Management Interaction and Estimates Revision
JSW Steel
Buy
Target Price: Rs872
CMP: Rs745
Upside: 17%
Better times ahead, maintain buy
We interacted with JSW Steel recently and were impressed with the company’s resistance to various external constraints through focus on value-addition and aggressive marketing. We see benefits of lower coking coal costs ahead with marginally better product realizations leading to better operating margin. We maintain our volume estimates but revise our EPS estimates upwards by 6%/8.1% for FY13E/14E. We revise our target price upwards to Rs872 and maintain buy rating.
Below are the highlights of our interaction and estimates revision:-
m Volumes & Capacity Utilization – Production guidance of 8.5 MT maintained for FY13E. Capacity utilization of ~80% possible for FY14E based on current expectations of iron ore situation in Karnataka.
m Capacity utilization has fallen to ~70% in November on account of planned shutdown of corex capacity and BF3 shutdown for commissioning of 4th stove. Volumes for Q3FY13 should be ~2 MT and overall FY13 volumes should be over and above 8.5 MT.
m Iron ore supply situation – Iron-ore supplies remain low in quality and restricted in volumes but things are improving steadily.
m Iron ore quality obtained from e-auctions is bad and overall quantity available has reduced. Increased costs are seen on using low quality fines but price reduction by NMDC in Q3FY13 has mitigated the impact. Blended iron ore cost guidance remains at ~Rs3400/tonne.
m JSW is buying iron ore from Orissa and Chhattisgarh. Transportation costs are ~Rs2000/tonne on bringing ore from these states but the blend of outside ore is not more than 10-15% in the overall mix.
m On mining resumption in Karnataka, as of now only 4 mines have restarted operations with ~2 MT capacity but others are completing approvals process. JSW sees a total of 7 MT capacity from a total of 17-18 A-category mines coming on-stream by the end of FY13E.
m B category mines are in the process of completing the R&R process and can help bring in 7-8 MT capacity in FY14E.
m Together with NMDC’s 8-9 MT production in FY14E, JSW expects availability of 23-24 MT iron ore in Karnataka in FY14E which should ensure production at ~80% capacity utilization levels.
m Steel Prices and Demand – Prices raised marginally but demand pick-up delayed.
m JSW has increased steel prices by Rs500-1000/tonne across product categories from Dec onwards based on global price improvements and weaker rupee.
m Demand pick up has been very slow and usual pick up expected in Nov and early Dec has not happened this year. On the construction side, many projects are still going slow due to expectations of softening interest rates ahead. Overall, demand from key consumer segments of auto and construction remains subdued.
m Demand is expected to see an increase post softening of interest rates in Q4FY13E.
m Capex guidance and expansions update – Capex of Rs50bn each in FY13E/14E. Expansion and value addition projects remain on schedule.
m Commissioning of HSM-2 (Phase 2) and Beneficiation plant-2 were completed recently. 4th stove at BF3 has also been commissioned. Other projects on CR mill -2 and 2 MT capacity expansion remain on track for completion in the next two years.
m Capex guidance for FY13E/14E is ~Rs50bn each.
m Focus remains on increasing value addition and downstream projects remain on track. 2.25 lakh tpa color coating line at Vasind is expected to be commissioned in H1FY14E.
m Earnings revised upwards: We have maintained our volume estimates at 8.4MT/8.8MT for FY13E/14E but revised our realizations estimates upwards slightly and lowered our coking coal cost assumptions. We revise our EBITDA estimates upwards for FY13E/14E by 1.8%/3.3%. We also upgrade our consolidated PAT estimates for JSW Steel (without merger of JSW Ispat) by 6%/8.1% for FY13E/14E. Our proforma PAT for JSW Steel-JSW Ispat merged entity stands at ~Rs21.1bn with an adj. EPS of Rs87.2.
m Valuations – Maintain buy: We expect profitability and margins to improve going forward and volumes to sustain on the back of better ore availability and higher demand. We value the proposed merged entity at 5.5x FY14E EV/EBITDA to arrive at a target price of Rs872. Maintain buy.
Thanks & Regards,
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