Buy JSW Steel - Motilal Oswal

JSW Steel (JSTL IN, Mkt Cap US$5.4b, CMP Rs965, Buy)

Net Sales increased 26% YoY to 58.1b (flat QoQ) on higher volumes and higher realization. EBITDA declined 11% YoY to Rs10b (+1% QoQ) due to higher raw material prices. EBITDA / ton declined 14% YoY to US$140/ton (up 3% QoQ due to rupee gains)

Consolidated PAT of Rs2.9b was affected due to subsidiaries’ PAT loss of Rs906m on account of lower utilization and higher interest costs.

JSW has announced plan to set up 2.3mtpa new Cold Rolling Mill (CRM) complex at capex of Rs40b, to increase the share of value added products. The investment is proposed to be funded with 2:1 debt-equity in two phases. Phase I includes 1.4mtpa CRCA unit at capex of Rs30b and is expected to get commissioned by 1QFY14. Consolidated gross debt at end of Dec-2010 was Rs143b, while cash and equivalents were at Rs21.4b. It had invested Rs5b out of total equity deal of Rs21.6b for Ispat by end-3QFY11. The balance amount has been paid in January 2011.

We remain positive on the stock due to strong volume growth and expected start of raw materials production in US and Chile. Margins are expected to expand in 4QFY11 due to recovery in steel prices, We have cut FY11 EPS by 6.2% to Rs65.8 to factor below estimate 3QFY11 performance. FY12 EPS however remain unchanged. The stock trades at FY12E P/E of 8.7x and EV/EBITDA of 5.4x. Maintain Buy.

Source : Equity Bulls

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