JSW Steel (Q3 FY13)

We downgrade the stock from Market Performer to SELL with a 9-month price target to Rs782.

January 29, 2013 11:23 IST | India Infoline News Service

CMP Rs871, Target Rs782, Downside 10.2%

Standalone revenue declined 6.5% qoq to Rs82.9bn and was slightly lower than our estimate of Rs83.2bn. Sales volume was largely flat on a qoq basis but increased 13.7% yoy to 2.17mn tons. The company’s production declined 3.5% qoq to 2.09mn tons due to unavailability of iron ore. Production of flat products jumped 8% to 1.57mn tons and that of long products also increased by 8% to 0.49mn tons. Availability of good quality ore remained a concern during the quarter. In addition to this the company felt pricing of iron ore lumps by NMDC was uneconomical for the company. The company has produced 6.4mn tons in the current fiscal year and was quite confident of meeting its production guidance of 8.5mn tons for FY13. The lower than estimated topline was largely due to a sharp decline in blended steel realizations. Realisations for the quarter declined 6.5% qoq to Rs38,214/ton, lower than our estimate of Rs39,653. We are surprised by the sharp decline in realization reported by the company. The management stated that this was due to lower export sales. Weaker international steel demand and subdued prices prompted the company to cut down on exports and focus on the domestic market.
On the back of lower than expected realizations, EBIDTA/ton declined 14% qoq to Rs6,054/ton. Total expenditure of the company declined 5% qoq to Rs69.8bn on account of a lower raw material prices. A drop of Rs200/ton in the procurement of iron ore and US$10/ton in coking coal prices helped the company to reduce raw material costs by Rs1,386/ton. All major costs per ton reduced on a qoq basis leading to a 5% decline in total costs per ton of saleable steel.

Per ton analysis

(Rs mn)	Q3 FY13	Q2 FY13	% qoq	Q3 FY12	% yoy
Steel production ('000 tons)	2,094	2,170	(3.5)	1,939	8.0
Steel sales ('000 tons)	2,170	2,170	0.0	1,908	13.7
Sales as a % of production	103.6	100.0		98.4
Net realisations	38,214	40,880	(6.5)	41,281	(7.4)

Cost per ton (Rs/ton)
Raw material	24,671	26,058	(5.3)	27,079	(8.9)
Personnel cost	739	810	(8.8)	787	(6.1)
Power and fuel costs	2,270	2,281	(0.5)	2,302	(1.4)
Other overheads	4,480	4,698	(4.6)	4,548	(1.5)
Total cost	32,161	33,847	(5.0)	34,716	(7.4)
EBIDTA/ton	6,054	7,033	(13.9)	6,565	(7.8)

Source: Company, India Infoline Research

PAT declined 19% yoy to Rs1.37bn with the company suffering a forex loss of Rs2.67bn due to 4% qoq depreciation in the rupee. The company also made a provision of Rs600mn towards carrying value of its investments in US Plate & Pipe Mill. Interest and depreciation too jumped on a qoq basis.
The company has planned a capex of Rs130bn for the completion of Cold Rolling Mill (CRM-2) Phase 1 and Phase 2 at Vijayanagar which will be completed during FY14-15 and Non-Grain Oriented Electrical Steel project which will be completed in FY15. Expansion of coated products facility in Maharashtra from 0.92mn tons to 1.2mn tons is scheduled for completion in Q1 FY14. The company has spent a total of Rs3.2bn in the current fiscal and plans to spend the remaining amount over the course of two years.
The management is reasonably confident of meeting its iron ore requirements for FY14. It expects the six category ’A’ mines currently operating in Karnataka to produce 2mtpa and along with four more category ‘A’ mines which will start mining soon, it expects a total production of 5mtpa of iron ore in FY14. NMDC’s proposed production of 8-10mtpa of iron ore in FY14 will be vital going ahead and if category ‘B’ mines are allowed to mine, a total of 18-20mtpa of iron ore can be cumulatively expected from Karnataka. The company had 0.6mn tons of iron ore inventory at the end of Q3 FY13.
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 to be incurred over the next two years. The stock has run up over the last two months on expectations of easing iron ore prices and increase in availability of ore in Karnataka. We believe that iron ore prices would not drop below US$100/ton and the tight iron ore market scenario would continue in FY14. We downgrade the stock from Market Performer to SELL with a 9-month price target to Rs782.

Results table (Standalone)

(Rs m)	Q3 FY13	Q2 FY13	% qoq	Q3 FY12	% yoy
Net sales	82,925	88,709	(6.5)	78,765	5.3
Material costs	(53,537)	(56,545)	(5.3)	(51,667)	3.6
Personnel costs	(1,604)	(1,759)	(8.8)	(1,502)	6.8
Power and fuel costs	(4,926)	(4,949)	(0.5)	(4,392)	12.2
Other overheads	(9,721)	(10,195)	(4.6)	(8,678)	12.0
Operating profit	13,136	15,262	(13.9)	12,526	4.9
*OPM (%)*	*15.8*	*17.2*	*(136 bps)*	*15.9*	*(6 bps)*
Depreciation	(4,975)	(4,812)	3.4	(4,444)	11.9
Interest	(4,546)	(4,208)	8.0	(2,818)	61.3
Other income	566	783	(27.7)	8	-
PBT	4,181	7,025	(40.5)	5,271	(20.7)
Tax	460	(3,016)	-	(2,066)	-
*Effective tax rate (%)*	*(11.0)*	*42.9*		*39.2*
Adjusted PAT	4,641	4,009	15.8	3,205	44.8
*Adj. PAT margin (%)*	*5.6*	*4.5*		*4.1*
Extra ordinary items	(3,274)	4,224	-	(5,001)	(34.5)
Reported PAT	1,367	8,233	(83.4)	(1,796)	-
Ann. EPS (Rs)	83.2	71.9	15.8	57.5	44.8

Source: Company, India Infoline Research

Financial summary

Y/e 31 Mar (Rs m)	FY12	FY13E	FY14E	FY15E
Revenues	343,681	363,061	410,091	452,768
yoy growth (%)	42.6	5.6	13.0	10.4
Operating profit	61,019	60,954	71,401	74,853
OPM (%)	17.8	16.8	17.4	16.5
Pre-exceptional PAT	13,626	13,951	18,737	19,973
Reported PAT	5,377

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