JSW Steel - Q4FY12 Result update - Centrum

Operational performance remains strong despite challenges

JSW steel (JSTL) reported robust performance in Q4FY12 despite iron ore procurement challenges with 35% YoY jump in standalone revenues to Rs95.1bn on account of sales volume of 2.31MT (higher than our expectation of ~2.1 MT). EBITDA stood at Rs16.2bn (margin of ~17%, in line with our estimate) and PAT was supported by forex gain of ~Rs2bn. JSTL has indicated restarting of mining from A-category from June and guided towards 9 MT of sales volume in FY13E. We see concerns related to the company receding as domestic demand has started picking up, raw material costs are down especially on coking coal and iron ore availability is expected to improve in Karnataka. We revise our volume and earnings estimate upwards for FY13E. We upgrade our rating to Buy from Hold and assign a target of Rs735 to the stock.

- Strong sales volumes despite challenges: Sales volumes stood at 2.31MT, up ~33% YoY on account of i) higher long product sales (up 70% YoY), ii) inventory reduction of ~1.5 lakh tonne and iii) marketing activities with retail sales through JSW Shoppe. JSTL achieved 7.8 MT of sales in FY12E, in line with its revised guidance and guided towards 9 MT of sales in FY13E on the back of expected improvement in iron ore availability. Realizations remained flat sequentially as product mix was tilted towards exports and flats.

- EBITDA margin improves QoQ as expected: Stable realizations, improved volumes and lower raw material costs (particularly in coking coal) led to 130bps QoQ improvement in EBITDA margin. Forex gain stood at ~Rs2bn on rupee appreciation as compared to the previous quarter and this might reverse again during the next quarter. We expect margin to sustain at current levels with drop in raw material prices and sequential improvement in realizations.

- Analysts' meet highlights and earnings revision: Overseas subsidiaries did well overall with US plate and pipe mill seeing an increase in capacity utilization and higher profits due to one time insurance claim receipt. Iron ore availability is expected to improve from Q2FY13 as A category mines would restart production and sales volume guidance from JSTL stood at 9 MT for FY13E. Capex guidance for FY13E was Rs6.3bn and all projects remain on schedule for completion before FY14E end. We revise our volume estimates for FY13E upwards to 8.1 MT as we believe that H2FY13E would benefit from improved iron ore availability in Karnataka. We revise our FY14E volume estimates to 8.8 MT.

- Valuations: We continue to like the operations of the company with iron ore procurement remaining the only major hurdle to achieving higher volumes and profitability. We see the iron ore availability improving from Q2FY13E onwards as mines start coming on-stream post R&R plans and other approvals. We continue to value the company at 5x FY14E EV/EBITDA arriving at a target price of Rs735. We see positive triggers ahead for the stock from restart of clean A-category iron ore mines in Karnataka and higher domestic steel demand.

Source : Equity Bulls

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