Subdued performance… • JSW Steel’s Q3FY15 :: ICICI Securities, report

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Subdued performance… • JSW Steel’s Q3FY15 numbers were below our estimates. The subdued performance for the quarter was driven by weak realisations that resulted in subdued EBITDA/tonne (| 6988/tonne vs. our estimate of | 8235/tonne). Sales volume at 3.03 million tonnes (MT) was also lower than our expectation of 3.10 MT • The company reported a net operating income of | 13223.0 crore for the quarter, down 2.9% YoY and 4.8% QoQ and below our estimate of | 13734.6 crore • The EBITDA came in at | 2295.7 crore (EBITDA margin of 17.4%) below our estimate of | 2564.3 crore • The consequent PAT came in at | 328.9 crore (our estimate: | 654.0 crore) Sales volumes outweighs subdued domestic demand The steel sector is facing headwinds in the form of a muted demand scenario both domestically as well as globally. Domestic steel demand has been stagnant with mere 0.6% consumption growth in FY14 and 1.3% in the first eight months of FY15. In the current challenging times, JSW Steel was able to report sales volume growth of 4% in FY14 (adjusting for merger with JSW Ispat) indicating an increase in its domestic market share (11.9 MT in FY14 vis-à-vis 11.4 MT in FY13). In the first nine months of FY15, JSW Steel reported a sales volume of 8.97 MT, up 2.4% YoY. Healthy EBITDA/tonne on product mix, cost optimisation JSW Steel Vijayanagar’s steel unit is one of the low cost convertors globally. The company does not have access to any captive operational iron ore and coking coal mine in India. However, despite its dependency on external sources for its key raw materials, JSW Steel was able to report healthy EBITDA/tonne due to economies of scale, cost optimisation and healthy realisations (due to superior product mix). The company also has a notable presence in the value-added products category, thereby having a large and diversified customer base with enhanced profitability. On a sustainable basis, JSW Steel clocks an EBITDA/tonne of ~| 7000- 7500/tonne, notably higher than its peers like SAIL, which clocked an EBITDA/tonne of ~| 4000 only despite having access to captive iron ore. Elevated debt levels remain area of concern Post the merger with Ispat Industries, the debt level of JSW Steel has increased significantly. On a consolidated basis, the net gearing stood at 1.7x at the end of Q3FY15 while net debt to EBITDA, on a consolidated basis, stood at 3.86x. EBITTDA/tonne misses estimates on weak realisations JSW Steel reported a subdued performance for Q3FY15 wherein sales volume and EBITDA/tonne came in below our estimates. On account of muted realisations, the EBITDA/tonne for the quarter stood at | 6988/tonne lower than our estimate of | 8235/tonne while sales volume stood at 3.03 MT vs. our estimate of 3.10 MT. Going forward, we have downward revised our FY16E EBITDA/tonne estimates from | 8578/tonne to | 7150/tonne and introduced FY17E EBITDA/tonne at | 7500/tonne. We value the stock at 6x FY17E EV/EBITDA and arrive at a target price of | 1025. We have assigned a HOLD recommendation to the stock.

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http://content.icicidirect.com/mailimages/IDirect_JSWSteel_Q3FY15.pdf