Reduce JSW Steel; target of Rs 595: Dolat Capital

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Reduce JSW Steel; target of Rs 595: Dolat Capital

Dolat Capital is bearish on JSW Steel and has recommended reduce rating on the stock with a target of Rs 595 in its October 24, 2011 research report.

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Dolat Capital is bearish on JSW Steel and has recommended reduce rating on the stock with a target of Rs 595 in its October 24, 2011 research report.

"JSW Steel reported Q2 FY12 profit of Rs  1.27bn-  below our estimate of Rs  3.59bn- due to forex loss of Rs  5.17bn. However, adjusted PAT, at Rs  4.85bn, stood better than our estimate due to higher sales volume and lower production cost. Sales volume, at 1.88mn tones (up 9.8% QoQ, 18.9% YoY), beat our estimates (1.73mn tonne) due to higher-than-expected production and inventory liquidation. Realisations fell 1.7% QoQ to Rs  40,515 per tonne (Dolat est: Rs  41,200), whereas cost of production rose 4.9% to Rs  30,422 per tonne. EBITDA per tonne, at Rs  6,849 (USD 150), matched expectations. We were, however, surprised by the lower production cost, which, due to dearer coking coal and iron ore, should have risen by Rs  3,500 per tonne but was up only Rs  1,400 per tonne."

"Production was hit due to the ban on iron ore mining in Karnataka and was lower by 4,55,000 tonnes. We expect production to ramp up due to higher availability of iron ore from CEC's e-auctions. However, logistical and procedural constraints have led JSW Steel to procure a mere 18% of the iron ore it needs, forcing it to operate at 50-60% capacity. JSW Steel has reduced production and sales guidance by 20% and 13.3% respectively for FY12E to 7.5mn tonnes and 7.8mn tonnes respectively, given the impact of the mining ban and delay in commissioning of BF-4. However, we maintain our 7.4-mn-tonne sales estimate for FY12E and 8.5- mn-tonne estimate for FY13E.

"JSW Steel currently trades at 6.7x FY12EV/EBITDA and 5.4xFY13EV/EBITDA. We maintain caution on JSW Steel, given the uncertainty on iron ore procurement, low return ratios and the negative outlook on the sector. We maintain our Reduce rating on the stock, with a price target of Rs  595 at which it will trade at 5.5x FY13 EV/EBITDA," says Dolat Capital research report.

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To read the full report click on the attachment