JSW Steel - Flexing realisation spreads; company update; Buy :: Edelweiss (pdf link)

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JSW Steel (JSTL IN, INR 860, Buy)

JSW Steel’s realisation spread has gone up to INR5,900/t for 9mFY12 vs  INR4,400/t in FY11. We revise up our FY13 spread assumption to INR4,900/t from INR3,700/t assumed earlier, leading to 9% revision in our EBITDA estimates. We are also revising up our fair value for JSW Ispat to INR(52) vs INR(109) due to improved Q3FY12 performance and visible decline in cost. We maintain our ‘BUY’ recommendation with a revised price target of INR992/share (earlier INR775/share). 

Revising realisation spreads on steady improvement

JSW Steel’s realisation spread (i.e. the premium of reported realisations over the benchmark HRC price) has been improving steadily. From an average of ~INR4,400/t in FY11, the 9MFY12 spread has gone up to an average of INR5,900/t. Factoring in this trend, sustaining in the last three quarters, we revise our spread assumption upwards for FY13 to INR4,900/t from INR 3,700/t assumed earlier.       

Cheaper power to elevate JSW Ispat earnings

JSW Steel’s 49% associate company, JSW Ispat reported an improved performance in Q3FY12 with an EBITDA/t of INR3,616 (vs INR2,357/t in Q2) on the back of 5.5% QoQ surge in realisations. The entity has also secured power from the group company, JSW Energy which will substitute the expensive power from the state grid, saving ~INR800-1,000/t.  With steel prices improving further in Q4 so far and benefits of lower costs, we expect an improved performance going ahead. We now estimate the entity’s FY13 EBITDA/t to be INR4,497 vs INR3,200 assumed earlier.   

Outlook and valuations: Better margins ahead; maintain ‘BUY’

With domestic steel prices inching up in spite of declining raw material costs and a higher realisation spread, we expect FY13 EBITDA/t to improve to USD175 (vs USD159 estimated). Given the upward revision in JSW Ispat’s FY13 estimates, we peg its fair value at INR(52) vs INR(109) earlier. With a revised price target of INR992/share (INR775 earlier), we maintain our ‘BUY/Sector Outperformer’ recommendation/rating.

              
JSW Steel - Flexing realisation spreads; company update; Buy