Accumulate JSW Steel - Dismal volumes drag down profits - Elara Capital

• JSW Steel
• Rating : Accumulate
• Target Price : INR1,230
• Upside : 6%
• CMP : INR1,161 (as on 27 July 2010)

Dismal volumes drag down profits

Results lower than expectations

JSW Steel reported a revenues growth of 18.3% YoY but a decline of 10.8% QoQ on the back of lower volume sales despite strong realizations. The volume sales during the quarter declined 21.5% sequentially to ~1.2mn tonnes as compared to 1.5mn tonnes in Q4FY10. Although, realizations during the quarter increased ~14% QoQ, the EBITDA declined 25.6% due to lower volume sales and higher cost per tonne. The adjusted PAT for the quarter declined 43.6% QoQ to INR 3,503mn as a result of lower EBITDA and higher depreciation.

Highlights of the quarter

- Volume sales stood at 1.2mn tonnnes as compared to 1.5mn tonnes in Q4FY10 and 1.3mn tonnes in Q1FY10.

- Realizations for Q1FY11 stood at INR 38,692/tonne as compared to INR 34,016 in Q4FY10 and INR 29,477 in Q1FY10.

- EBITDA/tonne for the quarter stood at INR 8,081 in Q1FY11 as compared to INR 8,512 in Q4FY10 and INR 5,479 in Q1FY10.

Preferential allotment to JFE

JSW has entered into an agreement with JFE (Japan) to issue 14.99% shares as preferential allotment to JFE. Both the companies have also entered into technology sharing agreement.

The JFE deal is likely to result in cash inflow to the tune of ~INR 57bn over a period of next 18 months. The management of JSW indicated that the company will focus on deleveraging its balance sheet rather than focusing on the additional capex for its West Bengal project. We expect the consolidated net debt:equity ratio of the company to come down from 1.5x in FY10 to 0.5x in FY12E. We expect the company to repay ~INR 65bn in FY12E as a result of higher FCFs and capital infusion by JFE.

Valuations & recommendation

Although, the volume off take has slowed down, we believe, JSW will end up reporting a strong volume growth in FY11 & FY12 on the back of capacity additions. We estimate EBITDA CAGR of 26% from FY10 to FY12E. Although the JFE deal is likely to bring in cash and relax the financial leverage, we believe, the cash inflow is still some time away (18 months away). We factor in the cash inflow from JFE in FY12 and have assumed a debt repayment of INR 65bn in FY12. We maintain our Accumulate rating on the stock with a changed target price of INR1,230 (6x FY12E EV/EBITDA)

Source : Equity Bulls

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