JSW Steel (Q1 FY15)

India Infoline News Service | Mumbai |

JSW Steel managed to register a growth of 29% yoy on the back of superior product mix and marginally higher than expected sales volume.

CMP Rs1,174, Target Rs1,104, Downside 6% 
  • Revenue growth of 29% yoy to Rs132.5bn was higher than our estimate due to superior product mix and marginally higher volume

  • The decline in realisations on a sequential basis was lower than expected as the impact of weaker HRC prices was negated by superior product mix

  • EBIDTA/ton of Rs8,545 was quite higher than expected on the back of improved product mix, lower coking coal prices and commissioning of backward integrated projects

  • Subsidiary performance improved  qoq led by US and JSW Coated 

  • Management maintained its FY15 volume growth guidance of 4.6% yoy to 12.4mn tons

  • Availability of iron ore remains an issue; After the recent correction we upgrade our rating from Sell to Reduce with a price target of Rs1,104

Result table
(Rs mn) Q1 FY15 Q1 FY14 % yoy Q4 FY14 % qoq
Net sales 132,540 102,707 29.0 143,424 (7.6)
Material costs (74,463) (58,521) 27.2 (85,538) (12.9)
Personnel costs (3,746) (3,346) 11.9 (3,266) 14.7
Power and fuel costs (9,573) (9,510) 0.7 (9,441) 1.4
Other overheads (18,643) (12,536) 48.7 (19,893) (6.3)
Operating profit 26,116 18,795 39.0 25,286 3.3
OPM (%) 19.7 18.3 140 bps 17.6 207 bps
Depreciation (7,954) (7,504) 6.0 (8,239) (3.5)
Interest (8,435) (7,179) 17.5 (7,842) 7.6
Other income 537 191 180.4 11 -
PBT 10,264 4,304 138.5 9,216 11.4
Tax (3,828) 321 - (4,595) (16.7)
Effective tax rate (%) 37.3 (7.5) 49.9
Other prov / minority etc 128 174 (26.5) 207 (38.2)
Adjusted PAT 6,564 4,799 36.8 4,828 36.0
Adj. PAT margin (%) 5.0 4.7 28 bps 3.4 159 bps
Extra ordinary items - (8,617) - - -
Reported PAT 6,564 (3,818) - 4,828 36.0
EPS (Rs) 108.6 79.4 36.8 79.9 36.0
Source: Company, India Infoline Research

Topline outperformance was boosted by superior product mix

JSW Steel managed to register a growth of 29% yoy on the back of superior product mix and marginally higher than expected sales volume. Sales volume of 2.88mn tons was higher by 12.9% yoy on a comparable basis and marginally higher than our estimate of 2.85mn tons. Share of exports of overall sales volume declined marginally from 28% in Q4 FY14 to 27% in Q1 FY15 due to the appreciation in the rupee. Blended realisations declined marginally by 0.5% qoq to Rs40,091/ton as the impact of weak steel prices was offset by higher sales of VAP. VAP as a % of sales improved on a qoq basis with the commissioning of the CRM_II and galvanizing line at Vijaynagar. JSW had announced price cuts in April and May ’14 inline with the decline in global steel prices. Crude steel production increased 8.4% yoy on a comparable basis to 3.1mn tons due to higher production at the Dolvi plant. 


Lower coking coal prices and commissioning of backward integration units led to higher than expected operating profit

Consolidated operating profit of Rs26.1bn was quite higher than our estimate of Rs21bn. The outperformance was due to lower coking coal prices, commissioning of backward integration units, superior product mix and marginal improvement in subsidiary performance. Standalone operating profit stood at Rs24.6bn, was higher by 21.3% yoy and also higher than our estimate of Rs20.6bn. Standalone EBIDTA/ton of Rs8,545 in Q1 FY15 was higher by 6.1% yoy and also quite higher than our estimate of Rs7,235.  Lower coking coal costs offset the increase in iron ore costs in the standalone entity. Average coking coal prices were lower by US$15/ton on a sequential basis due to the decline in global prices and are expected to decline further by US$15/ton in Q2 FY15. Iron ore costs for the Vijaynagar operations stood at Rs3,670/ton, which was lower than estimate.  Due to restrictions on supply of iron ore from Odisha the company has started to import iron ore from South Africa for its Vijajnagar plant. We believe this would be economically viable for the company on account of the higher iron ore prices in Odisha and the high costs involved in transportation of ore. In addition to this, less impurity would also lead to lower coking coal consumption and higher efficiencies at the plant.


Per ton analysis (Standalone)
(Rs mn) Q1 FY15  Q1 FY14 % yoy Q4 FY14 % qoq
Steel production ('000 tons) 3,100 2,860 8.4 3,150 (1.6)
Steel sales ('000 tons) 2,880 2,550 12.9 3,100 (7.1)
Sales as a % of production 92.9 89.2 98.4
Net realisations 40,091 36,699 9.2 40,288 (0.5)
Cost per ton (Rs/ton)
Raw material 22,537 20,443 10.2 23,869 (5.6)
Personnel cost 820 821 (0.1) 636 28.9
Power and fuel costs 2,871 3,302 (13.0) 2,577 11.4
Other overheads 5,319 4,176 27.4 5,154 3.2
Total cost 31,546 28,743 9.8 32,236 (2.1)
EBIDTA/ton 8,545 7,956 7.4 8,052 6.1
Source: Company, India Infoline Research

Tax rate continues to remain high at 32%

Standalone PAT of Rs8bn was higher than our estimate of Rs5.4bn. The outperformance in bottomline was restricted by high tax rate of 31.9% in Q4 FY14, higher than the earlier management guidance of 22-25%. Interest costs increased on a qoq basis to Rs8.4bn due to the commissioning of few plants during the quarter.

Subsidiary performance improves marginally sequentially

Performance of the subsidiaries which was lackluster in FY14, improved marginally in Q1 FY15. The improvement was due to better performance at JSW Coated products and increase in operating profit in the US Pipe & Plate mill subsidiary. Chile operations reported an operating loss of US$0.4mn due to weak iron ore prices globally. Iron ore sales volume doubled on a yoy and on a qoq basis due to sales of previous quarter accumulated inventory. JSW Steel Coated Products performance improved further on a qoq basis as the EBIDTA/ton improved from Rs2,136 in Q4 FY14 to Rs2,375 in Q1 FY15. Volumes remained steady at 0.4mn tons. The US plate and pipe mill subsidiary managed to report an operating profit of US$4mn due to execution of higher margin orders and increase in utilization levels. Last quarter the company was impacted by a one-off expense of US$10mn.


US pipe and plate mill performance
(Rs mn) Q1 FY15  Q1 FY14 % yoy Q4 FY14 % qoq
Plate sales (tons) 95,506 81,850 16.7 94,680 0.9
Pipes sales (tons) 9,230 9,593 (3.8) 15,672 (41.1)
Revenue (US$ mn) 99.2 79.8 24.3 106.2 (6.6)
Operating profit (US$ mn) 4.0 0.6 570.0 (4.0) (200.5)
PAT (US$ mn) (10.4) (13.7) (23.9) (18.7) (44.4)
Source: Company, India Infoline Research

Chile iron ore performance
(Rs mn) Q1 FY15  Q1 FY14 % yoy Q4 FY14 % qoq
Plate sales (tons) 220,736 209,623 5.3 236,640 (6.7)
Pipes sales (tons) 325,522 153,898 111.5 149,443 117.8
Revenue (US$ mn) 32.1 17.4 84.8 16.8 91.3
Operating profit (US$ mn) (0.4) 0.9 - 1.3 -
PAT (US$ mn) (1.6) (0.7) 120.8 (0.3) 536.0
Source: Company, India Infoline Research

JSW Coated steel performance
(Rs mn) Q1 FY15  Q1 FY14 % yoy Q4 FY14 % qoq
Production (mn tons) 0.40 0.34 17.6 0.43 (7.0)
Sales (mn tons) 0.40 0.33 21.2 0.44 (9.1)
Revenue (Rs mn) 25,050 19,382 29.2 27,350 (8.4)
Operating profit (Rs mn) 950 789 20.4 940 1.1
PAT (Rs mn) 70 30 135.7 350 (80.0)
Source: Company, India Infoline Research

Volume guidance maintained

The Company for FY15 has guided crude steel production/ saleable steel sales of 12.9/12.4mn tons, respectively, representing a growth of 6/4.6% yoy. The company believes that the growth in volumes is restricted by the availability of iron ore in FY15. The company expects to meet the shortfall created by the mining restrictions put in Odisha from imports. The company has already started to import iron ore from South Africa. We believe this would economically viable for the company due to the weak iron ore prices globally and the higher transportation costs involved in bringing ore from Odisha. The company exported 0.77mn tons of steel during the quarter and accounted for 50% of the total steel exports from India. The Company has earlier guided for exports of 2.8mn tons in FY15 against 3.1mn tons in FY14. The appreciation of the rupee would reduce the share of exports of total sales volume.

Availability of iron ore remains a concern; Upgrade to Reduce from SELL

We expect the iron ore supply in the region would continue to remain tight leading to lower volume growth in FY15. We believe the ban on iron ore mining in Odisha on merchant miners would increase the costs for iron ore procurement for JSW. Earnings expansion on the back of the modernization initiatives would be restricted by the increase in iron ore prices in the country. We believe concerns over restarting of new mines or increasing capacity of existing running mines would take time and the availability or iron ore from Orissa would decrease. We believe domestic prices would remain sideways to negative over the next one year due to appreciation of the rupee against the dollar. We raise our FY15 and FY16 estimates on the back of the strong performance posted in Q1 FY15. After the recent correction witnessed in the stock, we upgrade the stock from SELL to Reduce rating with a revised price target of Rs1,104. 


Financial Summary
Y/e 30 Jun (Rs m) FY13 FY14 FY15E FY16E
Revenues 382,097 512,196 549,030 589,534
yoy growth (%) 11.2 34.0 7.2 7.4
Operating profit 65,040 91,654 100,688 107,550
OPM (%) 17.0 17.9 18.3 18.2
Pre-exceptional PAT 13,325 21,647 23,832 27,316
Reported PAT 9,632 4,519 23,832 27,316
yoy growth (%) (2.2) 62.4 10.1 14.6
         
EPS (Rs) 59.7 89.6 98.6 113.0
P/E (x) 19.7 13.1 11.8 10.3
Price/Book (x) 1.5 1.3 1.2 1.1
EV/EBITDA (x) 7.2 7.0 6.7 6.2
Debt/Equity (x) 1.3 1.7 1.7 1.5
RoE (%) 7.8 10.9 10.4 10.9
RoCE (%) 10.3 11.8 10.6 10.8
Source: Company, India Infoline Research

***Note: This is a NSE Chart

 

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