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JSW Steel's 2Q12 EBITDA of Rs12.96bn (+31% yoy and -7% qoq) was 29% above our
estimates. Management has lowered FY12 volume guidance to 7.8mt vs our estimate of 6.9mt.
Operational performance remains robust despite several adversities. Maintain Buy.
Earnings analysis (standalone)
JSW Steel reported net sales of Rs76.25bn (+33% yoy and +8% qoq) and were 12% above
our estimates. Saleable steel volumes were 1.882mt (+19% yoy and +10% qoq) and 3%
above our estimates. Average realisations at $900/t (+12% yoy and -1.7% qoq) were 1%
below our estimates. Realisations were helped by a steady improvement in product mix with
semis as a proportion of total volumes dropping from 8% in 1Q12 to 4% in the current quarter.
EBITDA at US$153/t (+12% yoy and -15% qoq) was 14% above our estimates. Adjusted net
profit after tax of Rs4.85bn (+47% yoy and -16% qoq) was 64% above our estimate. Reported
earnings were significantly impacted by a Rs5.13bn adverse movement in foreign currency
rates.
Analyst meet highlights
During 2Q12 JSW Steel lost steel production volumes of 0.45mt on account of lower
availability of iron ore due to the mining ban imposed in the state of Karnataka, but for which
the EBITDA could have been higher by Rs6.75bn.
The current auction mechanism for idle stocks in the state has several issues such as: i)
volatile pricing; and ii) logistics and procedural delays. So far about 4.6mt of iron ore has been
put up for auction, of which just 74% has been sold despite the severe shortage. JSW Steel
requires about 55-58Kt of iron ore per day depending upon the quality, of which they have
been receiving 27-28Kt and have thus been operating at 50-60% of rated capacity.
Management has lowered its FY12 volume guidance by 14% to 7.8mt. We have built in
volume estimates of 6.9mt in our estimates.
Of the capex budget of Rs80bn for FY12, the company has so far spent Rs20bn and,
depending upon market conditions, the remaining sums may be deferred.
Management also stated that the promoters are likely exercise the 17.5m optionally
convertible warrants (1:1 conversion ratio) that are due for conversion to equity shares on or
before 15 December 2011. These warrants were issued at a conversion price of Rs1,210
(108% premium to CMP). We note that in case of non-excercise of these warrants, the
promoters stand to lose the entire amount of Rs5.29bn, which would be forfeited. In case of
the exercise of these warrants, JSW Steel would stand to receive Rs15.88bn.
Exports during the quarter have remained buoyant despite adverse market conditions.
Exports form about 19% of total sales and were up by 33% yoy and 6% qoq. They are
witnessing strong demand from the oil and gas sector, water pipelines sector and also for
rebars.
The company will report consolidated earnings before 15 November 2011.
Our views and outlook
We believe the current iron ore impasse has had a major impact on the local economy of the
state and thus once the environment impact assessment report is submitted to the Supreme
Court, mines that have been compliant with mining laws could be allowed to restart
operations. With the partial resumption of mining activities and continuation of the auctioning
process for the idle stocks and increased output from NMDC, the current iron ore shortage
appears to be temporary. In this backdrop, we believe current valuations are quite attractive.
In immediate short term, the current iron ore procurement costs remain high and have high
volatility due to the prevailing auction mechanism. However, there have been recent
corrections in the price of both iron ore and coking coal, which should flow through in next few
quarters, improving the outlook for JSW Steel.
However, continuing depreciation of the Indian rupee vis-à-vis the US$ could translate into
higher capitalisation for assets purchased on foreign loans and result in higher depreciation
costs in later years.
JSW Steel trades at an EV/EBITDA of 5.1x and PE of 5.9x its expected FY13 earnings.
We maintain Buy with a TP of Rs750 implying upside of 29%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel's 2Q12 EBITDA of Rs12.96bn (+31% yoy and -7% qoq) was 29% above our
estimates. Management has lowered FY12 volume guidance to 7.8mt vs our estimate of 6.9mt.
Operational performance remains robust despite several adversities. Maintain Buy.
Earnings analysis (standalone)
JSW Steel reported net sales of Rs76.25bn (+33% yoy and +8% qoq) and were 12% above
our estimates. Saleable steel volumes were 1.882mt (+19% yoy and +10% qoq) and 3%
above our estimates. Average realisations at $900/t (+12% yoy and -1.7% qoq) were 1%
below our estimates. Realisations were helped by a steady improvement in product mix with
semis as a proportion of total volumes dropping from 8% in 1Q12 to 4% in the current quarter.
EBITDA at US$153/t (+12% yoy and -15% qoq) was 14% above our estimates. Adjusted net
profit after tax of Rs4.85bn (+47% yoy and -16% qoq) was 64% above our estimate. Reported
earnings were significantly impacted by a Rs5.13bn adverse movement in foreign currency
rates.
Analyst meet highlights
During 2Q12 JSW Steel lost steel production volumes of 0.45mt on account of lower
availability of iron ore due to the mining ban imposed in the state of Karnataka, but for which
the EBITDA could have been higher by Rs6.75bn.
The current auction mechanism for idle stocks in the state has several issues such as: i)
volatile pricing; and ii) logistics and procedural delays. So far about 4.6mt of iron ore has been
put up for auction, of which just 74% has been sold despite the severe shortage. JSW Steel
requires about 55-58Kt of iron ore per day depending upon the quality, of which they have
been receiving 27-28Kt and have thus been operating at 50-60% of rated capacity.
Management has lowered its FY12 volume guidance by 14% to 7.8mt. We have built in
volume estimates of 6.9mt in our estimates.
Of the capex budget of Rs80bn for FY12, the company has so far spent Rs20bn and,
depending upon market conditions, the remaining sums may be deferred.
Management also stated that the promoters are likely exercise the 17.5m optionally
convertible warrants (1:1 conversion ratio) that are due for conversion to equity shares on or
before 15 December 2011. These warrants were issued at a conversion price of Rs1,210
(108% premium to CMP). We note that in case of non-excercise of these warrants, the
promoters stand to lose the entire amount of Rs5.29bn, which would be forfeited. In case of
the exercise of these warrants, JSW Steel would stand to receive Rs15.88bn.
Exports during the quarter have remained buoyant despite adverse market conditions.
Exports form about 19% of total sales and were up by 33% yoy and 6% qoq. They are
witnessing strong demand from the oil and gas sector, water pipelines sector and also for
rebars.
The company will report consolidated earnings before 15 November 2011.
Our views and outlook
We believe the current iron ore impasse has had a major impact on the local economy of the
state and thus once the environment impact assessment report is submitted to the Supreme
Court, mines that have been compliant with mining laws could be allowed to restart
operations. With the partial resumption of mining activities and continuation of the auctioning
process for the idle stocks and increased output from NMDC, the current iron ore shortage
appears to be temporary. In this backdrop, we believe current valuations are quite attractive.
In immediate short term, the current iron ore procurement costs remain high and have high
volatility due to the prevailing auction mechanism. However, there have been recent
corrections in the price of both iron ore and coking coal, which should flow through in next few
quarters, improving the outlook for JSW Steel.
However, continuing depreciation of the Indian rupee vis-à-vis the US$ could translate into
higher capitalisation for assets purchased on foreign loans and result in higher depreciation
costs in later years.
JSW Steel trades at an EV/EBITDA of 5.1x and PE of 5.9x its expected FY13 earnings.
We maintain Buy with a TP of Rs750 implying upside of 29%.
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