Strong operational show again, downgrade to neutral as upside looks capped JSW :: Centrum

Strong operational show again, downgrade to neutral as
upside looks capped
JSW Steel (JSTL) reported strong standalone operational performance yet again
despite iron ore procurement challenges with 5.3% YoY growth in consolidated
revenues to Rs82.7bn on account of robust sales volume of 2.2MT (higher than our
expectation of 2 MT). Cons. EBITDA stood at ~Rs13bn (margin of ~15.7% vs our
expectation of 14.9%) and standalone EBITDA/tonne stood at ~Rs5970/tonne.
Better long product sales and aggressive marketing led to volume
outperformance but realizations dropped sharply by ~6.3% QoQ. JSTL has
indicated an increase in iron ore availability going ahead, reduction in costs of
coking coal and maintained its volume guidance for FY13E. We see concerns
related to the company receding on raw material costs but remain concerned on
realizations, volumes and lower margin profile of the merged entity post its
merger with JSW-Ispat. We maintain our volume estimate of 8.8 MT for FY14E.
Post the recent run up in the stock, we downgrade our rating to Neutral from Buy.
Volumes higher but realizations drop sharply: Sales volumes stood at 2.2MT, up
~14% YoY, supported by better product mix, aggressive marketing and higher long
product volumes, up 6% QoQ at 0.43 MT. Realizations were down ~6.3% QoQ on
account of a drop in domestic steel prices amidst low demand from end customers and
skewed sales mix towards domestic sales.
EBITDA margin more than expected: Robust volumes and lower raw material costs
(coking coal down by ~5% QoQ and iron ore landed costs lower by 6% QoQ) led to
standalone EBITDA margin of 15.7% (above our expectation of 14.9%). We expect
margin to improve going ahead and expect that JSW would be able to maintain its
strong operational performance going ahead in FY13-14E with lower raw material costs
and better stability in prices from Q4FY13E onwards.

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Concall highlights and earnings revision: JSW maintained its production and volume
guidance for FY13E at 8.5 MT and 9 MT respectively. Iron ore supply situation is improving
slowly in Karnataka with the restart of 6 mines (cap:3.3 mtpa) from category-A mines and
possible restarting of category-B mines soon. JSW is still to receive ~2 MT of bought iron
ore in auctions and is also hopeful of using low grade dumps available in the state. Total
iron ore production in Karnataka is expected to be ~22-23 MT in FY14E. The company’s
focus is on commissioning of value added steel product facilities in the next two years with
the addition of a new CR mill of 2.3 mtpa and increase of color coated capacity to 1.2 mtpa
from 0.9 mtpa. Capex guidance for FY13E stands at Rs42bn and additional Rs90bn would
be spent in FY14-15E on the set up of value added facilities. Brownfield capacity addition of
2 mtpa has been put on hold as of now. We maintain our volume estimates of 8.8MT for
FY14E but revise FY13E volumes to 8.6 MT from 8.4 MT earlier.
Valuations: We like the operations of the company with low conversion cost and superior
marketing team but remain concerned on the stress on balance sheet and lower margin
profile post merger with JSW-Ispat along with concerns on iron ore situation in Karnataka. We
continue to value the proposed merged entity at 5.5x FY14E EV/EBITDA and revise our target
price upwards to Rs882 from Rs872 earlier. With the recent run up in the stock taking the price
to Rs871, we downgrade our rating to Neutral from Buy.