JSW Steel - Strong conversion model; Buy - Anand Rathi

Key takeaways

Weak demand reflects in earnings. JSW Steel's efficient conversion operations displayed its strength in the wake of weak steel consumption in 4QFY13. Despite the challenging situation of procuring iron ore due to the Karnataka mining ban, the company managed with 2.7% yoy sales volume growth to 2.2m tons. However, weak demand and an inferior product mix led to revenue declining 5% yoy. EBITDA per ton declined to Rs. 6,954, but sequential improvement is playing out as per our expectations, owing to lower input prices. Increase in financial expenses and depreciation led to standalone PAT declining to Rs. 5.7bn. Consolidated earnings were hit by muted subsidiary operations and losses at JSW Ispat (an associate).

Utilization levels depend on mining. We are confident of the company delivering on its full-year guidance (9.25m tons production) and improving utilization rates as the strangulated supply in Karnataka eases progressively. Resumption of production from Category B mines (mines with minor irregularities) in Karnataka, will provide the next strong stock price catalyst. Utilization levels could improve from the current 70%, offering operating leverage.

Our take. With prices of raw materials declining globally, terms of trade are shifting from miners to metal converters. This implies an improving outlook for companies like JSW Steel lacking captive access to inputs. However, a combination of declining coking coal prices and improving domestic iron-ore supplies more than offsets the adverse impact of weakening steel prices.

At the CMP of Rs. 720, the stock trades at EV/EBIDTA of 5.7x, discounting its FY14e figures. We maintain Buy, with a price target of Rs. 819 based on EV/EBITDA. Risks. Lower utilization rates and raw material cost escalation.

Source : Equity Bulls

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