JSW Steel - Dismal Volumes; Stake sale to JFE boosts confidence - PINC Result Review

JSW Steel's consolidated revenue grew 19% YoY to Rs46.8bn, as realisation improved 31% YoY, even though sales declined 10% YoY to 1.2mnt. Operating profit at Rs10.3bn grew 5% YoY, despite a 300bps contraction in OPM due to higher raw material & employee cost. PAT grew at 3% YoY to Rs3.5bn.

JFE, Japan's second largest steel maker, to infuse Rs48-57bn in JSW for 14.99% stake: In addition to reducing financial leverage & expedite growth projects, the partnership would help JSW through efficiency improvement. We expect Net debt/Equity to decline to 1.0x by FY11 end from current 1.4x.

OUTLOOK

We believe that steel margins would be under pressure in Q2FY11 due to sequential decline in steel prices amidst higher RM cost (coking coal contract price rose 12.5% QoQ to USD225/t). However, raw material spot prices have corrected by 20-35% since April, which should help improve margin Q3 onwards, further aided by bottoming out of steel prices. We have assumed HRC price/tonne of USD650 and USD700 for FY11 & FY12 respectively.

VALUATIONS AND RECOMMENDATION

We believe that JSW would benefit from capacity-addition led volume growth (FY10-FY13E CAGR of 16%), reducing leverage concerns and improved efficiency. Consequently, we expect EPS to grow at a CAGR of 28% over FY10-FY13E despite dilution. At CMP of Rs1,155, the stock is trading at 5.9x FY12E EV/EBITDA. Recommend 'BUY' with a target price of Rs1,373 (6x FY12E EV/EBITDA).

Source : Equity Bulls

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