JSW Steel - Q1FY13 Result Update - Centrum

Robust operational performance; upgrade to buy

JSW steel (JSTL) reported strong operational performance in Q1FY13 despite iron ore procurement challenges with ~33% YoY jump in consolidated revenues to Rs99bn on account of robust sales volume of 2.1MT and higher than expected realization increase of ~4% QoQ. Cons. EBITDA stood at Rs19bn (margin of ~19.3%) and standalone EBITDA/tonne stood at ~Rs8350/tonne, up by 19% QoQ. Better product mix and sales across different geographies led to operational outperformance. JSTL has indicated an increase in iron ore availability going ahead and maintained its volume guidance for FY13E. We see concerns related to the company receding on raw material costs and iron ore procurement but remain concerned on possible drop in domestic realizations ahead. We revise our volume and EBITDA estimate upwards for FY13/14E. We upgrade our rating to Buy from Neutral and assign a target of Rs805 (Rs735 earlier) to the stock.

- Realizations improve sequentially: Sales volumes stood at 2.1MT, up 23% YoY, supported by better product mix and flexibility of selling in different geographies. Realizations surprised positively and improved 3.9% QoQ on account of better product mix and competitive edge over other producers. JSTL maintained its volume guidance for FY13E on the back of expected improvement in iron ore availability in Karnataka.

- EBITDA margin improvement QoQ more than expected: Higher realizations, robust volumes and lower raw material costs led to 250bps QoQ improvement in standalone EBITDA margin, which was higher than our expectations. Forex loss stood at ~Rs5.9bn on account of sharp rupee depreciation during the quarter. We expect margin pressure ahead with sequential drop in realizations but believe that JSW would be able to maintain its strong operational performance going ahead in FY13-14E.

- Analysts' meet highlights and earnings revision: JSW maintained its production guidance for FY13E at 8.5 MT as iron ore supply situation is set to improve in Karnataka with the restart of mining from Category-A mines progressively from Aug'12. JSW is still to receive 3.2 MT of iron ore bought in auctions and is also hopeful of getting ~60% of ore which would get incrementally auctioned. The company's phase 2 beneficiation and HSM plant expansions are expected to be commissioned during H2FY13E which will lead to further value addition and cost savings. JSW Ispat's operational performance is expected to improve further going ahead due to various cost saving measures. US plate & pipe mill is expected to remain stable and Chile iron ore operations are expected to deliver volumes in excess of 1 MT in FY13E. We revise our volume estimates for FY13E/14E upwards to 8.3MT/8.8MT and revise our EBITDA estimates upwards by 8.3%/3.6% for FY13E/14E. We revise our PAT estimates lower to account for higher interest and depreciation costs.

- Valuation: We continue to like the operations of the company with improving iron ore availability expected to pave the way for higher volumes and profitability. We continue to value the company at 5x FY14E EV/EBITDA arriving at a target price of Rs805. We upgrade the stock to Buy from Neutral.

Source : Equity Bulls

Keywords