JSW Steel (Q1 FY13)

We marginally lower our 9-month price target on JSW to Rs690; while maintaining our Market Performer rating on the stock.

January 01, 1970 5:30 IST | India Infoline News Service
CMP Rs643, Target Rs690, Upside 7.3%
  • Standalone revenue of Rs90.4bn was lower than our estimate of Rs92bn due to lower sales volume. The decline in sales was due to some inventory buildup as domestic demand was subdued. The company managed to register sales volume of 2.1mn tons, 8.7% lower on a qoq basis. However, the company’s production volume of 2.14mn tons (+3.5% qoq) was marginally higher than our estimate. The company managed to operate at 80% utilization during the quarter despite the hardships in procurement of iron ore in Karnataka. The jump in production was largely due to the availability of e-auction iron ore in January. The company till date has purchased 15.6mn tons out of the total e-auction iron ore sales of 25.7mn tons in Karnataka. The company has already received 80% of the total purchase quantity. Realisations for the company surprisingly increased 3.7% qoq against our expectation of marginal increase. The company said that the jump in realizations was due to superior product mix.
  • Costs for the company remained flat on a qoq basis as the impact of lower raw material costs were offset by an increase in all other costs. On the back of stronger realizations, EBIDTA/ton increased 17.6% qoq to Rs8,406/ton in Q1 FY13 from Rs7,151 in Q4 FY12. Raw material costs per ton decreased 1.6% qoq from Rs27,012 in Q3 FY12 to Rs26,582 in Q1 FY12 inline with our expectations. We believe the decline in raw material costs is largely due to a reduction in coking coal costs as iron ore costs were flat qoq. Standalone operating profit of Rs17.7bn was higher than our estimate due to higher realizations.
Per ton analysis
  Q1 FY13  Q4 FY12 % qoq Q1 FY12 %  yoy
Steel production ('000 tons) 2,143 2,070 3.5 1,684 27.3
Steel sales ('000 tons) 2,109 2,310 (8.7) 1,714 23.0
Sales as a % of production 98.4 111.6
Net realisations 42,853 41,319 3.7 41,245 3.9
Cost per ton (Rs/ton)

Raw material 26,582 27,012 (1.6) 25,312 5.0
Personnel cost 826 662 24.8 1,030 (19.8)
Power and fuel costs 2,428 2,089 16.2 2,225 9.1
Other overheads 4,612 4,405 4.7 4,337 6.3
Total cost 34,447 34,168 0.8 32,905 4.7
EBIDTA/ton 8,406 7,151 17.6 8,340 0.8
Source: Company, India Infoline Research,  
  • Chile operations which were affected in Q4 FY12 due to low water levels recovered during the quarter. Shipments during the quarter jumped 3x on a qoq basis to 0.34mn tons on account of liquidation of previous quarter inventory. Production too improved by 12.9% qoq to 0.19mn tons. The company expects to achieve 1mn tons of iron ore production during FY13, while it is working to increase the iron ore capacity to 2.5mn tons by FY15. US plate mill capacity utilisation declined marginally during the quarter. The company is expecting strong performance from its US operations in FY13 on the back of demand revival in the plate and pipe segment.
  • Reported PAT for the standalone entity declined sharply by 64.2% qoq to Rs2.7bn due to forex losses. The company reported a forex loss of Rs5.9bn in Q1 FY13 against a forex gain of Rs2bn in Q4 FY12.
  • JSW is still going on with the capex to increase its capacity from 10mtpa to 12mtpa and expects the new plant to be completed by end-FY13. The total capex planned for FY13 stands at Rs63bn, which includes capex for the capacity expansion, CRM complex, HSM II and the beneficiation plant. The total capex over the next 3 years is estimated at Rs130bn.
  • On consolidated level, topline declined 4.4% qoq to Rs99.1bn. Contribution of Chile mines to total revenue increased sharply on a qoq basis. JSW Ispat showed a sharp improvement in performance, reporting an operating profit of Rs4.5bn against Rs2.9bn reported in Q4 FY12. As a result, the company reported an operating profit growth of 1.1% qoq.
  • JSW was quite confident to achieve its production guidance for FY13E on expectations of an improvement in iron ore supplies. The company expects Category ‘A’ mines to start over the next two months followed by the opening of Category ‘B’ mines. In the near term, it has enough inventories to run its plant on the balance e-auction sales and sales from NMDC. Q1 FY13 performance was quite encouraging and the company currently looks on track to achieve its target. However, we would wait for the category ‘A’ mines to start operations and then upgrade our sales volume for the year. We expect the iron ore supply in the region would continue to remain tight leading to lower volume growth than that expected by the company. In addition to this, the iron ore sourcing cost is expected to increase as the new system allows the seller to determine the base price and all the taxes are to be paid by the buyer. Ispat continues to remain a drag in the near term as we do not expect any meaningful improvement in profitability till the modernization initiatives are completed by FY15 and the supply of iron ore from Karnataka restarts. We expect consolidated debt/equity would stay at 1.2-1.3x over the next two years as free cash flow remains negative due to the capex for the 2mtpa expansion at Vijaynagar. We marginally lower our 9-month price target on JSW to Rs690; while maintaining our Market Performer rating on the stock.
Result table (Standalone)
(Rs m) Q1 FY13  Q4 FY12 % qoq Q1 FY12 % yoy
Net sales 90,376 95,447 (5.3) 70,694 27.8
Material costs (56,061) (62,398) (10.2) (43,385) 29.2
Personnel costs (1,742) (1,528) 14.0 (1,766) (1.4)
Power and fuel costs (5,120) (4,827) 6.1 (3,814) 34.2
Other overheads (9,726) (10,176) (4.4) (7,434) 30.8
Operating profit 17,728 16,518 7.3 14,295 24.0
OPM (%) 19.6 17.3 231 bps 20.2 (61) bps
Depreciation (4,678) (4,720) (0.9) (3,879) 20.6
Interest (4,067) (3,677) 10.6 (2,279) 78.4
Other income 723 483 49.5 478 51.3
PBT 9,706 8,604 12.8 8,615 12.7
Tax (1,096) (3,074) (64.4) (2,066) (47.0)
Effective tax rate (%) 11.3 35.7
Adjusted PAT 8,611 5,530 55.7 6,549 31.5
Adj. PAT margin (%) 9.5 5.8 373 bps 9.3 26 bps
Extra ordinary items (5,921) 1,992 - (352) -
Reported PAT 2,690 7,522 (64.2) 6,197 (56.6)
Ann. EPS (Rs) 154.4 99.1 55.7 117.4 31.5
Source: Company, India Infoline Research

Financial Summary
Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenues 241,059 343,681 366,269 424,575
yoy growth (%) 27.2 42.6

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