JSW Steel (JINVIJ) 1176

Transcription

1 Result Update Rating matrix Rating : Hold Target : 1250 Target Period : 12 months Potential Upside : 6% What s Changed? Target Changed from 1225 to 1250 EPS FY15E Changed from to EPS FY16E Changed from to Rating Unchanged Quarterly Performance (Consolidated) Q2FY15 Q2FY14 YoY (%) Q1FY15 QoQ (%) Revenue 13, , , EBITDA 2, , , EBITDA (%) bps bps PAT LP Key Financials ( Crore) FY13 FY14 FY15E FY16E Total Op. Income EBITDA Adj Net Profit Adj EPS ( ) Valuation summary FY13 FY14 FY15E FY16E PE (x) Target PE (x) EV/EBITDA (x) P/BV (x) Adj RoNW (%) Adj RoCE (%) Stock data Particular Amount Market Capitalisation crore Debt-Cons. (FY14P) crore Cash Cons. (FY14P) 663 crore EV crore 52 week H/L 1327 / 804 Equity capital crore Face value 10 Price performance (%) Return % 1M 3M 6M 12M JSW Steel SAIL Tata Steel Analyst s name Dewang Sanghavi dewang.sanghavi@icicisecurities.com Isha.Bansal isha.bansal@icicisecurities.com October 22, 2014 JSW Steel (JINVIJ) 1176 Performs well; margins surprise positively JSW Steel reported a good set of Q2FY15 numbers. The company reported a net operating income of crore for the quarter (higher by 7% YoY) in line with our estimate of crore The EBITDA margin for the quarter came in at 20.1%, up 38 bps QoQ and 200 bps YoY and better than our estimate of 19.4% The EBITDA came in at crore (up 18.9% YoY) above our estimate of crore. On a standalone basis, the company clocked an EBITDA/tonne of 8534/tonne (I-direct estimate: 8000/tonne) Consequent PAT was at crore, better than our estimate: crore Sales volumes outweigh subdued domestic demand The steel sector is facing headwinds in the form of a muted demand scenario both domestically and globally. Domestic steel demand has been stagnant with mere 0.6% consumption growth in FY14 and 0.3% during the first five months of FY15. In the current challenging times, JSW Steel has been able to report sales volume growth of 4% in FY14 (adjusting for merger with JSW Ispat) indicating an increase in its domestic market share (11.9 MT in FY14 vis-à-vis 11.4 MT in FY13). In H1FY15, JSW Steel reported sales volume of 5.94 MT, up 5.0% YoY. Healthy EBITDA/tonne on product mix, cost optimisation JSW Steel Vijayanagar s steel unit is one of the low cost convertors globally. The company does not have access to any captive operational iron ore and coking coal mine in India. However, despite its dependency on external sources for its key raw materials, JSW Steel was able to report healthy EBITDA/tonne due to economies of scale, cost optimisation and healthy realisations (due to superior product mix). The company also has a notable presence in the value-added products category, thereby having a large and diversified customer base with enhanced profitability. On a sustainable basis, JSW Steel clocks an EBITDA/tonne of ~ /tonne, notably higher than its peers like SAIL, which clocks an EBITDA/tonne of ~ 4000 only despite having access to captive iron ore. Elevated debt levels remains area of concern Post the merger with Ispat Industries, the debt level of JSW Steel has increased significantly. On a consolidated basis, the net gearing stood at 1.56x at the end of Q2FY15 while net debt to EBITDA on a consolidated basis stood at 3.46x. Healthy operational performance We expect JSW Steel to report a healthy set of numbers, going forward, on account of cost savings on declining coking coal prices and benefits on account of commissioning of the Dolvi pellet plant and coke oven plant along with enhancement of margins led by value-added products as utilisation at the CRM mill is progressively increasing. Going forward, we also expect an improved performance from subsidiaries. We have valued the stock at 6x FY16E EV/EBITDA and arrived at a target price of We have assigned a HOLD recommendation to the stock. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q2FY15 Q2FY15E Q2FY14 YoY (%) Q1FY15 QoQ (%) Comments Revenue 13, , , , Topline came in line with our estimate Other Income Other income came in higher than estimate Employee Expense Employee expense was in line with estimate Raw Material Expense 7, , , , Raw material expense came broadly in line with our estimate Power & Fuel Expense 1, , Power and fuel expense came in higher than estimate Other operating Expenses 1, , , , Other expenses were in line with our estimate EBITDA 2, , , , EBITDA Margin (%) bps bps EBITDA margins came in higher than estimates on account of improved efficiency of standalone operation and better-than-expected performance from subsidiaries Depreciation Depreciation was lower than our estimate Interest Interest expense was lower than estimate Exceptional Item PBT 1, LP 1, Tax Outgo PAT LP Minority Interest, Share of Associate &Extra Ordinary Item PAT for the Group LP PAT came in higher than estimate on account of improved operational performance Key Metrics Steel Sales (MT) Steel sales came in line with our estimate Standalone EBITDA/tonne ( /tonne) EBITDA/tonne came in higher than our estimate on account of lower operating costs and improvement in proportion of value-added products in overall product mix Change in estimates FY15E FY16E ( Crore) Old New % Change Old New % Change Comments Revenue 54, , , , Broadly maintained topline estimates EBITDA 10, , , , EBITDA estimates revised upwards due to improved product mix EBITDA Margin (%) bps bps EBITDA margin estimate revised upwards due to improved product mix Adj PAT 2, , , , PAT revised upwards on account of improved operational performance Adj EPS ( ) With improvement in PAT estimates, EPS also revised upwards Assumptions Current Earlier FY13 FY14 FY15E FY16E FY15E FY16E Comments Total Steel Sales (MT) Maintained FY15E and FY16E volume estimates EBITDA/tonne ( /tonne) 7,089 7,662 8,454 8,578 8,054 8,394 EBITDA/tonne revised upwards for both FY15E and FY16E ICICI Securities Ltd Retail Equity Research Page 2

3 Exhibit 1: Steel sales volumes to grow at CAGR of 4.5% in FY14-16E Company Analysis JSW Steel post its merger with JSW Ispat got catapulted to one of the leading steel producers in India (combined steel making capacity of 14.3 MT). In terms of capacity wise break-up, out of 14.3 MT, 10 MT is in Vijayanagar, Karnataka [8.4 MT through blast furnace (BF) route with balance 1.6 MT through the Corex route], 3.3 MT in Dolvi, Maharashtra (erstwhile Ispat Industries) and 1 MT in Salem, Tamil Nadu. JSW Steel has plants both in South and West India, thereby helping to cater to the regional demand. Healthy EBITDA/tonne on product mix, cost optimisation JSW Steel s Vijayanagar steel unit is one of the lower cost convertors globally. The company does not have access to any captive operational iron ore and coking coal mine in India and has to depend on external purchases for its key raw materials iron ore and coking coal. However, despite its dependency on external sources for its key raw materials, JSW Steel is able to report healthy EBITDA/tonne due to economies of scale, cost optimisation and healthy realisations (on account of superior product mix). The company also has a notable presence in the value-added products category, thereby having a large and diversified customer base with enhanced profitability. Exhibit 2:..while EBITDA/tonne stabilising at ~ tonne level million tonne FY11 FY12 FY13 FY14 FY15E FY16E /tonne FY11 FY12 FY13 FY14 FY15E FY16E Exhibit 3: Sales break-up; flats vs. longs The company is mainly a flat steel producer with flat steel constituting ~80% of total sales in FY14. Flat steel sales stood at 9.7 MT in FY14 vis-à-vis total steel sales of 11.9 MT in FY14 million tonne FY11 FY12 FY13 FY14 FY15E FY16E Flat Long Semis ICICI Securities Ltd Retail Equity Research Page 3

4 Elevated debt levels remain area of concern Post the merger with Ispat Industries, the debt level of JSW Steel has increased significantly. On a consolidated basis, the net gearing stood at 1.56x at the end of Q2FY15 while net debt to EBITDA on a consolidated basis stood at 3.46x at the end of Q2FY15. Exhibit 4: Gross debt & net debt trend crore FY11 FY12 FY13 FY14 FY15E FY16E Gross Debt Net Debt Key takeaway from analyst meet The proportion of value-added and special products in the overall product mix increased to 33% in Q2FY15 from 29% in Q1FY15 and 23% in Q2FY14. Sales to the auto sector grew 52% YoY and 13% QoQ while cold-rolled products sales grew 75% YoY and 42% QoQ. During the quarter, the company was able to realise ~US$15/tonne decline in coking coal costs. The company has maintained the guidance of 12.9 million tonne (MT) of crude steel production and 12.4 MT of saleable steel sales for FY15. JSW Steel has incurred a capex to the tune of 3100 crore in H1FY15 out of the projected 7500 crore capex guided for FY15. The brownfield expansion of Dolvi from 3.3 million tonnes per annum (MTPA) to 5 MTPA is ahead of its scheduled commissioning in September, The company is importing high grade iron ore, which has low alumina content, which aids in reducing fuel costs and improving productivity. JSW Steel plans to increase its iron ore imports from the current ~ MT per month to ~ MT per month. Total provision during the quarter stood at 190 crore, out of which diminution of US investments was to the tune of 168 crore and writedown due to cancellation of coal block was to the tune 21.2 crore. Amba river coke s (ARC) EBITDA for Q2FY15 stood at 41 crore. Total ~90% of pellets and 70% of coke from ARC are being utilised internally for Dolvi operations. The coke oven plant is operating at ~75% capacity utilisation level while the pellet plant is operating at 65%. With respect to the recently acquired Welspun Maxsteel, the management indicated at ramping up of production from the current levels of ~ tonnes. ICICI Securities Ltd Retail Equity Research Page 4

5 Subsidiaries performance JSW Steel Coated Products During the quarter, JSW Steel Coated Products registered production (galvanised/galvalume products) and sales of 0.41 MT. The gross turnover and net sales for the quarter stood at 2537 crore and 2404 crore, respectively. It recorded an operating EBITDA of 108 crore and net PAT of 11 crore for the quarter. Chile iron ore mines Iron ore mines in Chile produced and shipped 0.22 MT of iron ore concentrate during the quarter. The company reported an EBITDA loss of $1.76 million for the quarter due to a drop in iron ore prices in the seaborne market. US plate and pipe mill The US based pipe and plate mill facility produced million net tonnes of plates and million net tonnes of pipes, reporting a capacity utilisation of 40% and 9%, respectively, during Q2FY15. Sales volumes for the quarter stood at MT of plates and MT of pipes. The company earned an EBITDA of $2.54 million for the quarter. Project update The company started its second bar mill of 1.2 MTPA capacity at Vijayanagar works on October 2, 2014, which is under a trial run. ICICI Securities Ltd Retail Equity Research Page 5

6 Valuation We expect JSW Steel to report a healthy set of numbers, going forward, on account of cost savings on declining coking coal prices and benefits on account of commissioning of the Dolvi pellet plant and coke oven plant along with enhancement of margins led by value-added products. Going forward, we also expect an improved performance from subsidiaries. We have valued the stock at 6x FY16E EV/EBITDA and arrived at a target price of We have assigned a HOLD recommendation to the stock. Exhibit 7: Target price calculation Particular Unit Value EBITDA (JSW Steel & Ispat Combined) crore EV/EBITDA Multiple x 6.0 Enterprise Value (EV) crore Gross Debt (FY16E) crore Cash & Cash Eq (FY16E) crore 719 Net Debt (FY16E) crore Implied Market Cap crore No of Shares crore 24.2 Target Price 1250 Exhibit 8: Valuation Matrix Sales ( Crore) Growth (% YoY) EPS ( ) Growth (% YoY) PE (x) EV/EBIDTA (x) P/ BV (x) RoNW (%) RoCE (%) FY FY14P FY15E FY16E ICICI Securities Ltd Retail Equity Research Page 6

7 Company snapshot 2,000 1,800 1,600 1,400 Target Price: ,200 1, Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Jan-08 JSW Steel acquires eight iron ore mines in Chile for a consideration of US$52 million Mar-08 Government mulls over export tax on steel to curb domestic inflation and ensure supplies of finished steel in domestic markets. Speculation of government regulating steel prices domestically Aug-08 Global financial crisis adversely impacting the construction sector and capital spending. Production cuts across the globe to cater to subdued demand Feb-09 Global coking coal miners announce price cuts due to demand pressures & weak outlook on steel. The government in its Budget announces excise duty reduction from 10% to 8% and service tax rate reduction from 12% to 10% Nov-09 JSW Steel inks a collaborative agreement with JFE Steel Corporation (Japan). Both companies have, in principle, agreed to collaborate in India in the area of automotive steel, including production technologies and supply of substrate materials for hot rolled, cold rolled and galvanized products. May-10 JSW Steel acquires coking coal mine in West Virginia, US for a total consideration of US$ 100 million Dec-10 JSW Steel acquires majority stake in Ispat Industries (capacity 3.3 MTPA) for a consideration of 2157 crore Mar-11 Coking coal price sky rocket touching highs of US$330/tonne on account of floods in Australia (Queensland) Jun-11 Iron ore mining ban imposed in Karnataka with NMDC being the only miner allowed to mine under supervision of Supreme Court of India Dec-11 Mines & Mineral (Development & Regulation) Bill introduced in parliament. Proposes payment of amount equivalent to royalty for development of the areas in which the miners operate. Export duty increased to 30% iron ore exports from India Feb-12 JFE raises stake in JSW Steel to 15% Sep-12 JSW Steel merges JSW Ispat with itself. Share swap ratio fixed at 1:72 i.e. for every 72 shares of JSW Ispat one would get one share of JSW Steel Oct-13 Company announces a price hike of ~ 2000/ tonne to mitigate the rising input costs (coking coal on account of currency depreciation) Dec-13 Company announces a price hike of ~2% ( /tonne) for its steel products effective from January 1, 2014 Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Jindal Organisation 30-Sep JFE Steel Corporation 30-Sep Vividh Consultancy & Advisory Services Pvt. Ltd. 7-Oct M. M. Warburg Bank (Schweiz) AG 30-Sep Sahyog Tradecorp Pvt. Ltd. 1-Oct Danta Enterprises Pvt. Ltd. 30-Sep Virtuous Tradecorp Pvt. Ltd. 30-Sep Duferco Coke Investments, Ltd. 30-Sep Gagandeep Credit Capital Pvt. Ltd. 30-Sep The Vanguard Group, Inc. 30-Sep (in %) Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Promoter FII DII Others Source: Reuters, ICICIdirect.com Research Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Glebe Trading Pvt. Ltd m 1.72m Jindal Organisation m -9.96m Norges Bank Investment Management (NBIM) 27.52m 1.67m The Boston Company Asset Management, LLC -2.88m -0.22m Gagan Trading Co., Ltd m 1.23m State Street Global Advisors (US) -2.84m -0.15m Danta Enterprises Pvt. Ltd m 0.75m Swisscanto Asset Management AG -2.12m -0.13m ICICI Prudential Asset Management Co. Ltd m 0.75m Jain (Nirmal Kumar) -1.21m -0.11m ICICI Securities Ltd Retail Equity Research Page 7

8 Financial summary (Consolidated) Profit and loss statement ( crore) (Year-end March) FY13 FY14P FY15E FY16E Total operating Income 38, , , ,115.9 Growth (%) Raw Material Expenses 24, , , ,276.4 Employee Expenses , , ,644.0 Power and Fuel Costs 2, , , ,434.1 Mfg and Other expenses 4, , , ,359.1 Total Operating Expenditure 31, , , ,713.6 EBITDA 6, , , ,402.3 Growth (%) Depreciation 2, , , ,810.2 Interest 1, , , ,853.7 Other Income PBT 2, , , ,778.4 Exceptional Item , Total Tax , Reported PAT Before MI 1, , ,022.7 Profit/(loss) - JV/MI/Associate Reported PAT After MI , ,074.6 Growth (%) Adj PAT after MI 1, , , ,074.6 Adj 'EPS ( ) Balance sheet ( crore) (Year-end March) FY13 FY14P FY15E FY16E Liabilities Share Capital , , ,066.8 Reserve and Surplus 16, , , ,125.8 Total Shareholders funds 17, , , ,192.5 Total Debt 21, , , ,911.9 Deferred Tax Liability 3, , , ,123.4 Minority Interest / Others , , ,236.6 Total Liabilities 43, , , ,464.4 Assets Gross Block 44, , , ,710.4 Less: Acc Depreciation 11, , , ,407.6 Net Block 33, , , ,302.8 Capital WIP 5, , , ,398.0 Total Fixed Assets 39, , , ,700.8 Investments 1, Inventory 5, , , ,116.8 Debtors 2, , , ,184.4 Loans and Advances 5, , , ,709.4 Other Current Assets Cash 1, Total Current Assets 15, , , ,679.4 Current Liabilities 14, , , ,832.8 Provisions Total Current Liabilities 14, , , ,215.3 Net Current Assets , , ,464.1 Others Assets 1, , , ,561.9 Application of Funds 43, , , ,464.4 Cash flow statement ( crore) (Year-end March) FY13 FY14P FY15E FY16E Profit after Tax , ,074.6 Add: Depreciation 2, , , ,810.2 (Inc)/dec in Current Asset -1, , , ,361.1 Inc/(dec) in CL&Provisions , Others , CF from operating activities 3, , ,104.9 (Inc)/dec in Investments (Inc)/dec in Fixed Assets -6, , , ,500.0 Others CF from investing activities -5, , , ,500.0 Issue/(Buy back) of Equity Inc/(dec) in loan funds 1, , , Dividend paid & dividend tax Inc/(dec) in Sec. premium Others CF from financing activities 1, , , Net Cash flow -1, Opening Cash 3, , Closing Cash 1, Key ratios (Year-end March) FY13 FY14P FY15E FY16E Per share data ( ) Adj EPS Cash EPS BV , ,125.0 DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) Adj RoE Adj RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 8

9 ICICIdirect.com coverage universe (Metals & Mining) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) ROCE(%) ROE(%) Company ( ) TP ( ) Rating ( Cr) FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E Coal India Buy Hindalco Industries Hold Hindustan Zinc Buy JSW Steel ,250 Hold NMDC Buy SAIL Hold Sesa Sterlite Hold Tata Steel Hold ICICI Securities Ltd Retail Equity Research Page 9

10 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ANALYST CERTIFICATION We /I, Dewang Sanghavi MBA (FIN) Isha Bansal MBA (FIN) research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc. 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