there is coke inventory of
200 kt available. This strategy has helped avoid any force majeure on coking
coal purchases and the resultant penalties.
5. FY12 capex vis-à-vis guidance
Management had earlier guided for Rs80bn capex for FY12 while till date
only Rs20 bn has been spent, though the management has not admitted to
any slow down in the expansion plans – a) 10 to 12 mtpa b) 6mtpa green
field West Bengal project.
6. Overseas Businesses
US plate & pipe business- The capacity utilization has improved to 37%; the
slowdown in the plate segment, is being compensated by a strong pipe
business and the management expects improved performance over the
coming quarters.
Production at Chile iron ore mine was in line with that of last quarter at
c0.2mt.
7. Exports & Sales Mix
Exports were 18% of volumes in Q2, while sales through the retail venture -
JSW Shoppe increased 16% YoY to 372kt which is c25% of total domestic
sales.
8. Steel Price Outlook
JSW increased steel prices by c4% in October and expects that any softness
in global prices will not directly translate to India due to the depreciating
rupee.
9. Increase in stake by JFE & promoter warrants
JFE group currently holds 14.99% in JSW Steel and intends to increase it
further, however JSW board at this stage has not decided on allowing JFE to
increase its stake.
The promoters hold warrants that expire in Dec @Rs1,200/sh which in all
likelihood will be subscribed to, which should certainly act as a positive sign
for the stock price.
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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