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JSW Steel Limited
Volumes on the uptick
Key highlights
Iron ore procurement getting streamlined
JSW Steel Ltd. (JSTL) iron ore procurement is improving in near term. The court suggested
e-auction process is improving with higher receipts and NMDC is allowed to fix prices for
its produce. Coking coal prices have been on a declining trend and 4QFY12e contract
prices are at USD235/tn (19% QoQ lower; 40% lower from peak). JSTL benefits most with
declining raw material prices as it is lowest integrated compared to SAIL and Tata Steel.
New capacity and product mix will favour contribution
JSTL's traditional flat:long product mix of 78:22 is flexible with capacity utilisation in the
present scenario, providing higher contribution from long products. Also, new 3mtpa
blast furnace (BF) is the most efficient out of 8 BFs with low coke rate and will lead to
cost savings on raw material. The lower utilisation levels will mask the efficiency gains
for FY12e, but going forward, JSTL will move along the profitable path. Already JSTL
had 68% utilisation at Vijaynagar facilities in Nov 2011.
Expectations at the lowest
JSTL had unhedged forex exposure of ~USD2.3bn at FY11 end. In 2QFY12, JSTL had
forex losses of INR5.13bn related to acceptances (coking coal import) through P&L
while INR5.3bn related to MTM loss of forex loans was adjusted in balance sheet and
similar quantum is expected in 3QFY12e. Overseas subsidiaries and JSW ISPAT Ltd.
will need support till economic improvement. JSTL has FCCB redemption of USD274m
in July 2012 with 42.8% premium and will have to be replaced by new loan. The
expectations are at the lowest from the operational performance so improved utilisation
and reducing capex intensity will improve the outlook going ahead.
Valuation and outlook, reiterate BUY
We believe JSTL will chalk out long-term strategy for iron ore procurement while the
existing mining industry in Southern region will undergo overhaul and cleanup due to
judicial activity. We have adjusted for lapse of promoter warrants (17.5m shares) and
increased debt estimates on account of forex losses. With reducing iron ore and coking
coal prices, JSTL is best placed compared to SAIL and Tata Steel as a converter. We
reiterate BUY with a revised target price of INR709 (earlier TP of INR750) at 6.5x
FY13e EV/EBITDA, giving an upside of 36%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel Limited
Volumes on the uptick
Key highlights
Iron ore procurement getting streamlined
JSW Steel Ltd. (JSTL) iron ore procurement is improving in near term. The court suggested
e-auction process is improving with higher receipts and NMDC is allowed to fix prices for
its produce. Coking coal prices have been on a declining trend and 4QFY12e contract
prices are at USD235/tn (19% QoQ lower; 40% lower from peak). JSTL benefits most with
declining raw material prices as it is lowest integrated compared to SAIL and Tata Steel.
New capacity and product mix will favour contribution
JSTL's traditional flat:long product mix of 78:22 is flexible with capacity utilisation in the
present scenario, providing higher contribution from long products. Also, new 3mtpa
blast furnace (BF) is the most efficient out of 8 BFs with low coke rate and will lead to
cost savings on raw material. The lower utilisation levels will mask the efficiency gains
for FY12e, but going forward, JSTL will move along the profitable path. Already JSTL
had 68% utilisation at Vijaynagar facilities in Nov 2011.
Expectations at the lowest
JSTL had unhedged forex exposure of ~USD2.3bn at FY11 end. In 2QFY12, JSTL had
forex losses of INR5.13bn related to acceptances (coking coal import) through P&L
while INR5.3bn related to MTM loss of forex loans was adjusted in balance sheet and
similar quantum is expected in 3QFY12e. Overseas subsidiaries and JSW ISPAT Ltd.
will need support till economic improvement. JSTL has FCCB redemption of USD274m
in July 2012 with 42.8% premium and will have to be replaced by new loan. The
expectations are at the lowest from the operational performance so improved utilisation
and reducing capex intensity will improve the outlook going ahead.
Valuation and outlook, reiterate BUY
We believe JSTL will chalk out long-term strategy for iron ore procurement while the
existing mining industry in Southern region will undergo overhaul and cleanup due to
judicial activity. We have adjusted for lapse of promoter warrants (17.5m shares) and
increased debt estimates on account of forex losses. With reducing iron ore and coking
coal prices, JSTL is best placed compared to SAIL and Tata Steel as a converter. We
reiterate BUY with a revised target price of INR709 (earlier TP of INR750) at 6.5x
FY13e EV/EBITDA, giving an upside of 36%.
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