JSW Steel - Volume growth returning; visit note; Buy: Edelweiss

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JSW Steel (JSTL IN, INR 523, Buy)

Our interaction with JSW Steel denotes the following: a) FY13 to witness volume of 9mt (18% YoY growth) due to normalising iron ore situation in Karnataka, b) FY13 EBITDA/t to improve to USD175–200, led by lower raw material prices and c) Cut in FY12 capex from INR80bn to INR55bn. We broadly retain our FY12 and FY13 EBITDA estimates, but cut EPS estimates by 20.6% and 11.8% respectively due to higher interest, depreciation and PAT losses for JSW Ispat. With revised price target of INR775/share (vs INR867/share earlier), we maintain ‘BUY’.

To benefit from enhanced iron ore availability in Karnataka

JSW Steel has obtained 6.4mt of iron ore via e-Auctions (requirement for four months plus). The management says that iron ore costs have corrected by INR400/t though our checks indicate a decline of INR1,000-1,500/t. We expect a partial resumption of iron ore mining in FY13, but enough to meet requirements in Karnataka.

Volume, EBITDA/t to significantly increase going forward

The management is guiding for a crude steel production of 7.6mt and 9mt for FY12 and FY13 respectively. Given the decline in raw material costs and stable steel prices, it is also guiding for FY13 EBITDA/t of USD175/t (@INR:USD of 48). We factor in volume and EBITDA/t of 8.7mt and USD159/t for FY13 respectively.

Factoring in negative valuation for JSW Ispat

We cut our JSW Ispat value per share to negative INR106 from a positive INR61 earlier, led by higher PAT losses and switching from replacement cost to EV/EBITDA method.

Outlook and valuation: Robust volume; maintain ‘BUY’

We broadly retain our FY12 and FY13 EBITDA estimates, but cut our FY12 and FY13 EPS by 20.6% and 11.8% respectively, factoring in forex losses and higher capital charges. We lower our target price from INR867 to INR 775. We maintain ‘BUY/Sector Outperformer’ recommendation/rating on the stock.