JSW Steel - Stretched Valuation; Retain Sell - Nirmal Bang

We had a meeting recently with Mr Sandep Agarwal from the Investor Relations Department of JSW Steel to know the recent developments in the company Following are the key highlights:

Iron ore supply situation: There is no material change in the status of the company's category A and B mines in terms of R&R (rehabilitation and resettlement) approval and resumption of mining activity) given at the time of 1QFY14 results conference call. The company expects 9mt of iron ore supply from NMDC, 5mt from A category mines and 1mt from B category mines. The company expects to obtain two-thirds of the iron ore from these sources and 5mt from the dump auction as well where it would be a primary customer. The company expects 2.0mt-2.5mt of iron ore supply from other states in order to achieve 80%-85% capacity utilisation at its Vijayanagar plant in Karnataka.

New iron ore supply sources not to improve capacity utilisation: The management indicated that there is positive news flow in respect of opening up of a few category B mines, but it may not result in higher capacity utilisation as the company primarily looks to replace the sourcing of iron ore from outside Karnataka with iron ore from the state itself. The company would take into consideration the demand scenario and steel prices before increasing the capacity utilisation at its plant.

Targets 3mt of export sales volume in FY14: JSW Steel is targeting 3mt export sales in FY14, accounting for 26% of its sales volume guidance. In FY13, it exported 1.9mt of steel, or 21% of the total volume. The management remains fairly confident of the company achieving this target with its existing market reach. Considering the steep rupee depreciation and a sharp rise in the gap between overseas prices and domestic prices, the management remains confident of a sizeable drop in steel imports in India. However, all this would start showing from 3QFY14 as the current quarter's steel imports are a reflection of the orders obtained in 1QFY14 and earlier quarters.

Status quo in international operations: There is no material improvement in the US plate and pipe mill operations and the management expects capacity utilisation to remain unchanged from 1QFY14. In view of the sharp volatility in iron ore prices, Chile iron ore operations would maintain its 1mt annual run-rate in the coming quarters, but there would be no increase in output or cost savings as the company is not making any investments in Chile. Apart from the problem of unavailability of operating permits at its US coking coal operations, the current coking coal prices also make it an unviable option.

Capex to moderate post FY15: The company has chalked out total capex of Rs108bn over FY14E-FY16E, out of which Rs50bn would be spent in FY14E. The capex is primarily for value addition like in cold-rolled mill complex and in raw material and logistic projects like pellet plant, sinter plant, railway siding etc.

Marginal tweaking in our earnings estimates, retain target price: We have revised our EBITDA estimates by 3%/2% for FY14E/FY15E, respectively, following the change in our rupee-US dollar estimates (3%/5% decline in FY14E/FY15E, respectively) and the recent trend in metal prices. We have retained our Sell rating on the stock, keeping the target price unchanged at Rs525 (5.0x FY15E EV/EBITDA), 29% below the current market price.

Source : Equity Bulls

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