JM Financial: Usha Martin :2Q in-line; 2H volume remains key monitorable

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Usha Martin :2Q in-line; 2H volume remains key monitorable


�� Net profit in-line with estimates: Consolidated net profit grew 41% YoY to
`459mn. Standalone net profit of `325mn was in-line with JMFe `316mn.
�� Strong YoY volume growth boosts revenues: Standalone net sales grew
c.33% YoY to `6.4bn. This was primarily due to a 62% YoY increase in steel
segment revenue to `3.5bn on a 76% increase in volumes, partly cushioned by
an 8% decline in blended steel realisations to `37,846/ton. Wire segment
revenues grew 11% YoY to `3bn due to a 7% increase in volumes and 4%
increase in realisation to `71,306/ton. With stabilisation of the newly
commissioned blast furnace and availability of feed from the recently
commissioned sinter plant, we expect steel volumes to ramp up in 2HFY11.
�� Captive iron ore and coal production lower due to monsoon: 2QFY11
standalone EBITDA increased 66% YoY to `1.3bn (JMFe `1.2bn) and margins
improved 408bps to 20.2% due to strong volume growth and integration
benefits from production of 42,013 tons of thermal coal from captive mines.
However, production of captive coal was significantly lower than 1QFY11
levels of 120ktons due to seasonal factors. Consolidated EBITDA grew c.42%
YoY to `1.6bn. Iron ore mines continue to meet 100% of the company’s
requirements.
�� Volumes expected to ramp up in 2HFY11; scale fully backed by
integration to drive earnings; re-iterate BUY: The company recently
commissioned its second blast furnace of 400ktpa, taking the total metallic
capacity to 900ktpa, sufficient to meet significant share of the company’s
metallic requirements for the 1mtpa steel making capacity. We believe captive
iron ore (100% integration) and increased thermal coal production (a return to
Q1FY11 production level of 120ktons meeting 100% requirements) along with
an increase in steel sales volume would drive earnings growth. Volume ramp
up in 2HFY11 remains a key monitorable, in our view. We introduce FY13E
numbers. We roll-forward to Sept’11 and revise our target price to `106/share
(`101/share earlier) based on 4.5x average FY12/13E EV/EBITDA and a capex
value of `17/share. Re-iterate BUY.