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JSW STEEL (2-EQUAL WEIGHT; PT RS682; +12%): THE DARK HORSE
The disruption in iron ore supply in Karnataka following the Supreme Court’s order in
April 2011 has hit JSW Steel hard. However, its utilization has improved from a low of
30% to around 60% currently, as iron ore availability has improved both from e-auction
and NMDC. While we do not expect an early resolution of the Karnataka mining issue, it
would impact costs, not availability of iron ore. The share price has corrected 33% since
the Supreme Court directive, already discounting much of the negative news, in our view.
The stock is now trading at an attractive 5x FY13E EV/EBITDA and adjusted P/B of 0.8x.
We initiate with a 2-Equal Weight rating, with a positive bias, and a price target of Rs682.
Utilization set to improve albeit at a higher cost: We do not expect an early resolution of
the iron ore mining ban. The Supreme Court recently postponed (until Jan 2012) its hearing
to consider an appeal towards a partial lifting of the ban (at 15 mines having no major
violations). However, iron ore supply from e-auction has improved for JSW (inventory of 45
days now) and logistics bottle-necks are slowly being addressed. This should further
improve its utilization, albeit procuring costs will remain high. Despite weakening prices
globally, we estimate iron ore cost for JSW will rise by 50% for FY12E. We believe efficiency
improvements from recent complete integration of coke oven sinter, pellet and power plant,
coupled with already efficient conversion costs, should support margins.
Strategic investment in Ispat to remain a drag: Issues in gas procurement, rising power
and interest costs has hit JSW Ispat (49.3% held by JSW Steel) hard. Furthermore, supply of
pellets, earlier expected from JSW Steel’s unit, has also been impacted by the mining ban in
Karnataka. Although a non-cash charge, we expect losses in Ispat to impact JSW Steel’s EPS
by about Rs19 and Rs34 in FY12 and FY13, respectively.
Initiate with 2-Equal Weight and a Rs682 PT: Following the 33% correction in the share
price since the Supreme Court directive in Apr 2011, we believe most of the concerns are
now priced in. The shares trades on an EV of US$7bn for 11mn tonnes capacity, implying
FY13E EV/ EBITDA of 5x and an adjusted P/B of 0.8x. However, because of the iron ore
mining impasse at Karnataka and JSW’s dependence on local ore, we believe the share will
continue to trade at a discount to its peers. Furthermore, JSW’s debt represents around 2/3
of its EV currently, making it highly sensitive to earnings and valuation multiples. We ascribe
a 10% discount to its peer valuation of 6x EV/EBITDA and arrive at a price target of Rs682.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW STEEL (2-EQUAL WEIGHT; PT RS682; +12%): THE DARK HORSE
The disruption in iron ore supply in Karnataka following the Supreme Court’s order in
April 2011 has hit JSW Steel hard. However, its utilization has improved from a low of
30% to around 60% currently, as iron ore availability has improved both from e-auction
and NMDC. While we do not expect an early resolution of the Karnataka mining issue, it
would impact costs, not availability of iron ore. The share price has corrected 33% since
the Supreme Court directive, already discounting much of the negative news, in our view.
The stock is now trading at an attractive 5x FY13E EV/EBITDA and adjusted P/B of 0.8x.
We initiate with a 2-Equal Weight rating, with a positive bias, and a price target of Rs682.
Utilization set to improve albeit at a higher cost: We do not expect an early resolution of
the iron ore mining ban. The Supreme Court recently postponed (until Jan 2012) its hearing
to consider an appeal towards a partial lifting of the ban (at 15 mines having no major
violations). However, iron ore supply from e-auction has improved for JSW (inventory of 45
days now) and logistics bottle-necks are slowly being addressed. This should further
improve its utilization, albeit procuring costs will remain high. Despite weakening prices
globally, we estimate iron ore cost for JSW will rise by 50% for FY12E. We believe efficiency
improvements from recent complete integration of coke oven sinter, pellet and power plant,
coupled with already efficient conversion costs, should support margins.
Strategic investment in Ispat to remain a drag: Issues in gas procurement, rising power
and interest costs has hit JSW Ispat (49.3% held by JSW Steel) hard. Furthermore, supply of
pellets, earlier expected from JSW Steel’s unit, has also been impacted by the mining ban in
Karnataka. Although a non-cash charge, we expect losses in Ispat to impact JSW Steel’s EPS
by about Rs19 and Rs34 in FY12 and FY13, respectively.
Initiate with 2-Equal Weight and a Rs682 PT: Following the 33% correction in the share
price since the Supreme Court directive in Apr 2011, we believe most of the concerns are
now priced in. The shares trades on an EV of US$7bn for 11mn tonnes capacity, implying
FY13E EV/ EBITDA of 5x and an adjusted P/B of 0.8x. However, because of the iron ore
mining impasse at Karnataka and JSW’s dependence on local ore, we believe the share will
continue to trade at a discount to its peers. Furthermore, JSW’s debt represents around 2/3
of its EV currently, making it highly sensitive to earnings and valuation multiples. We ascribe
a 10% discount to its peer valuation of 6x EV/EBITDA and arrive at a price target of Rs682.
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