1. 1QFY2011 Result Update | Steel
July 28, 2010
JSW Steel BUY
CMP Rs1,155
Performance Highlights Target Price Rs1,344
Investment Period 12 months
(Rs cr) 1QFY11(S) 1QFY10(S) chg (%) 1QFY11(C) 1QFY10(C) chg(%)
Net revenue 4,608 3,894 18.3 4,779 3,990 19.8
EBITDA 1,089 747 45.9 1,134 688 64.7 Stock Info
EBITDA Sector Steel
23.6 19.2 447bp 23.7 17.3 646bp
margin (%) Market Cap (Rs cr) 21,710
Rep. PAT 350 340 3.0 295 234 26.2 Beta 1.8
Source: Company, Angel Research 52 Week High / Low 1,350/639
JSW Steel reported consolidated net revenue of Rs4,779cr in 1QFY2011, below Avg. Daily Volume 508748
our estimates of Rs5,817cr. Net profit at Rs295cr was also below our estimates of Face Value (Rs) 10
Rs565cr. The deviation was mainly due to lower sales volume. BSE Sensex 17,957
1QFY2011 hit by lower sales volume: Net revenue grew by 19.8% yoy to Nifty 5,398
Rs4,779cr, down 12.2% qoq, mainly due to lower sales volume. Sales volume fell Reuters Code JSTL.BO
by 9.8% yoy and 21.6% qoq due to cheaper imports mainly from China. Bloomberg Code JSTL@IN
However, JSW Steel gained from favourable steel prices. Despite increasing staff
cost and adjusted other expenses, EBITDA margin increased by 646bp yoy to
Shareholding Pattern (%)
23.7% due to higher realisations, as reflected in EBITDA growth of 64.7% yoy and
Promoters 45.0
net profit growth of 26.2% yoy.
MF / Banks / Indian Fls 5.8
Deal with JFE: The strategic alliance between JFE Steel and JSW Steel has finally FII / NRIs / OCBs 31.9
concluded. JFE Steel will make an initial investment of Rs4,800cr in JSW Steel. The Indian Public / Others 17.4
deal has been innovatively structured with options available to JFE Steel to
maintain or increase its stake in the event of future equity dilution.
Outlook and valuations: We believe JSW Steel is well placed to capitalise on Abs. (%) 3m 1yr 3yr
strong domestic demand on the back of its expanded capacity, improving product Sensex 3.3 12.8 17.9
mix, commissioning of beneficiation plant to lower iron ore cost and recovery in JSW Steel (1.9) 63.0 59.5
its US operations. At the CMP, the stock is trading at 7.1x FY2011E and 5.6x
FY2012E EV/EBITDA. We maintain our Buy recommendation on the stock with a
revised Target Price of Rs1,344 (earlier Rs1,360), valuing the stock at 6.5x
FY2012E EV/EBITDA.
Key financials (Consolidated)
Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E
Net sales 15,886 18,897 24,174 29,363
% chg 28.7 19.0 27.9 21.5
Adj. net profit 804 1,321 1,980 2,573
% chg 5.1 7.0 8.2 8.8
FDEPS (Rs) 38.2 63.8 76.2 99.4
EBITDA margin (%) 18.8 21.5 23.3 23.5
P/E (x) 30.3 18.1 15.2 11.6 Paresh Jain
P/BV (x) 2.9 2.4 1.5 1.3 Tel: 022-40403800 Ext: 348
RoE (%) 10.7 16.1 13.9 12.4 pareshn.jain@angeltrade.com
RoCE (%) 8.6 10.7 12.5 12.6
Pooja Jain
EV/Sales (x) 2.4 2.0 1.7 1.3
Tel: 022-40403800 Ext: 311
EV/EBITDA (x) 12.6 9.2 7.1 5.6 pooja.j@angeltrade.com
Source: Company, Angel Research
Please refer to important disclosures at the end of this report 1
2. JSW Steel | 1QFY2011 Result Update
Exhibit 1: 1QFY2011 performance (Consolidated)
Y/E March (Rs cr) 1QFY11 1QFY10 yoy% FY10 FY09 yoy%
Net sales 4,779 3,990 19.8 18,897 15,886 19.0
Raw material 2,681 2,523 6.2 11,231 9,619 16.8
% of net sales 56.1 63.2 59.4 60.6
Power & fuel 276 239 15.2 1,048 804 30.3
% of net sales 5.8 6.0 5.5 5.1
Staff cost 168 115 46.8 480 519 (7.5)
% of net sales 3.5 2.9 2.5 3.3
Other expenditure 600 448 33.9 2,128 2,011 5.8
% of net sales 12.6 11.2 11.3 12.7
Total expenditure 3,725 3,325 12.0 14,887 12,953 14.9
% of net sales 77.9 83.3 78.8 81.5
Operating profit 1,055 665 58.7 4,010 2,933 36.7
Other operating income 79 24 233.5 60 49 23.9
EBITDA 1,134 688 64.7 4,071 2,982 36.5
Margin (%) 23.7 17.3 21.5 18.8
Interest 273 298 (8.5) 1,108 1,156 (4.1)
Depreciation 361 317 14.1 1,299 988 31.5
Other income 3 4 (16.2) 128 272 (52.8)
Exceptional items (55) 236 408 (795)
Profit before tax 447 313 42.9 2,200 315 597.7
% of net sales 9.4 7.8 11.6 2.0
Current tax 159 97 63.6 647 73 790.8
% of PBT 35.5 31.0 29.4 23.0
Net income 295 234 26.2 1,598 275 481.1
Source: Company, Angel Research
Exhibit 2: 1QFY2011 - Actual vs. Angel estimates
(Rs cr) Actual Estimate Variation (%)
Net sales 4,779 5,817 (17.8)
EBITDA 1,134 1,325 (14.5)
EBITDA margin (%) 23.7 22.8 93bps
PBT 447 744 (39.9)
PAT 295 565 (47.7)
Source: Company, Angel Research
July 28, 2010 2
3. JSW Steel | 1QFY2011 Result Update
Partnership with JFE
Following extensive deliberations after a partnership agreement signed on
November 19, 2009, the strategic alliance between JFE Steel and JSW Steel has
finally concluded, and JFE Steel will make an initial investment of Rs4,800cr in JSW
Steel.
Exhibit 3: Relevance of the deal for both the companies
JSW Steel JFE Steel
Proceeds to deleverage balance sheet Presence in a fast-growing market like
India
Access to technology for automotive steel Strategic production base in India for
existing automobile customers
Substrate from JFE Steel Capitalise on future growth through equity
participation
Source: Angel Research
Innovative deal structure
The deal has been innovatively structured with options available to JFE Steel to
maintain its stake in the event of future equity (warrants and FCCBs) dilution.
However, the issue is subject to the following conditions:
Instrument determination criteria
Scenario 1: Share price is greater than or equal to Rs1,365
Tranche 1: If JSW Steel’s average share price is greater than or equal to Rs1,365
for two consecutive weeks/10days, or if the stock closes at or above Rs1,365 for
five consecutive days (from July 27–August 31, 2010), then JFE Steel will be issued
32mn equity shares at a price of Rs1,500/share.
Tranche 2: Going forward, if warrants get converted, JFE Steel has an option to
bring in minimum additional amount of Rs600cr to maintain its existing stake or
increase it to 14.99%. In which case, additional 4mn equity shares would be issued
to JFE Steel at a price of Rs1,500/share or 10% premium to SEBI’s floor price,
whichever is higher.
Tranche 3: Further, if the outstanding FCCBs are converted, then JFE Steel can
maintain its existing stake or increase it by bringing in a minimum additional
amount of Rs300cr. In which case, additional 2mn equity shares would be issued
to JFE Steel at a price of Rs1,500/share or 10% premium to SEBI’s floor price,
whichever is higher.
July 28, 2010 3
4. JSW Steel | 1QFY2011 Result Update
Scenario 2: Share price is below Rs1,365
If JSW Steel’s average share price closes below Rs1,365 during the specified
period, the company will issue fully convertible debentures (FCDs) at a 4.5%
interest rate to JFE Steel, which will mature in 18 months.
However, during these 18 months, change in share price can trigger two events:
Event 1: During the 18-month period, if JSW Steel’s share price averages or is
above Rs1,365 (for two consecutive weeks/10days, or if the stock closes at or
above Rs1,365 for five consecutive days), then FCDs will get converted into 32mn
equity shares at Rs1,500/share. From here on, JFE Steel will have the option to
either keep its existing stake or increase it to 14.99% by opting for Tranche 2 and
Tranche 3, as discussed above.
Event 2: During the 18-month period, if JSW Steel’s share price closes below
Rs1,365 for the specified period, then, on maturity, FCDs will be converted into
36mn shares at a price of Rs1,331. Later, JFE Steel has the option to go for
Tranche 3 (as discussed above) to maintain or increase its existing stake.
July 28, 2010 4
5. JSW Steel | 1QFY2011 Result Update
Key analyst meet takeaways
Sales volume lower, but volume guidance stable for FY2011E: During the quarter,
sales volume declined by 9.8% yoy and 21.6% qoq to 1.2mn tonnes on the back
of rising cheaper steel imports from China. During 1QFY2011, India’s imports
were nearly 2.9mn tonnes, up by 75%. Management indicated that sales volume
would improve in 2QFY2011E and expects to liquidate inventory by ~80–100ktpm
from the current levels of 564kt. Moreover, the company reiterated its volume
guidance of 6.7mn tonnes in FY2011E.
Current steel prices to remain stable: Management indicated that HRC prices have
corrected to Rs29,500/tonne from ~Rs34,000/tonne and expects prices to sustain
at current levels, as steel imports are expected to decline.
Cost of iron ore and coking coal in 1QFY2011: Average iron ore cost in
1QFY2011 was Rs2,800/tonne, and management expects iron ore costs to reduce
in 2QFY2011. Further, management indicated that coking coal contracts for
2QFY2011 have been signed at US $225/tonne.
Iron ore production to begin in 2HFY2011E: The company plans to commence
iron ore production from its Chile mine in October 2010 and expects to mine
70–80ktpm. The iron ore will be sold in the open market, thus providing a natural
hedge against iron ore price inflation.
US coking coal mine: The company expects the mine to start production in
October 2010 and expects to produce 70–80ktpm. The cost of production is
expected to be US $85–110/tonne (FOB). The development of the mine would
entail a capex of US $60mn–100mn.
US operations: During the quarter, plate mill production was up 39% yoy to
38,408 tonnes, while sales volume grew by 143% yoy to 34,986 tonnes. Similarly,
pipe mill production increased by 120% yoy to 12,033 tonnes and sales volume
grew by 200% yoy to 12,927 tonnes. The company reported an operating profit of
US $7.9mn in 1QFY2011 as against a loss of US $13.7mn in 1QFY2010. As per
management, the company has started earning an EBITDA/tonne of
US $150–200/tonne in the plates and pipes segments.
July 28, 2010 5
6. JSW Steel | 1QFY2011 Result Update
Result Highlights
Consolidated net revenue grew by 19.8% yoy to Rs4,779cr; however, it declined by
12.2% qoq primarily on account of lower sales volume. Crude steel production
increased by 14.4% yoy, but declined by 1.6% qoq, to 1.6mn tonnes. Sales volume
declined by 9.8% yoy and 21.6% qoq on account of cheaper imports mainly from
China. However, the company gained from favourable steel prices, which
increased by 31.2% yoy and 13.8% qoq to Rs38,692/tonne.
While sales volume of flat products stood at 859kt yoy, sales volume of long
products grew substantially by 46% yoy to 225kt. Sales volume of value-added
products was lower by 5% yoy to 346kt and that of semis fell by 66% yoy to 107kt.
Exhibit 4: Despite higher realisations Exhibit 5: ...net revenue was affected
60,000 100 6,000 120
75
45,000 4,500 80
50
(Rs/tonne)
(Rs cr)
30,000 25
(%)
3,000 40
(%)
0
15,000 1,500 0
(25)
0 (50) 0 (40)
1QFY09 3QFY09 1QFY10 3QFY10 1QFY11 1QFY09 3QFY09 1QFY10 3QFY10 1QFY11
Revenue/tonne (LHS) yoy change (RHS) Revenue (LHS) yoy change (RHS)
Source: Company, Angel Research Source: Company, Angel Research
Exhibit 6: ...due to lower sales volume in 1QFY2011
1.6 120
90
1.2
(mn tonnes)
60
0.8
(%)
30
0.4
0
0.0 (30)
1QFY09 3QFY09 1QFY10 3QFY10 1QFY11
Sales Volume (LHS) yoy change (RHS)
Source: Company, Angel Research
July 28, 2010 6
7. JSW Steel | 1QFY2011 Result Update
Despite staff cost and other expenses (adjusted for Forex loss of Rs55cr) increasing
by 46.8% yoy and 33.9% yoy, respectively, EBITDA margins expanded by 646bp
yoy to 23.7% on account of higher realisations. This was reflected in EBITDA
increasing by 64.7% yoy to Rs1,134cr.
Exhibit 7: EBITDA margin expands by 646bp yoy Exhibit 8: EBITDA/tonne at US $200
1,500 30 400 200
1,250 25 150
300
(US $/tonne)
1,000 20 100
(Rs cr)
750 15 200 50
(%)
(%)
500 10 0
100
250 5 (50)
0 0 0 (100)
1QFY09 3QFY09 1QFY10 3QFY10 1QFY11 1QFY09 3QFY09 1QFY10 3QFY10 1QFY11
EBITDA (LHS) margin (RHS) EBITDA/tonne (LHS) yoy change (RHS)
Source: Company, Angel Research Source: Company, Angel Research
Depreciation was higher by 14.1% yoy to Rs361cr on account of capitalisation of
the company’s HSM mill. Thus, consolidated net profit increased by 26.2% yoy to
Rs295cr, below our estimates, largely due to lower sales volume.
Exhibit 9: Net profit margin expands by 32bp yoy
800 15
12
600
9
400
6
(Rs cr)
200 3
(%)
0
0
(3)
(200)
(6)
(400) (9)
1QFY09 3QFY09 1QFY10 3QFY10 1QFY11
Net profit (LHS) margin (RHS)
Source: Company, Angel Research
July 28, 2010 7
8. JSW Steel | 1QFY2011 Result Update
Investment Rationale
Strong volume growth: JSW Steel is expanding its capacity by 3.2mn tonnes from
the current level of 7.8mn tonnes, thus taking its total capacity to 11mn tonnes by
FY2011E. We believe the company will benefit from increased capacity as volumes
are expected to grow at a 31.2% CAGR over FY2010–12E.
Savings due to low-grade ore usage: The commissioning of the beneficiation plant
by March 2011 is expected to lower iron ore cost for the company. In case of rising
iron ore prices, sourcing of low-grade iron ore fines from Bellary (Karnataka) is
likely to reduce the impact of increasing iron ore costs. As 50% of the company’s
total iron ore requirement is met from third party, usage of low-grade iron ore is
expected to lower iron ore cost by US $10–30/tonne.
Improving performance of the US subsidiary: Going ahead, we expect
performance of the company’s US subsidiary to improve. The subsidiary is
expected to post EBITDA of Rs174cr in FY2011E and Rs258cr in FY2012E as
compared to a loss of Rs188cr in FY2010.
Valuation
We believe JSW Steel is well placed to capitalise on a) strong domestic demand on
the back of its expanded capacity, b) improving product mix, c) commissioning of
beneficiation plant to lower iron ore cost and d) recovery in its US operations. At
the CMP, the stock is trading at 7.1x FY2011E and 5.6x FY2012E EV/EBITDA. We
maintain our Buy recommendation on the stock with a revised Target Price of
Rs1,344 (earlier Rs1,360), valuing the stock at 6.5x FY2012E EV/EBITDA.
Exhibit 10: Change in estimates
(Rs cr) Earlier estimates Revised estimates Upgrade/(downgrade) (%)
FY2011E FY2012E FY2011E FY2012E FY2011E FY2012E
Net sales 24,174 29,351 24,174 29,363 0.0 0.0
EBITDA 5,623 6,930 5,635 6,912 0.2 (0.3)
EBITDA margin (%) 23.3 23.6 23.3 23.5 5bp (7bp)
PBT 2,704 3,525 2,793 3,648 3.3 3.5
Net income 1,893 2,397 1,980 2,573 4.6 7.3
Net margin (%) 7.8 8.2 8.2 8.8 36bp 60bp
Source: Company, Angel Research
July 28, 2010 8
15. JSW Steel | 1QFY2011 Result Update
Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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Disclosure of Interest Statement JSW Steel
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock Yes
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.
Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)
July 28, 2010 15
