Spreads under stress JSW Steel: HDFC Securities

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Spreads under stress JSW Steel’s (JSTL) reported standalone EBITDA declined to Rs 6,344/t (5.9% YoY, ~21% QoQ) driven by lower realizations (down 2.3% YoY, 3.6 % QoQ) and higher other expenses per tonne (20.3% YoY, +14.2% QoQ). Higher other expenditure was driven by higher hedging costs for imported iron ore (incremental ~Rs 2.0bn for 3QFY15) and job work cost (Rs 600mn), which led to the underperformance (vs. estimated). RM costs remained flattish as benefits of lower coal prices were offset by higher iron ore prices (imports now at 30% in the mix). We remain constructive on JSW Steel given its operational cost leadership, strong capacity additions slate at a low cost and peaking out of raw material concerns. While steel to raw materials spreads may still play spoilsport led by the steel price decline, continued improvement in product mix and increasing backward integration will help JSTL avoid some of the margin erosion. Maintain BUY with a revised TP of Rs 1,356 (5.5x FY17 EV/EBITDA).  3QFY15 updates: Interest costs were higher due to prepayment premium (~Rs 300mn) on refinanced loans of US$500mn and higher working capital (finished goods and RM inventory). Hence, reported PAT was lower than estimated at Rs 5.2bn (-20.8% YoY, -45.7% QoQ). Consolidated results were impacted by losses in Chile (iron ore weakness) and the US pipe and plate mill (continued low utilizations). 3QFY15 end net debt was higher by ~Rs 35bn QoQ (Rs 395.6bn) due to higher working capital.  Outlook and view: Given higher debt, JSTL indicated that it will moderate its FY15 capex (Previous guidance Rs 75bn, 9M: Rs 45bn). However, Dolvi capacity addition remains firmly on track (mid-FY16). While declining steel-RM spreads remain a concern, JSTL will be able to neutralize the impact partly through higher value addition and import substitution. Improvement in domestic iron ore availability should provide a big impetus. Further, mgmt. has indicated lowering of exports in the mix as global environment is challenging. We have cut our realization estimates by 2.4/3.9% and EBITDA estimates by 3.9/5.5% for FY16/17.

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 http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3011076