Key takeaways from our meeting with JSW Steel (JSW) management are: (a) with restart of category A mines in Karnataka, pending auction of ~4mt iron ore inventory, and possible blending of low grade iron ore, it sees no risk to the 8.5mt FY13 production guidance (our estimate 8mt); (b) project investments in Ispat to yield high returns and help double EBITDA in two years. We retain our estimates and maintain ‘BUY’.
Sufficient iron ore to meet FY13 production guidance
As per the management, JSW has sufficient iron ore to meet its FY13 crude steel production guidance of 8.5mt (our assumption 8mt). With restart of category A mines in Karnataka (mining at first mine has commenced), the company expects a total of 17 mines to start operations till December 2012 with a total capacity of 7mt. The pending auction of ~4mt of iron ore inventory and possibility of blending low grade iron ore lends further visibility to iron ore availability. With possible restart of category B mines, JSW expects ~25mt of iron ore (including NMDC) to be available in FY14. We are keeping our FY14 production estimate unchanged at 9.7mt.
JSW Ispat: Turnaround story in two years
Ispat is currently operating at an EBITDA run rate of INR12bn p.a. However, with expected benefits of INR3bn from power plant and other projects (55MW plant to commission by January 2013), INR2bn from coke oven batteries (expected commissioning in September 2013), and INR10bn from the pelletisation plant (expected by March 2014), the EBIDTA will surge to over INR27bn. The project capex is expected to yield high RoE of ~25%.
Outlook and valuations: Retain estimates; maintain ‘BUY’
We maintain that the restart of mining in Karnataka will be a key trigger for JSW. We continue to value JSW at 5.5x and Ispat at 4.0x FY14E EV/EBITDA which yields target price of INR868. Maintain ‘BUY/Sector Outperformer’. At CMP, the stock trades at 3.1x FY14E EV/EBITDA of our pre-merger financials.
Regards,
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