Accumulate JSW Steel; target Rs 725: PINC Research

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Accumulate JSW Steel; target Rs 725: PINC Research

PINC Research is bullish on JSW Steel and has recommended accumulate rating on the stock with a target price of Rs 725 in its January 20, 2012 research report.

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PINC Research is bullish on JSW Steel and has recommended accumulate rating on the stock with a target price of Rs 725 in its January 20, 2012 research report.

"JSW Steel's Q3FY12 standalone revenue at Rs78.8bn grew 36% YoY on higher volumes (up 20% YoY) and improved steel realisation (up 14% YoY). Operating profit at Rs12.5bn grew 24% YoY, although OPM contracted to an 11-qtr low of 15.9% on higher iron ore cost. EBITDA/t at USD127 declined 6% YoY and 15% QoQ on higher cost. Adjusted PAT at Rs3.4bn declined 12% YoY on higher interest and depreciation cost on commissioning of 2.9mntpa capacity. Reported PAT declined 56% YoY to Rs1.7bn on Rs3.5bn forex loss (adj. for tax) despite Rs1.8bn of tax credit for prior period."

"Record sales volume of 1.91mnt grew 20% YoY on higher crude output (1.94mnt, up 19% YoY) despite iron ore supply constraint. Utilisation level improved gradually with 84% CU in Dec (Q3 - 71%). JSW Shoppe sold 317kt, 21% of domestic sales. Out of total 26mnt iron ore stock in Karnataka, ~17mnt have been auctioned till Dec'11 and 11mnt have been sold. JSW has secured 7.1mnt, 52% of which they have received at plant. JSW's avg. cost of iron ore fines (excl. 12% FDT) was Rs3,050/t. With only 3-4 months of stock remaining (~7mnt) for eauctions, iron ore supply in Karnataka is critical and awaits Supreme Court's decision to allow clean mines to operate. 17.5mn warrants to promoters expired worthless in Dec'11 (Rs5.3bn advance forfeited). Further, USD275mn of FCCBs are unlikely to be converted into equity (due Jun'12) and hence, has to be redeemed at 42.8% premium (resulting into an outflow of USD392mn)."

"JSW's 300MW CPP is on track for completion in Q4FY12 (eligible for 80IA tax benefit). Further, HSM 2 - phase II (1.5mntpa), beneficiation (pending 4 modules), CRM mill & 2.0mntpa debottlenecking expansion are on track. Received approval for supply of power to JSW Ispat from JSW Energy (@Rs4.5/unit incl. T&D losses). Further, JSW announced 1mntpa coke oven, 4mntpa pellet plant and 0.8mntpa CRM at JSW Ispat's Dolvi works via JSW's 100% subs. Amba River Coke at a capex of Rs21.4bn, expected in FY14."

"JSW's CU has improved gradually to 84% in Dec'11 (from 30% in Aug-Sep) on better flow of auctioned iron ore. Further, there is iron ore supply visibility of 6- 7mths (3mth of iron ore yet to receive, 3-4mths of stock yet to be auctioned). However, after that, supply is contingent on Supreme Court's decision to allow mining at clean mines. We have assumed FY13E output of 8.8mnt (vs company's guidance of 9.5-10mnt without supply disruption). To factor in the risk of iron ore supply, we value JSW at 4.8x FY13E EV/EBITDA (discount to peers). Recommend Accumulate with target price of Rs 725," says PINC Research report.

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