JSW Steel (Q4 FY14)

India Infoline News Service | Mumbai |

JSW Steel managed to register a growth of 44.9% yoy and 5.3% qoq on the back of strong blended realisations and a marginally higher than expected sales volume.

CMP Rs1,230, Target Rs1,072, Downside 12.9% 
  • Topline of Rs143bn was higher than estimates, boosted by marginally higher steel sales volume and higher than expected realisations

  • Inventory liquidation led to an outperformance in sales volume

  • EBIDTA/ton of Rs8,052 was lower than expected as the impact of higher realisations was offset by an increase in iron ore costs

  • Subsidiary performance remained lackluster due to weaker sales volume at Chile and one-offs in US

  • JSW plans to enhance capacity by 2.6mtpa over the next two years via brownfield expansions at Dolvi and Vijaynagar

  • Availability of iron ore remains an issue; Valuations looked stretched; Maintain Sell with a revised price target of Rs1,072

Result table
(Rs mn) Q4 FY14 Q4 FY13 % yoy Q3 FY14 % qoq
Net sales 143,424 98,982 44.9 136,228 5.3
Material costs (85,538) (61,830) 38.3 (80,965) 5.6
Personnel costs (3,266) (2,210) 47.8 (3,228) 1.2
Power and fuel costs (9,441) (4,836) 95.2 (9,616) (1.8)
Other overheads (19,893) (12,774) 55.7 (18,326) 8.6
Operating profit 25,286 17,332 45.9 24,094 4.9
OPM (%) 17.6 17.5 12 bps 17.7 -6 bps
Depreciation (8,239) (5,947) 38.6 (8,058) 2.2
Interest (7,842) (5,074) 54.6 (7,893) (0.6)
Other income 11 28 (60.4) 144 (92.2)
PBT 9,216 6,340 45.4 8,287 11.2
Tax (4,595) (3,761) 22.2 (3,737) 23.0
Effective tax rate (%) 49.9 59.3 45.1
Other prov / minority etc 207 (321) - 93 124.2
Adjusted PAT 4,828 2,258 113.9 4,643 4.0
Adj. PAT margin (%) 3.4 2.3 109 bps 3.4 -4 bps
Extra ordinary items - 702 - - -
Reported PAT 4,828 2,959 63.2 4,643 4.0
EPS (Rs) 79.9 40.5 97.4 76.8 4.0
Source: Company, India Infoline Research

Topline outperformance was boosted by strong realisations

JSW Steel managed to register a growth of 44.9% yoy and 5.3% qoq on the back of strong blended realisations and a marginally higher than expected sales volume. Sales volume of 3.1mn tons was higher by 9% yoy on a comparable basis and marginally higher than our estimate largely due to liquidation of 0.1mn tons. Share of exports of overall sales volume declined to 28% in Q4 FY14 from 34% in Q3 FY14 due to the appreciation in the rupee. Blended realisations improved 3.7% qoq to Rs40,288/ton on the back of strong domestic prices. JSW had managed to increase its prices thrice in Q3 and Q4 FY14 combined leading to the outperformance in realisations. Crude steel production increased 14% yoy on a comparable basis to 3.15mn tons due to higher availability of iron ore from dumps and NMDC’s strong production.

Jump in iron ore costs offset price hikes

Consolidated operating profit of Rs25.3bn was marginally higher than our estimate of Rs24.8bn. The outperformance of topline was not witnessed in operating profit due to the increase in iron ore costs for the standalone entity and weaker performance at Chile. Standalone operating profit stood at Rs25bn, higher by 8.4% qoq and 47.1% yoy. Standalone EBIDTA/ton of Rs8,052 in Q4 FY14 was marginally lower than our estimate of Rs8,202 as the impact of higher realisations, lower power costs was offset by a jump in iron ore costs and other expenditure. Iron ore costs increased 14% qoq to Rs3,800/ton in Q4 FY14 due to exhaustion of iron ore dumps and increase in demand from local players.

Per ton analysis
(Rs mn) Q4 FY14  Q4 FY13 % yoy Q3 FY14 % qoq
Steel production ('000 tons) 3,150 2,110 49.3 3,190 (1.3)
Steel sales ('000 tons) 3,100 2,430 27.6 3,080 0.6
Sales as a % of production 98.4 115.2 96.6
Net realisations 40,288 38,234 5.4 38,846 3.7
Cost per ton (Rs/ton)
Raw material 23,869 23,924 (0.2) 23,031 3.6
Personnel cost 636 661 (3.7) 643 (1.1)
Power and fuel costs 2,577 1,908 35.1 2,701 (4.6)
Other overheads 5,154 4,757 8.3 4,993 3.2
Total cost 32,236 31,249 3.2 31,368 2.8
EBIDTA/ton 8,052 6,985 15.3 7,478 7.7
Source: Company, India Infoline Research

Tax rate continues to remain high at 31%

Standalone PAT of Rs8bn was higher than our estimate of Rs7.7bn. The outperformance in bottomline was restricted by high tax rate of 31.9% in Q4 FY14, higher than the management guidance of 22-25%. Interest costs surprisingly declined on a qoq basis to Rs6.9bn. Depreciation increased 2.3% qoq as the company commissioned some units at Dolvi.

Subsidiary performance remains subdued

Performance of the subsidiaries continued to remain subdued during the quarter. The underperformance was largely due to weaker performance at Chile and a one-off in US. JSW Steel Coated Products performance was stronger on a qoq basis as the EBIDTA/ton improved from Rs1,887 in Q3 FY14 to Rs2,136 in Q4 FY14. Volumes remained steady at 0.44mn tons. This was the best quarter for the subsidiary since the demerger from JSW Steel. Weak iron ore prices led to lower iron ore sales volume at Chile. Operating profit of US$1.32mn was lower on a qoq basis due to weak realisations and increase in costs. The US plate and pipe mill subsidiary managed to report stronger operating performance in Q4 FY14. However, this was offset by a one-off expense of US$10mn. The company expects performance at the US subsidiary to improve going forward on the back of rising demand. Chile performance would be dependent on iron ore prices.

Volume growth constrained by availability of iron ore

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 is expected to source 13.5mn tons of iron ore from Karnataka, 6mn tons of ore from Chhatisgarh and Odisha together and will use the existing dumps 3mn tons in FY15. Any further requirement will be met through imported ore. The Company is targeting to export 2.8mn tons of exports in FY15 against 3.1mn tons in FY14. The appreciation of the rupee would reduce the share of exports of total sales volume.

Capex guidance increased from 60-65bn to 120bn over FY15-16

The Company has commissioned the CAL-1 of 0.95mtpa at CRM-2 in April 2014. CAL-2 is expected to commision by end of FY15. It has also commissioned the pellet and coke oven plant at Dolvi and 6 Hi CRM mill (0.15mtpa) at Kamleshwar during Q4 FY14. Both the capacities are in the stabilization phase and are expected to ramp up from Q2 FY15. The company now plans a capex of Rs120bn over the next two years to augment its steel making capacity and also for its backward and forward integration. The company plans to spend Rs40bn for capacity expansion project at Dolvi and Vijaynagar. At a capex of Rs33bn it plans to expand its capacity at Dolvi from 3.3mtpa to 5mtpa. The project will be financed in D/E ratio of 2:1 and will be commissioned by September 2015. It includes setting up sinter plant, BF modification, de-bottlenecking of SMS & HSM, billet caster and 1.4mtpa bar mill. It will take 90 days shutdown in its existing BF for said expansion project. The Company has also planned to modernize BF-1 at Vijaynagar to increase hot metal capacity from 0.9mtpa to 1.7mtpa at a capex of Rs 7.2bn subject to necessary approvals.

Planned capex of Rs120bn over FY14-16
Capex plan (Rs mn)
Capex already announced and under implementation 40,000
Dolvi expansion 33,000
Vijaynagar de-bottlenecking 7,200
Investment in raw material assets 15,000
Maintenance and other capex 25,000
Total 120,200
Source: Company, India Infoline Research

Availability of iron ore remains a concern; Valuations stretched; Maintain 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 continue going forward due to the value addition clause put by the state government. 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 increase our FY15 and FY16 sales volume estimate to factor in the strong performance from NMDC and a gradual increase in iron ore production in Karnataka. But on the other hand, we have reduced our FY16 earnings as we expect iron ore prices would remain high in the near term. We believe the recent rally in the stock is overdone. Valuations are 6.4x FY16 EV/EBIDTA appears stretched; maintain our SELL rating on the stock with a revised prices target of Rs1,072. 

Financial Summary
Y/e 30 Jun (Rs m) FY13 FY14E FY15E FY16E
Revenues 382,097 512,196 543,814 584,215
yoy growth (%) 11.2 34.0 6.2 7.4
Operating profit 65,040 91,654 99,393 106,423
OPM (%) 17.0 17.9 18.3 18.2
Pre-exceptional PAT 13,325 21,647 22,861 26,470
Reported PAT 9,632 4,519 22,861 26,470
yoy growth (%) (2.2) 62.4 5.6 15.8
EPS (Rs) 59.7 89.6 94.6 109.5
P/E (x) 20.6 13.7 13.0 11.2
Price/Book (x) 1.6 1.4 1.3 1.2
EV/EBITDA (x) 7.4 7.2 6.9 6.4
Debt/Equity (x) 1.3 1.7 1.7 1.5
RoE (%) 7.8 10.9 10.0 10.6
RoCE (%) 10.3 11.8 10.4 10.7
Source: Company, India Infoline Research
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