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JSW Steel’s Q3FY12 EBITDA/t of INR6,565 was above expectations due to
an increase in realisation and controlled costs. Though sales volume at
1.91mt was below expectations, the capacity utilization at its Vijaynagar
plant reached 84% in December due to improved iron ore availability. The
company is confident of achieving guided sales volume of 7.8mt in FY12
(implying 2.3mt in Q4FY12, including JSW Ispat re‐rolling volumes). With
improved steel prices and lower raw material costs, company is hopeful
of a margin improvement in Q4FY12. We maintain our ‘BUY/SO’
recommendation/rating with a price target of INR 775 per share.
EBITDA/t above estimates despite lower sales volume
JSW Steel reported sales volume of 1.91mt (up 20% YoY but lower than our estimate of
2.04 mt) and production of 1.94mt (vs our estimate of 1.9mt). However, the EBITDA/t
of INR6,565 was above our expectations of INR6,000/t, aided by 1.8% QoQ increase in
realization and controlled costs. With the improved iron ore availability, the capacity
utilisation at its Vijaynagar plant reached 84% in December and the company is hopeful
of ramping it up to ~90% in FY13 if the iron ore remains available (this translates into
an output of 9.5mt ‐ 10mt in FY13 vs our assumption of 8.7mt).
New capex announced to pull up performance of JSW Ispat
To help its 49% associate company JSW Ispat improve its operating performance, the
company has announced a capex of INR21.4bn. Efforts are being carried out towards
setting up cost reduction and integration projects viz. 1 mtpa coke oven plant, 4 mtpa
pellet plant and 0.8 mtpa CRM mill which will come on board starting December 2013.
The projects will be funded in the D/E ratio of 2:1.
Outlook and valuations: Healthy margins; maintain ‘BUY’
Given the recovery in steel prices by ~USD20‐30, both globally and in India, and
benefits of a reduction in the cost of coking coal, the company’s performance is set to
improve further in Q4FY12. We continue to like the stock and maintain ‘BUY/Sector
Outperformer’ recommendation/rating with a price target of INR 775 per share.
Key takeaways from the analyst meet
Key takeaways from the analyst meetDemand seen recovering in India; confident of
achieving guided sales of 7.8 mt in FY12
As per JSW Steel, the domestic demand is likely to grow by 5‐6% in FY12 and is showing
signs of a revival. With expectation of lower interest rates, reduced inflation and policy
action from the government in the forthcoming budget, it expects domestic consumption
growth to recover in FY13. The company is confident of achieving its sales guidance of 7.8
mt in FY12, which implies a volume of 2.3 mt in Q4FY12.
Iron ore situation normalizing; hopeful of partial restart of mining in Karnataka soon
Of the total auctioned iron ore of 12mt, the company has secured volume of ~7mt and has
received 52% of the same at its plant site. As a result, its utilisation in Vijaynagar plant
improved to 84% in December 2011. It is hopeful that CEC will soon allow mines with no
irregularities to resume operations in Karnataka and help continue the sourcing of iron ore
that will enable 90% utilisation in FY13.
Raw material: Coking coal cost to decline in Q4; iron ore cost to remain flat
The average cost of coking coal in Q3 was USD255/tonne CIF and with the reduction in
contract prices for Q4 from USD280 to USD235 per tonne, the average cost is estimated to
go down further to USD210‐220 per tonne. The cost of iron ore, however, is unlikely to
change in Q4FY12 since the volume was procured at the same cost (of Q3FY12).
Forex gain of ~INR3bn likely in Q4
In Q3FY12, the company reported a forex translation loss of INR5bn, considering the
exchange rate as at the end of December 2012. At the current exchange rate, the company
would potentially book a forex gain of ~INR3bn.
JSW Ispat: Secured power from JSW Energy
In January 2012, the company has secured power from the Ratnagiri unit of JSW Energy for
JSW Ispat. With a power cost of INR4.5 per unit, (we believe) the EBITDA/tonne of JSW Ispat
is likely to improve by ~INR800‐1000/tonne.
JSW Ispat: No guarantees from JSW Steel for existing debt; may come out of CDR soon
The company has assured that it has not given a guarantee (in any form) for the debt of JSW
Ispat. It also mentioned that the debt restructuring of JSW Ispat is complete and that very
soon, it is likely to come out of CDR.
US operations: Investment to be reviewed; currently no impairment
The company has reviewed its loss making US business and has indicated to its auditors that
no provision in required w.r.t. its investment/ corresponding loans of INR20bn. The
company has stated that it will get assets of US operations valued and would take necessary
action as per the valuers’/auditors’ advice.
Tax credit in Q3; normal rate from Q4
In Q3FY12, the company made a tax reversal of INR1.8bn related to provision made in
earlier years and therefore, there was a net gain of INR1.4 bn in the quarter. However, in
Q4FY12, the normal tax rate would resume.
Existing projects: On schedule
Projects related to the 3.2 mtpa expansion at Vijaynagar are on schedule. While the 171km
water pipe line from Alamatti dam to Vijaynagar plant and three beneficiation plant
modules have got commissioned, the timeline for the remaining projects are as below:
300 MW CPP by March 2012
HSM Phase II – 1.5 mtpa by September 2012
Beneficiation plant: Balance four modules by September 2012
CRM 2 project and 2mtpa Brownfield expansion by end of FY14.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel’s Q3FY12 EBITDA/t of INR6,565 was above expectations due to
an increase in realisation and controlled costs. Though sales volume at
1.91mt was below expectations, the capacity utilization at its Vijaynagar
plant reached 84% in December due to improved iron ore availability. The
company is confident of achieving guided sales volume of 7.8mt in FY12
(implying 2.3mt in Q4FY12, including JSW Ispat re‐rolling volumes). With
improved steel prices and lower raw material costs, company is hopeful
of a margin improvement in Q4FY12. We maintain our ‘BUY/SO’
recommendation/rating with a price target of INR 775 per share.
EBITDA/t above estimates despite lower sales volume
JSW Steel reported sales volume of 1.91mt (up 20% YoY but lower than our estimate of
2.04 mt) and production of 1.94mt (vs our estimate of 1.9mt). However, the EBITDA/t
of INR6,565 was above our expectations of INR6,000/t, aided by 1.8% QoQ increase in
realization and controlled costs. With the improved iron ore availability, the capacity
utilisation at its Vijaynagar plant reached 84% in December and the company is hopeful
of ramping it up to ~90% in FY13 if the iron ore remains available (this translates into
an output of 9.5mt ‐ 10mt in FY13 vs our assumption of 8.7mt).
New capex announced to pull up performance of JSW Ispat
To help its 49% associate company JSW Ispat improve its operating performance, the
company has announced a capex of INR21.4bn. Efforts are being carried out towards
setting up cost reduction and integration projects viz. 1 mtpa coke oven plant, 4 mtpa
pellet plant and 0.8 mtpa CRM mill which will come on board starting December 2013.
The projects will be funded in the D/E ratio of 2:1.
Outlook and valuations: Healthy margins; maintain ‘BUY’
Given the recovery in steel prices by ~USD20‐30, both globally and in India, and
benefits of a reduction in the cost of coking coal, the company’s performance is set to
improve further in Q4FY12. We continue to like the stock and maintain ‘BUY/Sector
Outperformer’ recommendation/rating with a price target of INR 775 per share.
Key takeaways from the analyst meet
Key takeaways from the analyst meetDemand seen recovering in India; confident of
achieving guided sales of 7.8 mt in FY12
As per JSW Steel, the domestic demand is likely to grow by 5‐6% in FY12 and is showing
signs of a revival. With expectation of lower interest rates, reduced inflation and policy
action from the government in the forthcoming budget, it expects domestic consumption
growth to recover in FY13. The company is confident of achieving its sales guidance of 7.8
mt in FY12, which implies a volume of 2.3 mt in Q4FY12.
Iron ore situation normalizing; hopeful of partial restart of mining in Karnataka soon
Of the total auctioned iron ore of 12mt, the company has secured volume of ~7mt and has
received 52% of the same at its plant site. As a result, its utilisation in Vijaynagar plant
improved to 84% in December 2011. It is hopeful that CEC will soon allow mines with no
irregularities to resume operations in Karnataka and help continue the sourcing of iron ore
that will enable 90% utilisation in FY13.
Raw material: Coking coal cost to decline in Q4; iron ore cost to remain flat
The average cost of coking coal in Q3 was USD255/tonne CIF and with the reduction in
contract prices for Q4 from USD280 to USD235 per tonne, the average cost is estimated to
go down further to USD210‐220 per tonne. The cost of iron ore, however, is unlikely to
change in Q4FY12 since the volume was procured at the same cost (of Q3FY12).
Forex gain of ~INR3bn likely in Q4
In Q3FY12, the company reported a forex translation loss of INR5bn, considering the
exchange rate as at the end of December 2012. At the current exchange rate, the company
would potentially book a forex gain of ~INR3bn.
JSW Ispat: Secured power from JSW Energy
In January 2012, the company has secured power from the Ratnagiri unit of JSW Energy for
JSW Ispat. With a power cost of INR4.5 per unit, (we believe) the EBITDA/tonne of JSW Ispat
is likely to improve by ~INR800‐1000/tonne.
JSW Ispat: No guarantees from JSW Steel for existing debt; may come out of CDR soon
The company has assured that it has not given a guarantee (in any form) for the debt of JSW
Ispat. It also mentioned that the debt restructuring of JSW Ispat is complete and that very
soon, it is likely to come out of CDR.
US operations: Investment to be reviewed; currently no impairment
The company has reviewed its loss making US business and has indicated to its auditors that
no provision in required w.r.t. its investment/ corresponding loans of INR20bn. The
company has stated that it will get assets of US operations valued and would take necessary
action as per the valuers’/auditors’ advice.
Tax credit in Q3; normal rate from Q4
In Q3FY12, the company made a tax reversal of INR1.8bn related to provision made in
earlier years and therefore, there was a net gain of INR1.4 bn in the quarter. However, in
Q4FY12, the normal tax rate would resume.
Existing projects: On schedule
Projects related to the 3.2 mtpa expansion at Vijaynagar are on schedule. While the 171km
water pipe line from Alamatti dam to Vijaynagar plant and three beneficiation plant
modules have got commissioned, the timeline for the remaining projects are as below:
300 MW CPP by March 2012
HSM Phase II – 1.5 mtpa by September 2012
Beneficiation plant: Balance four modules by September 2012
CRM 2 project and 2mtpa Brownfield expansion by end of FY14.
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