JSW Steel (JSTL)
Metals & Mining
Challenging times ahead. JSW Steel reported consolidated net loss of Rs6.7 bn on
(1) consolidation of share of loss of Ispat of 1HFY12 and (2) forex loss of Rs5.1 bn shown
as an extraordinary item but part of which may have pertained to core operations. We
expect debt levels of JSW to increase (though overall leverage is still manageable) in
subsequent quarters. We maintain SELL rating; cost pressure, iron ore sourcing and
domestic market slowdown are the key negatives. We build in revised Re/US$ forecast
of our economist which drives 3-13% earnings upgrade and 7% in TP.
Reported net income hurt by one-offs; EBITDA performance driven by beat at the standalone level
JSW reported consolidated performance today after reporting standalone performance on October
24 and JSW Ispat numbers on November 10. JSW reported consolidated EBITDA of Rs13.9 bn
(-2.9% qoq), 21.7% ahead of our estimate with the entire outperformance driven by the
standalone unit. However, part of the forex loss of Rs5.1 bn reported as an extraordinary item
pertained to coking coal imports which should form part of raw material costs. JSW reported net
loss of Rs6.7 bn in 2QFY12 owing to one-offs of Rs11.8 bn (1) forex loss of Rs5.1 bn, (2) loss of
Rs14.8 bn reported in 1HFY12 by JSW Ispat. JSW consolidated its proportionate share of loss of
Rs7.5 bn.
Among subsidiaries, (1) JSW Chile reported EBITDA of US$7.2 mn and net income of US$4.6 mn
on150 kt iron ore shipments. EBITDA was down sequentially on decline in shipments, (2) US plate
mill reported EBITDA of US$6.4 mn, up 87% qoq. Loss declined to US$7.6 mn from US$9.4 mn in
1QFY12. Pipe and plate mill capacity utilization continues to be at sub-optimal level and (3) other
subsidiaries reported EBITDA of Rs351 mn, an improvement from loss of Rs269 mn in 1QFY12.
Debt likely to increase further even as the company recalibrates its capex plan
JSW reported net debt of Rs163 bn, an increase from Rs144 bn at end-March 2011. Debt
increased due to (1) MTM of unhedged forex currency loans, (2) capex spend of Rs20 bn in
1HFY12 and (3) increase in inventory due to increase in raw material prices. We note that the debt
number does not include acceptances. This amount may have increased as witnessed in Rs29 bn
increase in current liabilities in 1HFY12. JSW indicated that it may recalibrate its capex plan
without quantifying the cut of its earlier capex guidance of Rs80 bn for FY2012E.
Adjust estimates and maintain SELL rating
We model our economist’s revised FY2013-14E Re/US$ rate of Rs49.8/48.5. We also marginally
adjust our profitability estimates for JSW. A combination of these factors leads to 13.1/2.6%
increase in FY2013-14E EPS. Pricing pressures, iron ore sourcing issues, likely domestic
overcapacity over the next few years and the visible slowdown in domestic steel consumption will
continue to weigh on JSW Steel’s performance and profitability. SELL with a TP of Rs600.
Metals & Mining
Challenging times ahead. JSW Steel reported consolidated net loss of Rs6.7 bn on
(1) consolidation of share of loss of Ispat of 1HFY12 and (2) forex loss of Rs5.1 bn shown
as an extraordinary item but part of which may have pertained to core operations. We
expect debt levels of JSW to increase (though overall leverage is still manageable) in
subsequent quarters. We maintain SELL rating; cost pressure, iron ore sourcing and
domestic market slowdown are the key negatives. We build in revised Re/US$ forecast
of our economist which drives 3-13% earnings upgrade and 7% in TP.
Reported net income hurt by one-offs; EBITDA performance driven by beat at the standalone level
JSW reported consolidated performance today after reporting standalone performance on October
24 and JSW Ispat numbers on November 10. JSW reported consolidated EBITDA of Rs13.9 bn
(-2.9% qoq), 21.7% ahead of our estimate with the entire outperformance driven by the
standalone unit. However, part of the forex loss of Rs5.1 bn reported as an extraordinary item
pertained to coking coal imports which should form part of raw material costs. JSW reported net
loss of Rs6.7 bn in 2QFY12 owing to one-offs of Rs11.8 bn (1) forex loss of Rs5.1 bn, (2) loss of
Rs14.8 bn reported in 1HFY12 by JSW Ispat. JSW consolidated its proportionate share of loss of
Rs7.5 bn.
Among subsidiaries, (1) JSW Chile reported EBITDA of US$7.2 mn and net income of US$4.6 mn
on150 kt iron ore shipments. EBITDA was down sequentially on decline in shipments, (2) US plate
mill reported EBITDA of US$6.4 mn, up 87% qoq. Loss declined to US$7.6 mn from US$9.4 mn in
1QFY12. Pipe and plate mill capacity utilization continues to be at sub-optimal level and (3) other
subsidiaries reported EBITDA of Rs351 mn, an improvement from loss of Rs269 mn in 1QFY12.
Debt likely to increase further even as the company recalibrates its capex plan
JSW reported net debt of Rs163 bn, an increase from Rs144 bn at end-March 2011. Debt
increased due to (1) MTM of unhedged forex currency loans, (2) capex spend of Rs20 bn in
1HFY12 and (3) increase in inventory due to increase in raw material prices. We note that the debt
number does not include acceptances. This amount may have increased as witnessed in Rs29 bn
increase in current liabilities in 1HFY12. JSW indicated that it may recalibrate its capex plan
without quantifying the cut of its earlier capex guidance of Rs80 bn for FY2012E.
Adjust estimates and maintain SELL rating
We model our economist’s revised FY2013-14E Re/US$ rate of Rs49.8/48.5. We also marginally
adjust our profitability estimates for JSW. A combination of these factors leads to 13.1/2.6%
increase in FY2013-14E EPS. Pricing pressures, iron ore sourcing issues, likely domestic
overcapacity over the next few years and the visible slowdown in domestic steel consumption will
continue to weigh on JSW Steel’s performance and profitability. SELL with a TP of Rs600.
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