JSW Steel's PAT for 2QFY11 declined 4% QoQ :: JM Fiancials

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 JSW Steel's standalone adjusted PAT for 2QFY11 declined 4% QoQ to Rs3.3b, broadly in line with our estimate of
Rs3.5b. Reported PAT of Rs4.5b included translation gain of Rs1.57b on foreign currency loans.
 The company sold 1.58m tonnes (up 33% QoQ and 9% YoY), reducing inventory by 128,000 tonnes at the end of
2QFY11 to 436,000 tonnes.
 Average realization declined Rs2,819/tonne QoQ to Rs36,510/tonne. JSW achieved favorable product mix by reducing
sale of semis. Sale of semis declined 79% YoY to 86,000 tonnes while the sale of rolled long products increased 57%
YoY to 281,000 tonnes. Flat rolled product sales grew 40% YoY to 1.215m tonnes.
 EBITDA declined 10% YoY to Rs10b. EBITDA per tonne declined 28% QoQ to Rs6,271 due to lower steel prices,
higher coking coal costs, and slightly lower iron ore costs.
 Reported consolidated PAT was Rs3.7b, and included forex gains of Rs1.57b.
 We expect cost benefits due to recent start up of 300MW CPP, higher integration of coke-oven capacity, and iron ore
beneficiation plant, in subsequent quarters.
 We believe that JSW Steel is better placed among domestic steel players due to strong volume growth, lowest
conversion cost and strategic location advantage. Volumes are expected to increase 42% to 9.1m tonnes in FY12
due to timely expansion of capacity to 11mtpa by March 2011.
 JSW Steel has demonstrated best execution skills globally by increasing capacity 7x to 11mtpa in 8 years. With
technical support of JFE and strong balance sheet, growth momentum is likely to continue on account of further
capacity expansion by 2mtpa at Vijaynagar, 4.5mtpa at West Bengal and coking coal and iron ore mines in the
Americas. The stock trades at 9.2x FY12E EPS and an EV of 4.7x FY12E EBITDA. We value the stock at Rs1,771
(6.5x FY12E EV/EBITDA). We reiterate Buy.






Expect 42% volume growth in FY12
 Ongoing expansion to take up production capacity to 10mtpa at Vijaynagar is running
on schedule; to be commissioned by March 2011.
 Two units of coke oven batteries will get commissioned by November 2010.
 Steel melting shops and sinter plants will get commissioned by January 2011 while the
blast furnace will be commissioned by March 2011.
West Bengal project to keep growth momentum up and cost of production
low
 JSW had signed a development agreement (in January 2007) with the Government of
West Bengal to set up an integrated 10mtpa steel plant in phases.
 The Board has approved the implementation of 4.5mtpa integrated steel plant in West
Bengal at a capex of Rs160b (includes 660MW CPP and mine development cost).
 JSW plans to fund the capex with debt to equity ratio of 2:1, thereby requiring equity
of Rs53b over 3-4 years, which will be comfortably funded by strong internal cash
flows from operations.
 The company has acquired 4,300 acres of land for the project. All the regulatory
approvals have been granted by MoEF and Government of West Bengal. JSW expects
the project to get commissioned by the end of FY14.


Equity infusion of Rs89b in FY11, FY12
 During the quarter, JSW made a preferential allotment of one fully convertible debenture
(FCD) of face value of Rs48b to JFE; in line with an agreement signed on 27 July
2010.
 The Board has also approved (a) the issue of up to 977,906 equity shares to JFE on a
preferential basis, and (b) 3,085,814 non-voting, non-transferable global depositary
receipts (GDRs) to JFE; both subject to shareholder approval. Both the issues, if
approved, will infuse another Rs6.1b in JSW Steel.
 Out of JFE's Rs48b equity infusion, JSW Steel has prepaid long term debt worth
Rs23.3b during the quarter and plans to prepay another Rs5.7b in 3QFY11. The rest
of the amount will be deployed for completing the balance capacity addition projects.
Consolidated net debt gearing stood at 0.8x (v/s 1.6x as of end of 1QFY11).
 There was a total equity infusion of Rs89.4b in FY11 and FY12. Promoters' 17.5m
warrants, priced at Rs1,210/share will bring Rs22.2b. JFE will bring in Rs57.2b by
way of issue of 38.11m shares priced at Rs1,500 (see table below). Conversion of
FCCBs will reduce debt by Rs11b. Of this, Rs64b has been received and Rs25b will
be received within 18 months. On a fully diluted basis, the equity will expand to 254m
shares and we are estimating net debt of Rs64b by the end of FY12.


American iron ore and coking mines likely to deliver US$140m EBITDA in
FY12
 Shipments of iron ore from Chile are likely to start from December 2010 and should
reach 1m tonnes in CY11 at expected cost of production of US$60 on FOB basis. Ore
deliveries are likely to reach 5m tonnes in three years.
 Coking coal deliveries from recently acquired mines in the US are also expected to
start from December 2010. In FY12, we expect coking coal production of ~1m tonnes.
US plate and pipe mills still a drag
 The US pipe and plate mill operations continue to suffer from lower capacity utilizations;
however, management expects the US pipe and plate mill to be profitable in FY12.


Strong volume growth; reiterate Buy
JSW Steel has demonstrated best execution skills globally by increasing capacity 7x to
11mtpa in eight years. With technical support of JFE and a strong balance sheet, growth
momentum is likely to continue due to further capacity expansion by 2mtpa at Vijaynagar,
4.5mtpa at West Bengal and coking coal and iron ore mines in the Americas. The stock
trades at 9.2x FY12E EPS and an EV of 4.7x FY12E EBITDA. We value the stock at
Rs1,771 (6.5x FY12E EV/EBITDA). We reiterate Buy.