Buy JSW Steel - PINC Result Review

Future growth drivers in place

JSW Steel's standalone revenue at Rs57.8bn grew 26% YoY as volume grew 8% YoY & blended realisation improved 16% on better product mix and higher steel prices. However, adj. EBITDA at Rs11.5bn declined 2% YoY as operating cost/tonne rose 24% YoY on higher iron ore and coking coal cost. PAT at Rs4.5bn remained flat.

JSW Steel's board has approved Greenfield project of 4.5mtpa integrated steel plant in West Bengal to be commissioned by FY14 for a capex of Rs160bn funded through D:E of 2:1.

OUTLOOK

Although steel demand in India has improved post-monsoon from construction, hike in prices (~Rs2,500/tonne in last one month) is acting as a demand dampener. Globally, a weak Dec'10 qtr guidance by Arcelor Mittal, amidst decline in prices in Europe and US, has raised some concerns on steel outlook. However, steel prices in China remain strong. For Indian producers, we expect improved profitability in Q3FY11 on better realization and decline in coking coal cost (down 7% QoQ).

VALUATIONS AND RECOMMENDATION

While brownfield expansion of 3.2mntpa by Q4FY11 gives growth visibility in near-term, we believe that JSW Bengal project puts company's future growth drivers in place. At CMP of Rs1,237 the stock is trading at 5.5x FY12 EV/EBITDA. Upgrade to 'BUY' with a TP of Rs1,373 (6x FY12E EV/EBITDA). Likely margin expansion from economies of scale, partial raw material integration and benefits of technical collaboration with JFE to provide further upside triggers.

Source : Equity Bulls

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