Please Share::
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel
Reuters: JSTL.BO Bloomberg: JSTL IN Exchange: BSE Ticker: JSTL
Strong results; cost saving
remains a key focus area
1Q'FY12 operating results 19% ahead of estimates; maintain Buy
JSW Steel’s (JSTL) reported a strong operating performance in 1Q'FY12 with
consolidated EBITDA of INR 14.28bn (+43% YoY, +19% vs DBe). The variance is
attributed primarily to a sequential increase in blended steel realizations (+3%
QoQ, +3% vs DBe) as against our expectation of flat realizations. JSTL also
recorded a marked (44% YoY) increase in saleable steel volumes. EBITDA/t stood
at US$180/t (DBe US$160/t), which is quite commendable given the current
constraints on iron ore availability and coking coal cost escalation.
Delivery on cost saving initiatives to boost investor confidence
We are very enthused by the steady progress on JSW Steel’s defined cost saving
initiatives. JSTL has increased use of low grade iron ore in its mix (up to 55% Fe).
The substitution of high cost lumps with sinter (80% in the mix) is likely to improve
productivity and reduce fuel rate by 20-30kg/t. The coal injection rate also
improved to 160kg/t and JSTL targets to increase it to 180kg/t by FY12 end. The
commissioning of new coke oven batteries has also ended company’s
dependency on external supplies of coke.
Encouraging progress on raw material integration
There is encouraging performance on the raw material integration front with sale
of 0.19mt of iron ore concentrate from the Chilean iron ore mines. This
considerably improves the visibility on JSTL’s target of 1mt of iron ore concentrate
sales in FY12 (DBe 0.8mt). JSW Steel also secured its third permit for
commencement of mining in its US coking coal mines. Sale of 9000 net tons of
coking coal during the quarter is an encouraging sign and the first coking coal
shipment from US is likely to be delivered in 3Q’FY12.
TP of INR1,120/share based on SOTP methodology; risks
We use sum-of-the-parts (SOTP) methodology to value JSW Steel - JSW Steel SA
at 7x FY12 EV/EBITDA, Ispat Industries at a 6.3x FY12 EV/EBITDA, Chilean iron ore
assets at 5x FY12 EV/EBTIDA. Risks: delay in volume ramp up; raw material cost
escalation; iron ore supply constraints sustaining in Karnataka
Strong performance on higher
realizations
Consolidated EBITDA 19% above DBe
JSW Steel’s reported a strong operating performance in 1Q’FY12 with consolidated EBITDA
of INR 14.28bn (+43% YoY), which was significantly (+19%) ahead of our and street
estimates. The variance is attributed primarily to a surprise sequential increase in blended
steel realizations (+3% QoQ, +3% vs DBe) as against our expectation of flat realizations.
JSW Steel also recorded a 44% YoY increase in saleable steel volumes due to the low base
effect (volumes in 1Q’FY11 were impacted due to a sharp increase in Chinese imports) and
sale of material purchased from Ispat Industries (0.16mn tonnes).
The performance of JSW Steel’s US operations remained weak during the quarter with low
capacity utilization rates but the operations managed to remain EBITDA positive. The results
for Ispat Industries are yet to be announced and hence not been incorporated in JSW Steel’s
consolidated numbers.
Volume growth continues to be the key earnings driver for JSW Steel and the management
remains confident of delivering a volume growth CAGR of ~25% over FY11-13.
EBITDA/t of US$180 despite raw material cost escalation
JSW Steel India was able to sustain its EBITDA/tonne in 1Q’FY12 at US$180/t (DBe
US$160/t), a level similar to 1Q’FY11, which is quite commendable given the current
constraints on iron ore availability within Karnataka (where JSW Steel’s steel plant is located)
and coking coal cost escalation . We have factored in an EBITDA/t of US$157/t in our FY12
forecast.
Steady progress on cost saving initiatives
We are very enthused by the steady progress on JSTL’s defined cost saving initiatives during
the quarter. With the recent commissioning of Phase-I of beneficiation plant 2 (10mtpa), JSW
Steel has increased use of low grade iron ore in its mix (up to 55% Fe). The substitution of
lumps with sinter and pellets has allowed the company to not only reduce its dependence on
high cost lumps, but also improve the productivity and fuel efficiency of the blast furnace. In
fact, the company now uses more than 80% sinter in its blast furnace feed. We expect these
initiatives to bring down the fuel rate by 20-30kg/t.
With the coking coal prices sustaining at record levels, the company has been focusing on
improving the coke rate at its Indian operations. There has been a favorable change in the
coal mix with JSW Steel increasing the coal injection rate to 160kg/t during 1Q’FY12 and
JSTL targets to increase it to 180kg/t by FY12 end. The commissioning of new coke oven
batteries has also ended company’s dependency on external supplies of coke. JSW Steel is
also working on a coal briquetting project which will help bring down the requirements for
imported corex coal and lead to further cost savings.
Commencement of iron ore shipment and coking coal sale
improve visibility on raw material integration
There is encouraging performance on the raw material integration front with sale of 0.19mn
tonnes of iron ore concentrate from the Chilean iron ore mines. The iron ore sales contributed
an EBITDA of US$11.53mn, implying EBITDA/t of US$59 at the iron ore operations. This
considerably improves the visibility in management achieving its target of 1mn tonnes of iron
ore concentrate sales in FY12. We have been conservative and have built in concentrate sales
of 0.8mn tonnes for the full year.
JSW Steel also secured another DEP (Department of Environmental Protection) permit for
commencement of mining in its US coking coal mines, taking the total number of permits to
three. Though there has been a one quarter delay in receiving the first coking coal shipment
from its US mines (due to delay by the mine contractor), sale of 9000 net tons of coking coal
during the quarter is a positive development. We now factor in 350kt of coking coal
shipments from the US coking coal mines in FY12. JSW Steel plans to ramp this up to 3mn
tonnes over the next 3 years.
Valuation and risks
After the acquisition of Ispat Industries, we use SOTP methodology to value JSW Steel. We
value JSW Steel standalone operations at 7x FY12 EV/EBITDA (at a slight discount to the
average over the last 3 years), Ispat Industries at a 6.3x FY12 EV/EBITDA (at a ~10% discount
to JSW Steel’s target valuation), Chilean iron ore assets at 5x FY12 EV/EBTIDA. At our TP,
JSW Steel will be trading at 11.6x FY12 EPS, which is in line with the average PER(x) over the
last three years.
Risks
Mine shutdowns and iron ore supply constrains sustaining in Karnataka
The ongoing survey of iron ore mines in Bellary Hospet by the Supreme Court appointed
Central Empowered Committee (CEC) and the consequent shutdown of iron ore mine is
leading to increased constraints in supplying iron ore to steel makers in Karnataka. JSW Steel
has an inventory of 0.4mn tonnes(~10 days of iron ore consumption) as of Jun’11 end. In
case the iron ore supply situation does not improve and supplies are curtailed further, there is
a risk of partial shutdown of facilities, which will adversely impact the volume growth
forecast and hence earnings.
Delay in integration and refinancing of outstanding debt of Ispat industries
JSW is in the process of re-financing the entire outstanding debt of Ispat Industries over the
next 4 months. Successful negotiation with lenders in order to bring down Ispat's interest
cost and a moratorium of debt repayment hold key for the success of the transaction, in our
view.
Delay in ongoing expansion, stabilization of commissioned capacity
With volume growth being the dominant theme in our positive investment case for JSW
Steel, any delay in the company’s ongoing expansion programme will be a strong negative,
both for earnings and sentiment.
Higher-than-anticipated increase in steel making raw material prices
In case raw material price hikes are higher than our assumptions, there could be a risk to our
target price being achieved.
Overhang of an inflation-wary government of India
In case, an inflation-wary government of India begins frowning on the domestic steel price
hikes to pass on the rising cost of raw material procurement, sentiment for all steel stocks,
including JSW Steel may be impacted negatively
No comments:
Post a Comment