JSW Steel (Q3 FY14) - Result Update - IIFL

JSW Steel (Q3 FY14) – SELL - CMP Rs930, Target Rs835, Downside 10.2%

JSW's standalone results were stronger than our estimates due to some inventory liquidation and higher realisations. Results cannot be compared on a yoy basis due to the merger of Ispat and the demerger of its value added business. The company managed to register 4.2% qoq growth in topline led by 5.9% qoq increase in realisations. Sales volume for the quarter was lower by 1.6% qoq at 3.08mn tons, higher than our estimate of 2.9mn tons. Availability of iron ore from dumps and NMDC's strong production output led to 7% qoq jump in steel production. JSW managed to export 0.87mn tons from its standalone entity and 1.05mn tons from its consolidated entity, thereby offsetting the weak demand scenario in the domestic market. Exports accounted for 28.3% of total standalone sales volume, higher than 22% registered in Q2 FY14. JSW managed to increase its blended realisations on the back of price hikes announced at the start of Q3 FY14 and higher exports.

The impact of higher realisations and higher volumes was offset by an increase in other expenditure. Other expenditure increased 26.5% qoq to Rs15.3bn due to expenses related to hedging. Iron ore costs for the company increased by Rs330/ton due to the price hikes announced by NMDC and higher demand from the local steel producers. In addition to the price hikes the quality of iron ore has also degraded leading to higher coal consumption. EBIDTA/ton improved by 4.8% qoq to Rs7,478/ton against our expectation of Rs6,961/ton.

Standalone PAT of Rs6.5bn was higher than our estimate of Rs5.2bn. The outperformance in bottomline was restricted by the jump in tax rate from 21.1% in Q2 FY14 to 31% in Q3 FY14. Interest costs continued to increase on a qoq basis to Rs7.2bn.

Consolidated debt increased by 6.2% qoq to Rs32.2bn due to the capex incurred on its back ward integration projects at Ispat and capex related the SMS plant. The company has increased its capex guidance to Rs50-55bn in FY14 from the earlier guidance of Rs40bn due to accelerated capex for its Steel Melting Shop (SMS) at Vijay Nagar. The pellet plant and the coke oven batteries are under the final stages to completion and are expected to be ready for commercial production by end-Q4 FY14. The company has commenced commercial production of the first phase of CRM2 Project at the Vijay Nagar facility. The company also expects the DRI plant along with the SMS to be operational in Q1 FY15, which would boost production by 0.5mn tons in FY15.

The management is reasonably confident of meeting its iron ore requirements for FY14 and till the end of Q1 FY14. The company has indicated that 21 miners with a capacity of ~9.7mtpa capacity have restarted their operations. This coupled with NMDC's output would lead to a total output ~18mtpa. The company expects dump sales worth 4.5mn tons to be done over the next one quarter. However, availability of iron ore post the exhaustion of dumps and the tight supply situation from Orissa would lead to lower ore availability for JSW. We believe if the situation doesn't improve over the next one quarter we believe JSW would miss its crude steel production guidance of 12.5mn tons in FY15.

On a consolidated basis, topline growth stood at 4.9% qoq to Rs136.7bn. Operating profit for the quarter stood at Rs24.1bn. Chile operations registered a topline of US$27.3mn and an operating profit of US$5.2mn. US plate and pipe mills reporting an operating loss of US$1.7mn.

We expect the iron ore supply in the region would continue to remain tight leading to lower volume growth in FY15. 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 due to the Shah Commission report. We believe domestic prices would remain sideways to negative over the next one year due to subdued demand in the country. We increase our FY14 earnings on the back of the strong volume growth reported by the company. But on the other hand, we have reduced our FY15 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 5.3x FY16 EV/EBIDTA appears stretched; maintain our SELL rating on the stock with a revised prices target of Rs835.

Source : Equity Bulls

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