JSW Steel Ltd. Result Update Q3 FY15

Transcription

1 Change in Estimates Rating Target Q3 FY15 JSW Steel Ltd. JSW s standalone results was marginally below our estimate due to higher than expected decline in blended realisations Consolidated numbers were impacted by weaker performance at US, Chile and JSW Coated Weak domestic demand growth coupled with pressure from imports led to a 3.3% qoq decline in realisations Operating profit was marginally lower due to costs involved in hedging of iron ore imports and payments for outside job work Imports accounted for 40% of total iron ore consumption in Q3 FY15, company expects 30% of total demand to be met by imports in FY15 Debt increased due to increase in working capital requirement Maintain Buy with a price target of Rs1,332. Result table Net sales 132, ,228 (2.9) 138,948 (4.8) Material costs (72,862) (80,965) (10.0) (76,487) (4.7) Personnel costs (3,911) (3,228) 21.2 (3,868) 1.1 Power and fuel costs (10,030) (9,616) 4.3 (10,954) (8.4) Other overheads (22,469) (18,326) 22.6 (19,726) 13.9 Operating profit 22,958 24,094 (4.7) 27,912 (17.8) OPM (%) bps bps Depreciation (8,900) (8,058) 10.5 (8,509) 4.6 Interest (9,366) (7,893) 18.7 (8,550) 9.5 Other income (10.0) 265 (50.9) PBT 4,821 8,287 (41.8) 11,118 (56.6) Tax (1,753) (3,737) (53.1) (3,737) (53.1) Effective tax rate (%) Other prov / minority etc Adjusted PAT 3,290 4,643 (29.1) 7,488 (56.1) Adj. PAT margin (%) bps bps Reported PAT 3,290 4,643 (29.1) 7,488 (56.1) EPS (Rs) (29.1) (56.1) Blended realisations under pressure from cheap imports JSW Steel s topline in Q3 FY15 of Rs132.2bn was lower than our estimate due to lower contribution from subsidiaries and lower steel prices. Most of the subsidiaries reported lower than expected revenue as the company saw some inventory buildup in US and lower production at JSW Coated. For the standalone entity the miss in topline was largely due to lower realisations, which was under pressure due to cheap imports. Realiations are expected to remain under pressure in Q4 FY15 as global prices have been in downward trend and the rupee has appreciated in the last one month. Blended realisations were lower by 3.3% qoq after declining 2.2% qoq in the previous quarter. Standalone volumes at 3.03mn tons were inline with our estimate and the company is on track to meet its guidance for FY15. JSW saw an inventory accumulation of 0.135mn tons during the quarter as demand remained subdued. This report is published by IIFL India Private Clients research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc. The views and opinions expressed in this document may at times be contrary in terms of rating, target prices, estimates and views on sectors and markets. Rating:. Sector: Sector view: Metals & Mining Neutral Sensex: 29, Week h/l (Rs): 1,365 / 805 Market cap (Rscr) : 23,623 6m Avg vol ( 000Nos): 596 Bloomberg code: JSTL IN BSE code: NSE code: JSWSTEEL FV (Rs): 10 Price as on Jan 30, 2015 Share price trend JSWSTEEL Sensex 0 Feb 14 Aug 14 Jan 15 Share holding pattern BUY Target: Rs1,332 CMP: Rs977 Upside: 36.4% % Jun 14 Sep 14 Dec 14 Promoters Insti Others Research Analyst: Tarang Bhanushali research@indiainfoline.com February 02, 2015 Result Update

2 JSW Steel (Q3 FY15) Improvement in production from CRM complex at Vijaynagar led to an increase in share of VAP as a % of sales to 25% in Q3 FY14 and 33% in Q2 FY15 to 35% in Q3 FY15. Standalone steel production was lower by 0.6% yoy and 3.9% qoq at 3.17mn tons. Utilisation levels at Dolvi s pellet and coke oven have been rising on a qoq basis. Both the units were operating at 95%+ utilizations levels during the quarter. Domestic iron ore situation has not improved during the quarter and as a result the company consumed 40% of its iron ore from imports. Standalone quarterly revenue trend Standalone sales volume trend 140, , ,000 80,000 60,000 40,000 20,000 0 (Rs mn) Q3 FY13 Q4 FY13 Revenue Q1 FY14 Q2 FY14 Q3 FY14 qoq growth Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 (%) (5) (10) (mn tons) Q3 FY13 Q4 FY13 Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Increase in other expenditure and lower realisations lead to lower than expected EBIDTA/ton On the operating level, JSW Standalone s result was marginally lower than our estimate due to higher other expenditure and lower realisations. Other expenditure for the quarter was higher due to hedging cost for import of iron ore and increase in job work charges. The impact of lower realisations was offset by a marginal decline in raw material costs. Power costs per ton were also lower on a qoq basis due to lower coal costs. EBIDTA/ton was marginally lower than our estimate at Rs6,988, 11.7% lower on a qoq basis. Next quarter margins would be under pressure due to lower blended realisations. We believe the impact of this would be offset by softening iron ore prices in the country and also globally. Large Odisha miners have cut iron ore prices sharply over the last one month and the company is evaluating of reducing imports and buying from Local players if prices further correct. The company expects iron ore situation to improve going ahead as it expects output in Karnataka to rise 20% and also expects auction of C category mines to commence in Q4 FY15. On a consolidated basis, operating profit was lower due to higher operating loss at Chile, inventory pileup in US and lower production in JSW Coated. Chile subsidiary s operating loss increased due to a sharp decline in iron ore costs. The US plate and pipe mill is not showing signs of improvement and the company has taken a loss on its investments in the subsidiary. Subdued demand in the domestic market led to lower production at JSW Coated and as a result the subsidiary reported a loss in bottomline. JSW s recently acquired Maxsteel plant contributed ~Rs150mn to operating profit. Production at Ispat and Salav (Name changed from Maxsteel to Salav) was impacted to disruption in APM gas supply. The company has managed to get back the supply with the help of a court order. 2

3 JSW Steel (Q3 FY15) Per ton analysis (Standalone) Steel production ('000 tons) 3,170 3,190 (0.6) 3,300 (3.9) Steel sales ('000 tons) 3,030 3,080 (1.6) 3,070 (1.3) Sales as a % of production Net realisations 37,971 38,846 (2.3) 39,262 (3.3) Cost per ton (Rs/ton) Raw material 21,333 22,864 (6.7) 21,664 (1.5) Personnel cost (0.5) Power and fuel costs 2,847 2, ,105 (8.3) Other overheads 6,036 4, , Total cost 30,983 31,201 (0.7) 31,346 (1.2) EBIDTA/ton 6,988 7,645 (8.6) 7,917 (11.7) US pipe and plate mill performance Plate sales (tons) 63,822 85,774 (25.6) 86,084 (25.9) Pipes sales (tons) 18,101 19,409 (6.7) 16, Revenue (US$ mn) (14.0) 94.5 (15.5) Operating profit (US$ mn) (0.5) (1.7) (73.4) 2.5 PAT (US$ mn) (16.1) (15.2) 5.7 (12.7) 26.6 Chile iron ore performance Plate sales (tons) 218, ,171 (10.1) 224,387 (2.6) Pipes sales (tons) 224, ,000 (3.0) 221, Revenue (US$ mn) (48.0) 18.2 (22.1) Operating profit (US$ mn) (6.5) 5.2 (1.8) PAT (US$ mn) (6.4) 2.8 (2.7) JSW Coated steel performance Production (mn tons) (12.2) 0.41 (12.2) Sales (mn tons) (11.9) 0.41 (9.8) Revenue (Rs mn) 22,700 24,450 (7.2) 25,371 (10.5) Operating profit (Rs mn) (18.0) 1,080 (39.8) PAT (Rs mn) (180) Volume guidance maintained; upgrade to Accumulate JSW Steel has corrected sharply over the last three months due to rising concerns over dumping of Chinese steel, subdued domestic demand and decreasing domestic iron ore production. We believe that the correction in the stock is overdone and we expect the scenario to improve in FY16. The sharp correction in global iron ore prices has helped the company to switch to imported iron ore over domestic purchase. Landed cost of imported iron ore at JSW s Dolvi and Salem plant is quite lower than the landed cost of iron ore from NMDC. The depreciation of the rupee would reduce the pressure of imports from China and Ukraine. We believe domestic demand would pick up from FY16 as revival in the domestic economy gains steam, which in turn will lead to an increase in infrastructure spending. We expect JSW s bottomline to double over FY14 17 on account of (1) increased output from Dolvi (2) substitution of expensive domestic ore with cheaper imports (3) cost rationalization exercise at Dolvi (4) superior product mix. Valuations at 4.8x FY16E EV/EBIDTA appear cheap compared to the global steel players trading at 5.7x. We maintain our BUY reco with a price target of Rs1,332. 3

4 JSW Steel (Q3 FY15) Financial Summary Y/e 30 Jun (Rs m) FY14 FY15E FY16E FY17E Revenues 512, , , ,738 yoy growth (%) Operating profit 91, , , ,005 OPM (%) Pre exceptional PAT 21,647 27,012 34,928 42,852 Reported PAT 4,519 27,012 34,928 42,852 yoy growth (%) EPS (Rs) P/E (x) Price/Book (x) EV/EBITDA (x) Debt/Equity (x) RoE (%) RoCE (%)

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