JSW Steel - CEC recommendations - a ray of light; Maintain 'ACCUMULATE' - TP Rs865 - PINC Research

Q3FY12 Result Review - JSW Steel

CEC recommendations - a ray of light; Maintain 'ACCUMULATE'

JSW Steel's Q3FY12 consol. revenue at Rs84.2bn increased 40% YoY on higher standalone volumes (up 20% YoY) and realisations (up 14% YoY). Although operating profit at Rs13.2bn grew 29% YoY, OPM contracted by 143bps to 15.6% on higher raw material cost. Adjusted PAT declined 39% YoY to Rs1.8bn due to higher interest and depreciation expenses and Rs924mn share in losses in associate JSW Ispat. Reported net loss of Rs479mn was impacted by Rs5.0bn of forex losses (on revenue account) and Rs547mn of exceptional items in associate JSW Ispat, and partially offset by a prior period tax credit of Rs1.8bn.

Standalone performance: EBITDA/t at USD127 declined 6% YoY and 15% QoQ on higher cost, mainly iron ore and coking coal, despite record sales volume of 1.91mnt, which is up 20% YoY on higher crude output.

Subsidiary performance: Subsidiary EBITDA (Consol. - Standalone) at Rs648mn, though grew ~4x YoY, declined by 34% QoQ. Iron ore shipments from JSW's Chile mines at 148kt were flat QoQ, but EBITDA/t of USD19 declined 60% QoQ on lower realisation (declined 22% QoQ to USD136/t). Sales volume at JSW's US ops grew 128% YoY to 84kt and EBITDA at USD3.6mn grew 115% YoY, even though EBITDA/t declined 6% YoY to USD43 despite 19% improvement in blended realisation.

JSW Ispat: Sales volume rose 146% YoY to 0.69mnt on higher HRC output (up 126% YoY) and inventory liquidation. EBITDA at Rs2.5bn improved vs. loss of Rs1.6bn in Q3FY11, as EBITDA/t improved to Rs3,616. However, it reported losses of Rs3.1bn at the PAT level on high interest, depreciation charges & forex translation loss of Rs1.1bn. As a part of restructuring, JSW Ispat received open access for using 220MW of power from JSW Energy @Rs4.5/unit incl. T&D losses. Further, JSW announced plans to set 1mntpa coke oven, 4mntpa pellet plant and 0.8mntpa CRM at JSW Ispat's Dolvi works via JSW's 100% subs. Amba River Coke at a capex of Rs21.4bn, expected in FY14. JSW Ispat has net debt of Rs68.7bn.

JSW Steel has adj. net debt of Rs199bn with net D/E of 1.3x vs. 1.1x in FY11.

VALUATIONS AND RECOMMENDATION

JSW Steel's stock has appreciated by 15% since 5th Feb'12 after CEC cleared 45 iron ore mines in Karnataka from illegal mining and 72 mines with minor offense post penalty payment, raising hopes that Supreme Court (SC) would soon allow these mines to resume operations, thereby improving iron ore supply situation in Karnataka. We have already been factoring these views in our estimates, maintaining that iron ore supply is unlikely to be a concern for JSW, although higher cost is likely to keep margins low. Nevertheless, we increase our target FY13E EV/EBITDA multiple for JSW Steel to 5.3x (from 4.8x earlier) to factor in increased clarity on iron ore supply. We find the stock attractive at CMP of Rs817, 5.1x FY13E EV/EBITDA and maintain ACCUMULATE on the stock with a revised target price of Rs865 (Rs725 earlier).

Source : Equity Bulls

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