1. Please refer to important disclosures at the end of this report 1
(` cr) 2QFY11(S) 2QFY10(S) chg(%) 2QFY11(C) 2QFY10(C) chg(%)
Net revenue 5,713 4,494 27.1 5,908 4,669 26.5
EBITDA 992 1,188 (16.5) 1,023 1,096 (6.7)
Margin (%) 17.4 26.4 (907bp) 17.3 23.5 (617bp)
Rep. PAT 445 452 (1.4) 373 323 15.6
Source: Company, Angel Research
JSW Steel’s 2QFY2011 standalone net revenue stood at `5,713cr, above our
estimates. Adj. net profit at `340cr was also above our estimates of `284cr.
The deviation was largely due to higher sales volume reported by the company.
Margin hit by higher raw-material cost: Consolidated net revenue grew by 26.5%
yoy to `5,908cr, aided by higher sales volume and improved product mix. Sales
volume grew by 8.9% yoy and 32.9% qoq and semis as a percentage of total
sales declined to 5.5% as compared to 27.9% in 2QFY2010. Realisations also
increased by 16.8% yoy to `36,089/tonne, down 6.7% qoq. On account of
higher raw-material cost, EBITDA margin contracted by 617bp yoy to 17.3%.
Consequently, EBITDA declined by 6.7% yoy to `1,023cr. While depreciation was
higher by 16.5% yoy to `379cr, interest expenses declined by 13.4% yoy to
`261cr as the company prepaid debt of `2,330cr. Moreover, other income
included a translation gain of `157cr on foreign exchange. Hence, lower interest
cost and exceptional gain aided the 15.6% yoy increase in net profit to `373cr.
Outlook and valuation: We believe JSW Steel is well placed to capitalise on strong
domestic demand on the back of its expanded capacity, improving product mix,
commissioning of beneficiation plant to lower iron ore cost and recovery in its US
operations. At the CMP, the stock is trading at 8.7x FY2011E and 6.0x FY2012E
EV/EBITDA. We recommend Accumulate with a revised Target Price of `1,310
(earlier `1,344), valuing the stock at 6.5x FY2012E EV/EBITDA.
Key financials (Consolidated)
Y/E March (` cr) FY2009 FY2010 FY2011E FY2012E
Net sales 15,886 18,897 22,349 29,363
% chg 28.7 19.0 18.3 31.4
Adj. net profit 804 1,321 1,454 2,517
% chg 5.1 7.0 6.5 8.6
FDEPS (`) 38.2 63.8 55.6 97.2
EBITDA margin (%) 18.8 21.5 21.9 23.3
P/E (x) 32.1 19.2 22.0 12.6
P/BV (x) 3.1 2.6 1.6 1.5
RoE (%) 10.7 16.1 10.4 12.5
RoCE (%) 8.6 10.7 10.3 12.6
EV/Sales (x) 2.5 2.1 1.9 1.4
EV/EBITDA (x) 13.1 9.5 8.7 6.0
Source: Company, Angel Research
ACCUMULATE
CMP `1,225
Target Price `1,310
Investment Period 12 months
Stock Info
Sector
Bloomberg Code JSTL@IN
Shareholding Pattern (%)
Promoters 45.0
MF / Banks / Indian Fls 7.1
FII / NRIs / OCBs 29.6
Indian Public / Others 18.3
Abs. (%) 3m 1yr 3yr
Sensex 12.2 20.8 5.1
JSW Steel 4.7 50.5 27.0
Face Value (`)
BSE Sensex
Nifty
Reuters Code
Steel
Avg. Daily Volume
Market Cap (` cr)
Beta
52 Week High / Low
10
20,221
6,082
JSTL.BO
26,843
1.9
1,400/652
425372
Paresh Jain
Tel: 022-40403800 Ext: 348
pareshn.jain@angelbroking.com
Pooja Jain
Tel: 022-40403800 Ext: 311
pooja.j@angelbroking.com
JSW Steel
Performance Highlights
2QFY2011 Result Update | Steel
October 26, 2010
2. JSW Steel | 2QFY2011 Result Update
October 26, 2010 2
Exhibit 1: 2QFY2011 performance (Consolidated)
Y/E March (` cr) 2QFY11 2QFY10 yoy% 1HFY11 1HFY10 yoy%
Net sales 5,908 4,669 26.5 10,688 8,660 23.4
Raw material 3,820 2,761 38.4 6,501 5,284 23.0
% of net sales 64.7 59.1 60.8 61.0
Power & fuel 313 257 21.9 589 496 18.7
% of net sales 5.3 5.5 5.5 5.7
Staff cost 156 122 28.4 325 236 37.4
% of net sales 2.6 2.6 3.0 2.7
Other expenditure 660 521 26.7 1,260 969 30.0
% of net sales 11.2 11.2 11.8 11.2
Total expenditure 4,950 3,660 35.2 8,674 6,986 24.2
% of net sales 83.8 78.4 81.2 80.7
Operating profit 959 1,009 (5.0) 2,013 1,674 20.3
Other operating income 64 87 (26.3) 143 111 29.1
EBITDA 1,023 1,096 (6.7) 2,156 1,785 20.8
Margin (%) 17.3 23.5 (616.8) 20.2 20.6 (43.4)
Interest 261 302 (13.4) 535 600 (11.0)
Depreciation 379 326 16.5 740 642 15.3
Other income 6 1 390.0 10 5 86.9
Exceptional items 157 (21) 102 215
Profit before tax 546 449 21.5 993 762 30.3
% of net sales 9.2 9.6 9.3 8.8
Current tax 182 137 32.8 340 234 45.6
% of PBT 33.3 30.4 34.3 30.7
Net income 373 323 15.6 669 557 20.1
Source: Company, Angel Research
3. JSW Steel | 2QFY2011 Result Update
October 26, 2010 3
Exhibit 2: 2QFY2011 performance (Standalone)
Y/E March (` cr) 2QFY11 2QFY10 yoy% 1HFY11 1HFY10 yoy%
Net sales 5,713 4,494 27.1 10,321 8,388 23.1
Raw material 3,693 2,540 45.4 6,279 4,947 26.9
% of net sales 64.6 56.5 60.8 59.0
Power & fuel 304 250 21.8 573 483 18.7
% of net sales 5.3 5.6 5.6 5.8
Staff cost 129 96 35.1 270 188 44.0
% of net sales 2.3 2.1 2.6 2.2
Other expenditure 657 506 29.9 1,252 944 32.7
% of net sales 11.5 11.3 12.1 11.3
Total expenditure 4,784 3,391 41.1 8,375 6,561 27.6
% of net sales 83.7 75.5 81.1 78.2
Operating profit 929 1,103 (15.7) 1,858 2,032 (8.5)
Other operating income 63 86 (26.3) 135 109 24.5
EBITDA 992 1,188 (16.5) 2,082 1,935 7.6
Margin (%) 17.4 26.4 20.2 23.1
Interest 199 230 (13.2) 414 450 (8.2)
Depreciation 332 281 18.5 650 552 17.6
Other income 6 1 398.4 10 7 40.2
Exceptional items 157 (21) 102 215
Profit before tax 624 658 (5.2) 1,130 1,154 (2.1)
% of net sales 10.9 14.6 10.9 13.8
Current tax 178 207 (13.7) 334 362 (7.7)
% of PBT 28.6 31.4 3.2 4.3
Net income 445 452 (1.4) 796 792 0.5
Source: Company, Angel Research
Exhibit 3: 2QFY2011 - Actual vs. Angel estimates
(` cr) Actual Estimates Variation (%)
Net sales 5,713 4,605 24.1
EBITDA 992 942 5.3
EBITDA margins (%) 17.4 20.5 (309bp)
Adj. PAT 340 284 19.9
Source: Company, Angel Research
4. JSW Steel | 2QFY2011 Result Update
October 26, 2010 4
Key analyst meet takeaways
Management indicated that the company currently has no plans to acquire
stake in JFE Steel.
The board has approved to issue a) 3mn GDRs and 1mn shares to JFE Steel
and b) 2mn shares to JFE Steel on conversion of outstanding FCCBs, which
could result in potential equity infusion of `900cr over the next 21 months.
In addition, conversion of promoters’ warrants could result in additional cash
inflow of `1,588cr to the company.
Management said that it has restarted the blast furnace at Salem, as it expects
demand for long products to improve in the coming quarters. This will result in
additional sales volume of 0.1mn tonnes.
Management mentioned that its raw-material assets – Chile iron ore project
and coking coal mine in the US – are expected to start production from
December 2010. The full benefits are expected to accrue from 4QFY2011E.
The commissioning of the 300MW power plant is likely to lower power cost
going ahead.
During the quarter, plate production was down 23% yoy to 37,699 tonnes,
while sales volume declined by 40% yoy to 23,040 tonnes. Similarly, pipe
production declined by 44% yoy to 9,495 tonnes and sales volume was down
by 33% yoy to 11,970 tonnes. The company’s US subsidiary reported EBITDA
(including other income) of US $0.85mn in 2QFY2011 as against a loss of
US $21mn in 2QFY2010.
The company has filed a petition in response to the Supreme Court’s decision
in September 2010, where the allocation of Hadimpade iron ore mine to
JSW Steel was rejected and the Karnataka government was asked to review all
the applications.
The company plans to set up a 4.5mn-tonne greenfield steel plant in
West Bengal at an estimated cost of `16,000cr. The proposed project is
expected to be funded through a debt equity ratio of 2:1 and is expected to be
commissioned by March 2014.
5. JSW Steel | 2QFY2011 Result Update
October 26, 2010 5
Result highlights
Consolidated net revenue grew by 26.5% yoy to `5,908cr, aided by higher sales
volume and improved product mix. While crude steel production increased by
1.9% yoy to 1.57mn tonnes, sales volume increased by 8.9% yoy and 32.9% qoq.
Moreover, realisations increased by 16.8% yoy to `36,089/tonne, down 6.7% qoq.
While flat product sales volume increased by 39.7% yoy to 1.2mn tonnes yoy, sales
volume of long products grew by 57.0% yoy to 281kt. Sales volume of
value-added products was higher by 19% yoy to 451kt and that of semis fell by
78.5% yoy to 87kt. Semis as a percentage of total sales declined to 5.5% during
2QFY2011 as compared to 27.9% in 2QFY2010.
Exhibit 4: Higher sales volume...
Source: Company, Angel Research
Exhibit 5: coupled with higher realisation yoy...
Source: Company, Angel Research
Exhibit 6: ...aided net revenue growth of 26.5% yoy
Source: Company, Angel Research
(30)
0
30
60
90
120
0.0
0.4
0.8
1.2
1.6
2.0
1QFY09 4QFY09 3QFY10 2QFY11
(%)
(mntonnes)
Sales Volume (LHS) yoy change (RHS)
(50)
(25)
0
25
50
75
100
0
10,000
20,000
30,000
40,000
50,000
60,000
1QFY09 4QFY09 3QFY10 2QFY11
(%)
(`/tonne)
Revenue/tonne (LHS) yoy change (RHS)
(40)
(20)
0
20
40
60
80
100
120
0
1,500
3,000
4,500
6,000
7,500
1QFY09 4QFY09 3QFY10 2QFY11
(%)
(`cr)
Revenue (LHS) yoy change (RHS)
6. JSW Steel | 2QFY2011 Result Update
October 26, 2010 6
Despite an increase in top line, EBITDA margin contracted by 617bp yoy to 17.3%
on account of higher raw-material cost. Consequently, EBITDA declined by
6.7% yoy to `1,023cr.
Exhibit 7: EBITDA margin contracts by 617bp yoy
Source: Company, Angel Research
Exhibit 8: EBITDA/tonne at US $135
Source: Company, Angel Research
During the quarter, depreciation was higher by 16.5% yoy to `379cr on account of
capitalisation of the company’s HSM mill. However, interest expenses declined by
13.4% yoy to `261cr as the company prepaid debt of `2,330cr. Moreover, other
income included a translation gain of `157cr on foreign exchange. Hence, lower
interest cost and exceptional gain aided the growth in net profit, which grew by
15.6% yoy to `373cr.
Exhibit 9: Net profit came in at `373cr
Source: Company, Angel Research
0
5
10
15
20
25
30
0
250
500
750
1,000
1,250
1,500
1QFY09 4QFY09 3QFY10 2QFY11
(%)
(`cr)
EBITDA (LHS) margin (RHS)
(100)
(50)
0
50
100
150
200
0
50
100
150
200
250
300
350
1QFY09 4QFY09 3QFY10 2QFY11
(%)
(US$/tonne)
EBITDA/tonne (LHS) yoy change (RHS)
(9)
(6)
(3)
0
3
6
9
12
15
(400)
(200)
0
200
400
600
800
1QFY09 4QFY09 3QFY10 2QFY11
(%)
(`cr)
Net profit (LHS) margin (RHS)
7. JSW Steel | 2QFY2011 Result Update
October 26, 2010 7
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 an 18.2% 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. Moreover, power cost is
expected to come down as the 300MW power plant has been commissioned.
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 `174cr in FY2011E and `258cr in FY2012E as
compared to a loss of `188cr in FY2010.
Valuation
We believe JSW Steel is well placed to capitalise on strong domestic demand on
the back of its expanded capacity, improving product mix, commissioning of
beneficiation plant to lower iron ore cost and recovery in its US operations. At the
CMP, the stock is trading at 8.7x FY2011E and 6.0x FY2012E EV/EBITDA.
We recommend Accumulate on the stock with a revised Target Price of `1,310
(earlier `1,344), valuing the stock at 6.5x FY2012E EV/EBITDA.
We have revised our estimates for FY2011E to factor in lower sales volume.
Our EBITDA margin estimates for FY2011E and FY2012E are lowered on account
of higher coking coal cost.
Exhibit 10: Change in estimates
(` cr) Earlier estimates Revised estimates Upgrade/(downgrade) (%)
FY2011E FY2012E FY2011E FY2012E FY2011E FY2012E
Net sales 24,174 29,363 22,349 29,363 (7.6) 0.0
EBITDA 5,635 6,912 4,884 6,832 (13.3) (1.2)
EBITDA margin (%) 23.3 23.5 21.9 23.3 (146bp) (27bp)
PBT 2,793 3,648 2,042 3,568 (26.9) (2.2)
Net income 1,980 2,573 1,454 2,517 (26.5) (2.2)
Net margin (%) 8.2 8.8 6.5 8.6 (168bp) (19bp)
Source: Company, Angel Research
14. JSW Steel | 2QFY2011 Result Update
October 26, 2010 14
Disclosure of Interest Statement JSW Steel
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
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 `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%)
Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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