Hammered, but not bent

Updated: Oct 31 2011, 06:27am hrs
JSW Steel (JSTL) reported stand-alone Ebitda (earnings before interest, taxes, depreciation and amortisation) of R13 bn (+31% year-on-year, down 7% q-o-q) vs our estimate of R10.1 bn; Ebitda/tonne was $151 (down 17% q-o-q, up 12% y-o-y).

Sales volumes surprised positively at 1.74 million tonne vs our estimate of 1.66 mt, as September output was better than expected. Iron ore costs per tonne of crude steel increased by R1,500/t (50%) q-o-q, and overall raw material cost at R29,000/t was up 6%. The management said that 0.45mt (equivalent to R6.25 bn) was lost from cutbacks in production due to raw material issues.

JSW Steel reported notional forex translational losses of R5.1 bn ($105m) in the P&L (profit & loss account) on acceptances of $1.2 bn. An additional R4.88 bn impact due to foreign currency loans (which constitute 65% of JSTLs debt portfolio) was capitalised. Reported NPAT (net profit after tax) was R1.25 bn (down 79% y-o-y) and on an adjusted basis was R4.8 bn (up 46% y-o-y).

The management has cut FY12 production and sales guidance to 7.5 mt (14% cut) & 7.8mt (13% cut), respectively, with the underlying assumption that frequency of iron ore e-auctions increase and logistics bottlenecks are resolved. We retain our FY12 sales volume estimates of 6.9 mt as uncertainty on resolution of the iron ore issue prevails.

The management expects 1.5-3.5 mt per month of incremental iron ore supply in Karnataka if non-violating mines are permitted to operate by the apex court. The outcome would depend on the findings of the Central Empowered Committees Environmental Impact Assessment Report, due in early November. This could help JSTL reach rated capacity, as mine proximity will alleviate logistic-related issues it faces; timelines are uncertain, though.

We value JSW Steel on FY12e EV(enterprise value)/Ebitda of 5.5 and derive our 12-month target price of R720. We rate JSTL Neutral (V). Risks: Steel and raw material prices pose upside and downside risks. Other risks include timely commissioning of raw material projects and turnaround of Ispat.

HSBC Global Research