JSW Steel Ltd: Challenges persist

India Infoline News Service | Mumbai |

India's steel consumption declined by 6.8% yoy in August and grew by just 0.3% yoy during April-August ’13 to 30.35mn tons.

CMP Rs733, Target Rs641, Downside 12.5%

JSW’s performance over the last two years has been challenging due to the regulatory measures undertaken by the Government to curb illegal mining. Expectations of a faster reversal in iron ore output increased after the Supreme Court (SC) cleared the category ‘A’ and ‘B’ iron ore mines to resume operations in Karnataka, subject to necessary conditions. However, most of the mining lease agreements have expired in the past 18 months. As per the SC order, mining can resume only after they renew leases and secure statutory approvals; these mines may take anywhere between 6-12 months to resume production. We believe the impact of resumption of these mines would only be felt in FY15. However, this would not be able to boost production as it would replace the iron ore dumps to be used in FY14 and iron ore bought from other states. We expect the utilization levels at Vijaynagar to remain low at 81.5% in FY14 and 86.5% in FY15.

Profitability of the consolidated entity would decline in FY14 as raw material costs would decline only marginally and lower profitability operations of Ispat would be merged. Iron ore costs remain flat due to the tight iron ore situation in Karnataka and the decline in global coking coal has been offset by the weaker rupee. We expect blended EBIDTA/ton to decline from Rs7,110 in FY13 to Rs5,998/ton in FY14 on account of the merger of the high cost operations of Ispat. Higher interest costs would further impact the company’s earnings. We expect pre-exceptional profit to increase 16% yoy in FY14 to Rs15.4bn and 25% yoy in FY15 to Rs19.3bn. In FY14, net debt is expected to increase by 41.4% yoy to Rs296bn with the merger of Ispat and a capex of Rs50bn. Net debt/equity too would jump from 1.2x in FY13 to 1.71x in FY14. In addition to the stretched balance sheet, we are also concerned about the foreign debt exposure (40% of total debt exposure) and ~US$1.6bn of revenue acceptances. JSW is set to be an underperformer in the near term due to the above challenges. We believe the recent rally in the stock should be used to exit the counter and downgrade the stock from Market Performer to Sell with a revised price target of Rs641.

Financial summary
Y/e 31 Mar (Rs m) FY12 FY13 FY14E FY15E
Revenues 343,681 382,097 465,375 500,207
yoy growth (%) 42.6 11.2 21.8 7.5
Operating profit 61,019 65,040 77,628 85,200
OPM (%) 17.8 17.0 16.7 17.0
Pre-exceptional PAT 13,626 13,325 15,457 19,342
Reported PAT 5,377 9,632 6,840 19,342
yoy growth (%) (22.3) (2.2) 16.0 25.1
EPS (Rs) 61.1 59.7 63.9 80.0
P/E (x) 12.0 12.3 11.5 9.2
EV/EBITDA (x) 5.7 5.7 6.1 5.6
Debt/Equity (x) 1.3 1.3 1.8 1.6
RoE (%) 8.2 7.8 8.5 10.2
RoCE (%) 11.0 10.3 10.2 10.0
Source: Company, India Infoline Research

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