JSW Steel, 29th January 2013

7/29/2019 JSW Steel, 29th January 2013

1/12

Please refer to important disclosures at the end of this report 1

Quarterly performance (Standalone)

EBITDA 1,314 1,253 4.9 1,525 (13.9) 1,314

% margin 15.9 15.9 (6)bp) 17.3 (139)bp 15.9

Source: Company, Angel Research

JSW Steels 3QFY2013 standalone top-line came in lower than our expectation;

however, the bottom-line was slightly better than our expectation.

JSW Steels standalone net sales

grew by 5.3% yoy to `8,275cr, below our estimate of `8,521cr due to

lower-than-expected realizations. Net sales growth was driven by an increase

in steel volumes (+13.7% yoy to 2.17mn tonne), although the same was

partially offset by a decline in realizations (-9.5% yoy to`38,804/tonne).

JSW Steels EBITDA increased only 4.9% yoy to

`1,314cr on account of decrease in realizations. Interest expenses grew by

61.3% yoy to`455cr. Hence, the adjusted net profit (excluding exceptional items)

de-grew by 30.6% yoy to`464cr (our estimate was of`451cr).

JSW Steel stated that 6 A

category mines, with a capacity of 3.3mtpa, have opened up while another4 mines with a capacity of 1.8mtpa are at various stages of approvals. For B

category mines, 20 mines received R&R approvals; however, there is no clarity

on timelines of production from these mines.

JSW Steel aims to raise utilization levels at its Vijaynagar

plant during FY2014. However, we believe increasing steel production

meaningfully during FY2014 would remain a challenge until there is significant

rise in iron ore supplies from Karnataka mines. Although we expect iron ore

supplies in Karnataka to improve gradually during FY2014, there is lack of

clarity on the timelines and production from category B mines. Moreover, we

opine that JSW Ispats merger with JSW Steel is likely to be value-destructive for

JSW Steels shareholders. The stock is currently trading at 4.9x FY2014EV/EBITDA.

Key financials (Consolidated)

% chg 26.3 44.0 13.7 3.6

% chg 7.4 3.6 4.7 5.0

OPM (%) 20.4 17.8 16.5 18.2

P/E (x) 11.1 15.5 10.5 9.6

P/BV (x) 1.2 1.2 1.1 1.0

RoE (%) 14.2 7.8 10.7 10.7

RoCE (%) 10.5 10.8 9.6 10.4

EV/Sales (x) 1.4 1.0 0.9 0.9

EV/EBITDA 6.7 5.9 5.5 4.9


CMP `869

Target Price -

Investment Period -

Stock Info

Sector

Net Debt (` cr) 18,739

Bloomberg Code JSTL@IN

Shareholding Pattern (%)

Promoters 38.1

MF / Banks / Indian Fls 5.3

FII / NRIs / OCBs 20.6Indian Public / Others 36.1

Abs. (%) 3m 1yr 3yr

Sensex 7.9 16.6 23.3

JSW Steel 18.7 31.4 (12.1)

10

20,103

6,075

JSTL.BO

19,409

1.5

894/566

205,903

Steel

Avg. Daily Volume

Market Cap (` cr)

Beta

52 Week High / Low

Face Value (`)

BSE Sensex

Nifty

Reuters Code

Tel: 022- 39357800 Ext: 6821

[email protected]

Tel: 022- 39357600 Ext: 6841

[email protected]

Performance Highlights

3QFY2013 Result Update | Steel

January 28, 2013


2/12

JSW Steel | 3QFY2013 Result Update

January 28, 2013 2

Exhibit 1:3QFY2013 performance (Standalone)

Raw material 5,354 5,167 3.6 5,655 (5.3) 16,614 14,421 15.2% of net sales 64.7 65.7 64.0 63.6 64.0

Power & fuel 493 439 12.2 496 (0.7) 1,501 1,280 17.2

% of net sales 6.0 5.6 5.6 5.7 5.7

Staff cost 160 150 6.8 176 (8.8) 510 473 7.9

% of net sales 1.9 1.9 2.0 2.0 2.1

Other expenditure 972 868 12.0 1,019 (4.6) 2,964 2,461 20.4

% of net sales 11.7 11.0 11.5 11.3 10.9

Total expenditure 6,979 6,624 5.4 7,346 (5.0) 21,589 18,635 15.9

% of net sales 84.3 84.3 83.2 82.6 82.6

Other operating income 18 17 4.0 37 (52.8) 62 29 114.3

EBITDA margins (%) 15.9 15.9 0.06 17.3 17.6 17.5 (0.16)

Interest 455 282 61.3 421 8.0 1,282 713 79.8

Depreciation 498 444 11.9 481 3.4 1,446 1,236 17.0

Other income 57 1 7,348.7 78 (27.7) 207 54 283.6

Exceptional items 327 0 422 497 513 (3.1)

% of net sales 1.1 6.7 12.7 6.1 6.8

Tax (46) (141) (67.4) 302 (115.3) 365 161 126.8

% of PBT (50.7) (26.8) 26.8 22.9 10.5


Exhibit 2:3QFY2013 Actual vs. Angel estimates (Standalone)

EBITDA 1,314 1,474 (10.9)

EBITDA margin (%) 15.9 17.3 (143)bps



3/12


January 28, 2013 3

Result highlights

JSW Steels standalone net sales grew

by 5.3% yoy to `8,275cr, below our estimate of `8,531cr due to lower-than-

expected realizations. Net sales growth was driven by an increase in steel volumes

(+13.7% yoy to 2.17mn tonne), although the same was partially offset by a

decline in realizations (-9.5% yoy to`38,804/tonne).

Exhibit 3:Higher sales volumes...


Exhibit 4:...Partially offset by lower realizations...


Exhibit 5:...resulted in net revenue growth of 5.3% yoy


JSW Steels EBITDA increased only 4.9%

yoy to`1,314cr in spite of a 13.7% yoy increase in volumes due to decrease in

realizations.

Interest expenses grew by 61.3% yoy to

`455cr. The company reported an exceptional item related to forex loss of`327cr.

Hence, the adjusted net profit (excluding exceptional items) de-grew by 30.6% yoy

to`464cr (our estimate was of`451cr). The reported net profit was however down

79.5% yoy to`137cr.

1.7 1.71.9 1.9

2.32.1 2.2 2.2

(30.0)

0.0

30.0

60.0

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2.8

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

(%)

(mntonnes)

Sales Volume (LHS) yoy change (RHS)

40,577

43,13042,831 42,901

43,003 42,900

41,884

38,804

(25)

0

25

36,000

37,000

38,000

39,000

40,000

41,000

42,000

43,000

44,000

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

(%)

(`/tonne)

Revenue/tonne (LHS) yoy change ( RHS)

7,032 7,065 7,6257,860

9,5119,030 8,834

8,275

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0

1,500

3,000

4,500

6,000

7,500

9,000

10,500

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

(%)

(`c

r)

Revenue (LHS) yoy change (RHS)


4/12


January 28, 2013 4

Exhibit 6:Adjusted net profit stood at `464cr


On the iron ore situation inKarnataka, the company stated that 6 A category mines, with a capacity of

3.3mtpa, have opened up while another 4 mines with a capacity of 1.8mtpa are at

various stages of approval. For B category mines, 20 mines received R&R

approvals; however, there is no clarity on timelines of production from these

mines.

On the projects front, the company is implementing various projects which are

likely to take the companys share of value-added products to 40-50% of the total

capacity over the coming two years.

833

578 640 668 553

861

400464

0

3

6

9

12

15

-

200

400

600

800

1,000

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

(%)

(`cr)

Adjusted net profit (LHS) margin (RHS)


5/12


January 28, 2013 5

Investment rationale

JSW Steel had expanded its capacity by

3.2mn tonne during FY2012, taking its total capacity to 11mn tonne. Further, JSW

Steel is expanding capacity at its Vijaynagar plant from 10mn tonne to 12mn

tonne by FY2014-15.

Although JSW Steel has expanded its capacity, its

Vijaynagar plant (capacity 10mn tonne) continues to operate at lower utilization

levels on account of shortage of iron ore due to mining ban in Karnataka.

Although we expect iron ore supplies to improve gradually during FY2013 as

category A and B mines commence operations, there is lack of clarity on the

timelines and anticipated production from these mines. Procedural delays in the

commencement of operations from Karnataka mines could result in higher iron

ore costs/lower utilization for JSW Steel.

JSW Steel is expected to merge with

JSW Ispat over the coming one year. However, JSW Ispats margins are much

lower compared to JSW Steels standalone margins. Given the commodity nature

of the business, JSW Steels Management is not expected to turnaround JSW Ispats

loss making plants in the near-term, in our opinion. Further, JSW Ispats debt will

raise debt-equity ratio of the merged entity. Hence, JSW Ispats merger with JSW

Steel is likely to be value-destructive for JSW Steels shareholders (at least during

our investment horizon).

Outlook and valuationJSW Steel aims to raise utilization levels at its Vijaynagar plant during FY2014.

However, we believe increasing steel production meaningfully during FY2014

would remain a challenge until there is significant rise in iron ore supplies from

Karnataka mines. Although we expect iron ore supplies in Karnataka to improve

gradually during FY2014, there is lack of clarity on the timelines and anticipated

production from category B mines. Procedural delays in the commencement of

operations from Karnataka mines could result in higher iron ore costs/lower

utilization for JSW Steel. Moreover, we opine that JSW Ispats merger with JSW

Steel is likely to be value-destructive for JSW Steels shareholders. The stock is

currently trading at 4.9x FY2014 EV/EBITDA.

Exhibit 7:EPS Angel forecast vs. consensusFY2013E 82.4 73.6 11.9

FY2014E 90.3 89.8 0.6

Source: Bloomberg, Angel Research


6/12


January 28, 2013 6

Exhibit 8:P/E band


Exhibit 9:EV/EBITDA band


Exhibit 10:P/BV band


0

200

400

600

800

1,000

1,200

1,400

1,600

Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13

(`)

6x 9x 12x 15x

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000


(`

cr)

2x 4x 6x 8x 10x

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000


(`)

0.5x 1.0x 1.5x 2.0x


7/12


January 28, 2013 7

Exhibit 11:Recommendation summary

SAIL 90 - Neutral 37,236 - 13.3 13.0 0.9 0.9 8.0 8.4 6.9 6.7 6.1 6.2Tata Steel 406 463 Accum 36,493 14 17.1 8.4 0.8 0.8 6.4 5.4 4.9 9.3 7.2 10.0


Incorporated in 1994, JSW Steel is India's second largest private sector steel maker

with a steel making capacity of 11mn tonne. The company has the most modern

steel plants with the latest technologies for both upstream and downstream

processes. The company has an iron ore mine in Karnataka which fulfills 15% of its

requirement. During FY2011, the company acquired 49% stake in JSW Ispat foran enterprise value of US$3bn and is now expected to be merged with JSW Steel

during CY2013. The combined capacity of both companies would be 14mn tonne.


8/12


January 28, 2013 8

Profit & loss statement (Consolidated)

Less: Excise duty 1,178 1,254 1,968 2,596 2,891 2,996

Other operating income 49 60 244 - 64 65

% chg 27.9 19.0 27.2 42.6 13.9 3.6

Total Expenditure 12,953 14,887 19,238 28,266 32,672 33,239

Net Raw Materials 9,619 11,231 14,774 21,928 24,819 25,100

Other Mfg costs 2,815 3,176 3,824 5,492 6,838 7,086

Personnel 519 480 641 846 1,016 1,053

% chg (14.3) 36.5 19.6 25.4 5.9 14.2

(% of Net Sales) 18.8 21.5 20.4 17.8 16.5 18.2

Depreciation& Amortization 988 1,299 1,560 1,933 2,344 2,632

% chg (27.1) 39.0 19.3 26.0 (1.2) 15.3

(% of Net Sales) 12.6 14.7 13.9 12.1 10.5 11.7

Interest & other Charges 1,156 1,108 1,060 1,427 1,703 1,681

Other Income 272 128 190 77 251 276

(% of PBT) 24.5 7.2 7.8 2.7 9.4 8.3

Share in profit of Associates - - - - - -

% chg (54.2) 61.4 36.0 15.6 (5.4) 25.5

Extraordinary Inc/(Expense) (795) 408 - (825) - -

Tax 73 647 779 500 800 1,004

(% of PBT) 23.0 29.4 31.9 25.1 30.0 30.0

Add: Share of earnings of asso. 12 11 71 (226) (52) (357)

Less: Minority interest (MI) 21 33 (24) 19 24 30

Extraordinary Expense/(Inc.) - - - 710 - -

% chg (32.5) 11.2 47.4 (28.8) 47.3 9.6

(% of Net Sales) 6.7 6.3 7.4 3.6 4.7 5.0

% chg (50.6) 67.1 23.3 (28.8) 47.3 9.6

Note: Some of the figures from FY2011 onwards are reclassified; hence not comparable with

previous year numbers


9/12


January 28, 2013 9

Balance sheet (Consolidated)

Equity Share Capital 187 187 284 284 284 284Reserves & Surplus 7,617 9,070 15,716 16,465 18,019 19,769

Share Warrants - - 529 - - -

Minority Interest 273 219 222 218 194 164

Total Loans 16,550 16,173 18,373 21,786 24,286 24,186

Deferred Tax Liability 1,277 1,685 2,049 2,725 2,725 2,725

Other Long term liabilities - - 773 472 472 472

Long term provisions - - 23 35 35 35

Gross Block 22,389 26,792 32,684 41,446 47,246 52,746

Less: Acc. Depreciation 4,080 5,339 6,873 8,877 11,222 13,854

Capital Work-in-Progress 9,585 6,956 5,983 2,832 2,332 1,832

Goodwill 783 899 1,093 1,244 1,244 1,244

Investments 397 628 2,914 2,090 2,090 2,090

Cash 509 303 2,036 3,047 6,053 5,222

Loans & Advances 1,243 1,604 1,203 2,187 2,187 2,187

Other 3,341 3,563 5,343 7,329 5,913 6,042

Mis. Exp. not written off - - - - - -




10/12


January 28, 2013 10

Cash flow statement (Consolidated)

Profit before tax 315 2,200 2,438 1,933 2,666 3,345

Depreciation 988 1,299 1,560 1,933 2,344 2,632Change in Working Capital 2,678 (471) (1,314) (1,062) 1,931 (82)

Others 874 793 570 1,054 - -

Direct taxes paid 262 459 426 407 800 1,004

(Inc.)/ Dec. in Fixed Assets (5,971) (2,736) (7,674) (4,079) (5,300) (5,000)

(Inc.)/ Dec. in Investments 115 (209) (11.6) 13.2 - -

Share of profit/ (loss) from asso. 15 13 53 144 (52) (357)

Issue of Equity - - 5,936 - - -

Inc./(Dec.) in loans 2,548 629 401 2,191 2,500 (100)

Dividend Paid (Incl. Tax) 340 57 240 350 284 265

Others 972 1,149 1,001 1,143 - -

Inc./(Dec.) in Cash (12) (147) 293 110 3,006 (831)




11/12


January 28, 2013 11

Key ratios

P/E (on FDEPS) 22.8 13.6 11.1 15.5 10.5 9.6P/CEPS 12.9 5.6 5.9 7.8 4.6 4.2

P/BV 2.2 1.8 1.2 1.2 1.1 1.0

Dividend yield (%) 0.1 1.1 1.2 1.2 1.2 1.3

EV/Sales 2.0 1.7 1.4 1.0 0.9 0.9

EV/EBITDA 10.7 7.7 6.7 5.9 5.5 4.9

EV/Total Assets 1.2 1.1 0.9 0.9 0.8 0.8

EPS (Basic) 41.2 68.8 78.6 55.9 82.4 90.3

EPS (fully diluted) 38.2 63.8 78.6 55.9 82.4 90.3

Cash EPS 67.5 154.8 148.5 110.7 187.5 208.3

DPS 1.0 9.5 10.0 10.0 10.0 11.0

Book Value 401.8 480.0 704.7 738.3 807.9 886.3

EBIT margin 12.6 14.7 13.9 12.1 10.5 11.7

Tax retention ratio (%) 77.0 70.6 68.1 74.9 70.0 70.0

Asset turnover (x) 0.7 0.7 0.8 1.0 1.1 1.0

ROIC (Post-tax) 6.3 7.6 7.3 8.7 7.8 8.5

Cost of Debt (Post Tax) 6.2 4.8 4.2 5.3 5.2 4.9

Leverage (x) 2.1 1.7 0.9 1.0 0.9 0.9

Operating RoE 6.6 12.4 10.0 12.1 10.2 11.5

RoCE (Pre-tax) 8.6 10.7 10.5 10.8 9.6 10.4

Angel RoIC (Pre-tax) 14.5 17.3 15.7 14.9 12.7 13.6

RoE 10.7 16.1 14.2 7.8 10.7 10.7

Asset Turnover (Gross Block) 0.8 0.8 0.8 0.9 0.9 0.8

Inventory (days) 55 52 51 50 50 50

Receivables (days) 11 11 12 13 13 13

Payables (days) 46 43 40 30 30 30

WC cycle (days) 32 32 36 42 39 29

Net debt to equity 2.1 1.7 0.9 1.0 0.9 0.9

Net debt to EBITDA 5.2 3.7 2.8 2.7 2.5 2.3

Interest Coverage 1.7 2.5 3.1 2.9 2.4 2.8

Note: Some of the figures from FY2011 onwards are reclassified; hence some ratios may not be

comparable with previous year ratios


12/12


January 28 2013 12

Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investmentdecision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make

such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies

referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and

risks of such an investment.

Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make

investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this

document are those of the analyst, and the company may or may not subscribe to all the views expressed within.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and

trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's

fundamentals.

The information in this document has been printed on the basis of publicly available information, internal data and other reliablesources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as thisdocument is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any wayresponsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report .Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify,nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. WhileAngel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory,compliance, or other reasons that prevent us from doing so.

This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,

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Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or

other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in

the past.

Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in

connection with the use of this information.

Disclosure of Interest Statement JSW Steel

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

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JSW Steel, 29th January 2013

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