JSW Steel : Q2FY15 Update: ICICI Securities, PDF link

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Performs well; margins surprise positively…
• JSW Steel reported a good set of Q2FY15 numbers. The company
reported a net operating income of | 13894.8 crore for the quarter
(higher by 7% YoY) in line with our estimate of | 13564.2 crore
• The EBITDA margin for the quarter came in at 20.1%, up 38 bps
QoQ and 200 bps YoY and better than our estimate of 19.4%
• The EBITDA came in at | 2791.2 crore (up 18.9% YoY) above our
estimate of | 2628.3 crore. On a standalone basis, the company
clocked an EBITDA/tonne of | 8534/tonne (I-direct estimate:
| 8000/tonne)
• Consequent PAT was at | 748.8 crore, better than our estimate:
| 662.0 crore
Sales volumes outweigh subdued domestic demand
The steel sector is facing headwinds in the form of a muted demand
scenario both domestically and globally. Domestic steel demand has
been stagnant with mere 0.6% consumption growth in FY14 and 0.3%
during the first five months of FY15. In the current challenging times, JSW
Steel has been able to report sales volume growth of 4% in FY14
(adjusting for merger with JSW Ispat) indicating an increase in its
domestic market share (11.9 MT in FY14 vis-à-vis 11.4 MT in FY13). In
H1FY15, JSW Steel reported sales volume of 5.94 MT, up 5.0% YoY.
Healthy EBITDA/tonne on product mix, cost optimisation
JSW Steel Vijayanagar’s steel unit is one of the low cost convertors
globally. The company does not have access to any captive operational
iron ore and coking coal mine in India. However, despite its dependency
on external sources for its key raw materials, JSW Steel was able to
report healthy EBITDA/tonne due to economies of scale, cost optimisation
and healthy realisations (due to superior product mix). The company also
has a notable presence in the value-added products category, thereby
having a large and diversified customer base with enhanced profitability.
On a sustainable basis, JSW Steel clocks an EBITDA/tonne of ~| 8000-
8500/tonne, notably higher than its peers like SAIL, which clocks an
EBITDA/tonne of ~| 4000 only despite having access to captive iron ore.
Elevated debt levels remains area of concern
Post the merger with Ispat Industries, the debt level of JSW Steel has
increased significantly. On a consolidated basis, the net gearing stood at
1.56x at the end of Q2FY15 while net debt to EBITDA on a consolidated
basis stood at 3.46x.
Healthy operational performance
We expect JSW Steel to report a healthy set of numbers, going forward,
on account of cost savings on declining coking coal prices and benefits
on account of commissioning of the Dolvi pellet plant and coke oven
plant along with enhancement of margins led by value-added products as
utilisation at the CRM mill is progressively increasing. Going forward, we
also expect an improved performance from subsidiaries. We have valued
the stock at 6x FY16E EV/EBITDA and arrived at a target price of | 1250.
We have assigned a HOLD recommendation to the stock.

LINK
http://content.icicidirect.com/mailimages/IDirect_JSWSteel_Q2FY15.pdf