JSW Steel - Steady Performance; We up TP But Retain Sell - Nirmal Bang

JSW Steel's consolidated EBITDA was 15%/20% above our/street expectations, respectively, largely driven by better-than-expected realisation. Steel volume was 4% below our estimates, but steel realisation was 2% above our estimate. Standalone EBITDA/tn, at Rs8,406 (US$155), was 17% higher compared to our expectation. Consolidated PAT was 89%/90% lower compared to our/ consensus estimates, respectively, due to forex loss and loss of associate companies. The management has retained production and volume guidance of 8.5mt and 9.0mt, respectively, for FY13E. We have revised our volume estimates upward by 6%/3% for FY13E/FY14E, respectively, after strong performance in 1QFY13 and better visibility in iron ore sourcing. We have also tweaked our realisation and cost assumptions after factoring in the current trend and the above factors result in 8%/3% rise in consolidated EBITDA for FY13E/FY14E, respectively. We retain our Sell rating with a revised TP of Rs586 (up 3% from earlier TP of Rs570).

Resolution of iron ore crisis on the horizon: JSW Steel has indicated that a sizeable number of mines had their reclamation and rehabilitation (R&R) plans approved and these mines should start production in the next one-two months. Though we believe it may take three-four months to start production, JSW Steel has built in sufficient amount of inventory to take care of its needs in the interim period.

Operational performance remains strong: JSW Steel achieved 27% YoY and 4% QoQ jump in steel production due to higher utilisation. The company posted a 4% QoQ surge in realisation, which helped it to achieve a 17% QoQ jump in EBITDA/tn. Overall, the company was able to achieve 33% YoY and 1% QoQ (4QFY12 had an exceptional gain of US$36mn made by the US subsidiary) jump in consolidated EBITDA.

Performance update of subsidiary and associate companies: US operations reported EBITDA of US$6.4mn in 1QFY13 compared to US$3.6mn in 1QFY12. The Chilean subsidiary reported EBITDA of US$8.5mn compared to US$12.7mn in 1QFY12 and US$0.9mn in 4QFY12. JSW Ispat reported EBITDA of Rs4,490mn compared to Rs2,907mn in 4QFY12. In calculating the profit of associate companies, JSW Steel has not considered deferred tax credit and therefore it reported a loss of Rs1,496mn despite JSW Ispat reporting a profit of Rs4,782mn during the quarter.

Source : Equity Bulls

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