JSW Steel - Overcoming challenges smartly, upgrade to buy - Centrum

JSW Steel (JSTL) reported robust operational performance yet again despite iron ore procurement challenges with 16.5% YoY jump in consolidated revenues to Rs94.7bn on account of robust sales volume of 2.2MT (higher than our expectation of 2.1 MT). Cons. EBITDA stood at Rs15.3bn (margin of ~16.2% vs our expectation of 15.5%) and standalone EBITDA/tonne stood at ~Rs6850/tonne. Better product mix and flexible sales mix in different geographies led to operational outperformance yet again in difficult times. JSTL has indicated an increase in iron ore availability going ahead, reduction in costs of coking coal and maintained its volume guidance for FY13E. We see concerns related to the company receding on raw material costs but remain concerned on further drop in realizations ahead and lower margin profile of the merged entity post its merger announcement with JSW-Ispat. We revise our volume and EBITDA estimate upwards for FY13/14E. We upgrade our rating to Buy from Neutral and assign a target of Rs815 to the stock.

- Volumes improve and cover up for drop in realizations: Sales volumes stood at 2.2MT, up 15% YoY, supported by better product mix and flexibility of selling in different geographies with exports at ~24% of overall sales. Realizations were down ~5% QoQ on account of a drop in global steel prices. JSTL maintained its volume guidance for FY13E on the back of expected improvement in iron ore availability.

- EBITDA margin more than expected: Robust volumes and lower raw material costs (particularly in coking coal) led to standalone EBITDA margin of 16.8% (above our expectation of 16.4%). 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 with lower raw material costs and better stability in prices from Q4FY13E onwards.

- Concall 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 and possible restarting of category-B mines soon. JSW is still to receive ~1.8 MT of bought iron ore in auctions and is also hopeful of using low grade ore available incrementally. The company's phase 2 Beneficiation and HSM plant expansions have been commissioned which would lead to further value addition and cost savings. JSW Ispat's operational performance is under pressure due to cost squeeze but 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 of ~1 MT in FY13E. Capex guidance for FY13E was maintained at Rs60bn. We revise our volume estimates for FY13E/14E upwards to 8.4/8.8 MT on better iron ore sourcing visibility. We revise our EBITDA estimates for FY13E/14E upwards by 0.5/3.1%.

- Valuations: We like the operations of the company with improving iron ore availability expected to pave the way for higher volumes and profitability but remain concerned on the stress on balance sheet and lower margin profile post merger with JSW-Ispat. We value the merged entity at 5.5x FY14E EV/EBITDA arriving at a target price of Rs815. We upgrade the stock to Buy from Neutral.

Source : Equity Bulls

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