JSW Steel (JINVIJ) 1335

Transcription

1 Result Update Rating matrix Rating : Hold Target : 1250 Target Period : 12 months Potential Upside : -6% What s Changed? Target Changed from 900 to 1250 EPS FY17E Changed from 63.8 to 95.0 EPS FY18E Introduced at Rating Changed from Sell to Hold Quarterly Performance (Consolidated) Q4FY16 Q4FY15 YoY (%) Q3FY16 QoQ (%) Revenue 10, , , EBITDA 1, , EBITDA (%) bps bps PAT LP LP Key Financials ( Crore) FY15 FY16 FY17E FY18E Total Op. Income EBITDA Adj Net Profit Adj EPS ( ) Valuation summary FY15 FY16 FY17E FY18E PE (x) 17.5 NA Target PE (x) 16.4 NA EV/EBITDA (x) P/BV (x) Adj RoNW (%) Adj RoCE (%) Stock data Particular Amount Market Capitalisation crore Debt-Cons. (FY16P) crore Cash Cons. (FY16P) 1913 crore EV crore 52 week H/L 1380 / 800 Equity capital crore Face value 10 Price performance (%) Return % 1M 3M 6M 12M JSW Steel SAIL Tata Steel Performs well May 19, 2016 JSW Steel (JINVIJ) 1335 JSW Steel reported Q4FY16 numbers that were better than our estimates. While topline broadly came in line with our estimates, EBITDA, EBITDA margin, EBITDA/tonne and PAT came in higher than our estimates. Consolidated topline for the quarter came in at crore (down 15.1% YoY, up 23.0% QoQ and higher than our estimate of crore). Steel volumes came in at 3.3 million tonnes (MT), marginally higher than our estimate of 3.2 MT. Consolidated EBITDA came in at crore (up 8.4% YoY, 104.6% QoQ and higher than our estimate of crore). Consolidated EBITDA margin for the quarter was at 17.1%, higher than our estimate of 13.4%. EBITDA/tonne was at 5404/tonne, significantly higher than our estimate of 4500/tonne. The subsequent PAT came in at crore, higher than our estimate of 31.8 crore. Sales volume guidance of 15 MT for FY17E, implying a growth of 24%... For FY17E, JSW Steel has guided crude steel production and saleable steel sales guidance of MT and 15 MT respectively. The sales volume guidance looks optimistic considering moderate demand growth, threat of imports and capacity expansion by peer group companies such as Tata Steel, SAIL, etc. We have modelled sales volume of 14 MT for FY17E and 15 MT for FY18E. For FY16 JSW steel saleable steel sales volume stood at 12.1 MT. Elevated debt level remains area of concern Post the merger with Ispat Industries, the debt level of JSW Steel has increased significantly. On a consolidated basis, at the end of Q4FY16, the net gearing was at 1.78x while net debt to EBITDA was at 6.33x. On a standalone basis, at the end of Q4FY16, net gearing was at 1.41x while net debt to EBITDA was at 5.35x. EBITDA/tonne surprises positively; upgrade to HOLD JSW Steel reported better than expected EBITDA/tonne for Q4FY16 driven by improved product mix and cost optimization. For Q4FY16 value added products constituted ~36% of total sales volume. For FY17E we have modelled EBITDA/tonne of 6750/tonne, while for FY18E we have modelled EBITDA/tonne of 7000/tonne. We value the stock at 6x FY18E EV/EBITDA and arrive at a target price of We have a HOLD recommendation on the stock. Research Analyst Dewang Sanghavi dewang.sanghavi@icicisecurities.com ICICI Securities Ltd Retail Equity Research

2 esv Variance analysis Q4FY16 Q4FY16E Q4FY15 YoY (%) Q3FY16 QoQ (%) Comments Revenue 10, , , , Topline came in broadly in line with our estimate Other Income Other income broadly came in line with our estimate Employee Expense Employee expense came in lower than our estimate Raw Material Expense 5, , , , Power & Fuel Expense , , Piwer and fuel expense came in lower than our estimate Other operating Expenses 2, , , , Other operating expense came in lower than our estimate EBITDA 1, , , EBITDA came in higher than our estimate EBITDA Margin (%) bps bps EBITDA margin came in higher than our estimate Depreciation Depreciation expense came in higher than our estimate Interest Interest expense came in higher than our estimate Exceptional Item ,122.1 NA PBT ,791.8 LP Tax Outgo , PAT LP Minority Interest, Share of Associate &Extra Ordinary Item PAT for the Group LP PAT came in higher than our estimate Key Metrics Steel Sales (MT) Sales volume came in marginally higher than our estimate Standalone EBITDA/tonne ( /tonne) EBITDA/tonne came higher than our estimate Change in estimates FY17E FY18E ( Crore) Old New % Change Introduced Comments Revenue 54,235 56, ,298 Upward revised FY17E revenue due to higher sales volume estimate EBITDA 9,724 9, ,969 EBITDA Margin (%) bps 17.6 EBITDA ( /tonne) * Maintained EBITDA/tonne estimate PAT Upward revised FY17E PAT estimate EPS ( ) Upward revised FY17E EPS estimate, *-Standalone entity Assumptions Current Earlier FY16 FY17E FY18E FY17E Comments Total Steel Sales (MT) Downward revised FY16E sales volume estimate EBITDA/tonne ( /tonne) * 4,718 6,750 7,000 6,750 Downward revised FY16E and FY17E EBITDA/tonne estimate, *-Standalone entity ICICI Securities Ltd Retail Equity Research Page 2

3 Exhibit 1: Sales volume trend Company Analysis JSW Steel, post its merger with JSW Ispat, got catapulted to the position of one of the leading steel producers in India (combined steelmaking 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. Currently company is in the process of expanding its capacity to 18 MT. Sales volume guidance of 15 MT for FY17E, implying a growth of 24%... For FY17E, JSW Steel has guided crude steel production and saleable steel sales guidance of MT and 15 MT respectively. The sales volume guidance looks optimistic considering moderate demand growth, threat of imports and capacity expansion by peer group companies such as Tata Steel, SAIL, etc. We have modelled sales volume of 14 MT for FY17E and 15 MT for FY18E. For FY16 JSW steel saleable steel sales volume stood at 12.1 MT. Exhibit 2:..EBITDA/tonne to firm up going forward million tonne FY16 FY17E FY18E /tonne FY16 FY17E FY18E Elevated debt level remains area of concern Post the merger with Ispat Industries, the debt level of JSW Steel has increased significantly. On a consolidated basis, at the end of Q4FY16, the net gearing was at 1.78x while net debt to EBITDA was at 6.33x. On a standalone basis, at the end of Q4FY16, net gearing was at 1.41x while net debt to EBITDA was at 5.35x. Exhibit 3: Gross debt & net debt trend crore FY14 FY15 FY16 FY17E FY18E Gross Debt Net Debt ICICI Securities Ltd Retail Equity Research Page 3

4 Key takeaway from conference call JSW Steel has chalked out capex of 7000 crore for next two years, broken up as 4000 crore for FY17E and 3000 crore for FY18E. Some of key capex programmes are as follows Pipe conveyor system at Vijayanagar A pipe conveyor system for transporting iron ore from the yard near the mines to the Vijayanagar plant will be set up with a capacity of 20 Million tonnes per annum (Mtpa). This will be an environment friendly solution and reduce transportation costs of iron ore to the plant. The estimated project cost is 650 crore and is expected to be commissioned in a period of 24 months Water reservoir at Vijayanagar JSW Steel will build a water reservoir facility to augment the storage capacity of water at its Vijayanagar plant. The investment is strategic in nature for un-interrupted operations of the plant. The estimated project cost is 520 crore and is expected to be commissioned in a period of 26 months. Tinplate at Tarapur complex JSW Steel s subsidiary, JSW Steel coated products is setting up a Tin plate mill and related facilities at its Tarapur work to cater to the increasing demand for tin plate. The estimated project cost is 650 crore and is expected to be commissioned in a period of 24 months. Coke oven plant at Dolvi The company had earlier decided to setup a 3mtpa coke oven plant at Dolvi through Dolvi coke projects limited (DCPL). The company holds ~40% stake in DCPL. The first phase of the coke oven is 1.5mtpa which will take care of the open coke requirements for Dolvi and Vijaynagar. The company has got the EC of 3 million tonne coke oven plant which will eventually take care of capacity expansion of Dolvi from 5 MT to 10 MT. The total cost for the first phase of the plant is 2000 crore, with 700 crore of equity and the remaining being debt. JSW Steel s contribution is 500 crore. Going forward Chile and US coking coal operations will remain under pressure in near future, while, some improvement can be expected in US Plate and Pipe mills Amba river coke reported EBITDA of 166 crore during Q4FY16 The company highlighted that in FY17 net debt is going to move up on account of new Indian accounting standards. Excluding the impact of Ind- AS, net debt would have reduced YoY on 31st Mar Capital acceptance and revenue acceptances stood at US$447 million and US$1233 million respectively JSW Steel continues to get relaxation from most of the lenders regarding covenant testing. Current relaxation has led to Net Debt/EBITDA roadmap (as sought by the lenders) reducing from 6.75x in FY16 to 5x in FY17E and 4x in FY18E. Similarly desired Net Debt to Equity trajectory is 2.5x for 17E and 2x in FY18E. Interest costs for the company is 7.16% which is down 15bps YoY. Mine auction is expected to start in July 16. Total iron ore availability in Karnataka is likely to go up to 29 MT in FY17 ICICI Securities Ltd Retail Equity Research Page 4

5 Performance of subsidiaries JSW Steel Coated Products During the quarter, JSW Steel Coated Products registered production (galvanised/galvalume products) volume of 0.40 MT and sales volume of 0.42 MT. The gross turnover and net sales for the quarter were at 1996 crore and 1835 crore, respectively. It recorded an operating EBITDA of 95 crore and net profit after tax of 24 crore for the quarter. Chile iron ore mines The Chile operations remain under care and maintenance from end April The company reported an EBITDA loss of US$0.33 million for the quarter. US plate and pipe mill The US based pipe and plate mill facility produced MT of plates and MT of pipes, reporting capacity utilisation of 15% and 8%, respectively, in Q4FY16. Sales volumes for the quarter were at MT of plates and MT of pipes. The company has reported an EBITDA loss of US$ million for the quarter. Project update During the year FY16, the company has commissioned Steek Melting Shop III (SMS-III) and balance portion of CRM-II including electrical steel complex at Vijayanagar. The three Blast Furnaces which were under shut down for refining and modification/capacity augmentation (one at each location viz Vijayanagar, Dolvi and Salem works) have been recommissioned and ramp up is progressing satisfactorily and are likely to complete as per schedule. ICICI Securities Ltd Retail Equity Research Page 5

6 Valuation JSW Steel reported better than expected EBITDA/tonne for Q4FY16 driven by improved product mix and cost optimization. For Q4FY16 value added products constituted ~36% of total sales volume. For FY17E we have modelled EBITDA/tonne of 6750/tonne, while for FY18E we have modelled EBITDA/tonne of 7000/tonne. We value the stock at 6x FY18E EV/EBITDA and arrive at a target price of We have a HOLD recommendation on the stock. Exhibit 4: Target price calculation Target Price Calculation Particular Unit Value EBITDA (JSW Steel & Ispat Combined) crore EV/EBITDA Multiple x 6.0 Enterprise Value (EV) crore Gross Debt crore Cash & Cash Eq crore 4322 Net Debt crore Implied Market Cap crore No of Shares crore 24.2 Target Price 1250 Exhibit 5: Valuation Matrix Sales ( Crore) Growth (% YoY) EPS ( ) Growth (% YoY) PE (x) EV/EBIDTA (x) P/ BV (x) RoNW (%) FY FY PL NM FY17E FY18E RoCE (%) ICICI Securities Ltd Retail Equity Research Page 6

7 Company snapshot 1,600 1,400 1,200 Target Price: , 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 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Dec-10 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 Announces a price hike of ~ 2000/ tonne to mitigate the rising input costs (coking coal on account of currency depreciation) Dec-13 Announces a price hike of ~2% ( /tonne) for its steel products effective from January 1, 2014 Feb-16 Moody's downgraded JSW Steel's credit rating by two notches from Ba1 to Ba3 Feb-16 JSW Steel recommisioned two of its blast furnaces at Vijaynagar and Salem which were shut since August and Novemeber 2015 for relining and modification Feb-16 ICRA downgraded the long term credit rating of the company to ICRA AA- from ICRA AA and reaffirmed the short term rating at ICRA A1+ Mar-16 CARE Ratings downward revised the long term credit rating of the company to CARE AA- from CARE AA, while reaffirming its short term rating at CARE A1+ Apr-16 Fitch Ratings downgraded the credit rating of JSW Steel from BB+ to BB Apr-16 The blast furnace at Dolvi was recommisioned after it was shut down for relining and modification in November 2015 Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %) Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 1 Jindal Organisation 31-Dec Promoter FII JFE Steel Corporation 31-Dec DII Vividh Consultancy & Advisory Services Pvt. Ltd. 31-Dec Others Sahyog Tradecorp Pvt. Ltd. 31-Dec M. M. Warburg Bank (Schweiz) AG 31-Dec Danta Enterprises Pvt. Ltd. 31-Dec Virtuous Tradecorp Pvt. Ltd. 31-Dec JSW Techno Projects Management, Ltd. 1-Sep Gagandeep Credit Capital Pvt. Ltd. 31-Dec Dimensional Fund Advisors, L.P. 29-Feb Source: Reuters, ICICIdirect.com Research Recent Activity Buys Sells Investor Name Value (M) Shares(M) Investor Name Value (M) Shares(M) Invest AD M. M. Warburg Bank (Schweiz) AG Jindal Organisation IDFC Asset Management Company Private Limited Life Insurance Corporation of India Norges Bank Investment Management (NBIM) Reliance Capital Asset Management Ltd Raiffeisen Kapitalanlage-Gesellschaft mbh Amundi Asset Management J.P. Morgan Asset Management (Hong Kong) Ltd Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

8 Financial summary (Cons.) Profit and loss statement ( crore) (Year-end March) FY15 FY16 FY17E FY18E Total operating Income 52, , , ,297.6 Growth (%) Raw Material Expenses 29, , , ,264.0 Employee Expenses 1, , , ,430.9 Power and Fuel Costs 4, , , ,303.1 Mfg and Other expenses 8, , , ,330.7 Total Operating Expenditure 43, , , ,328.7 EBITDA 9, , , ,968.9 Growth (%) Depreciation 3, , , ,495.8 Interest 3, , , ,411.1 Other Income PBT 2, , ,262.0 Exceptional Item , Total Tax , , ,065.5 Reported PAT Before MI 1, , ,196.5 Profit/(loss) - JV/MI/Associate Reported PAT After MI 1, , ,197.6 Growth (%) PL Adj PAT after MI 1, , , ,197.6 Adj 'EPS ( ) Balance sheet ( crore) (Year-end March) FY15 FY16 FY17E FY18E Liabilities Share Capital 1, , , ,066.8 Reserve and Surplus 21, , , ,106.0 Total Shareholders funds 23, , , ,172.8 Total Debt 34, , , ,911.0 Deferred Tax Liability 3, , , ,420.2 Minority Interest / Others Total Liabilities 61, , , ,398.3 Assets Gross Block 74, , , ,844.3 Less: Acc Depreciation 24, , , ,651.5 Net Block 50, , , ,192.8 Capital WIP 8, , , ,804.7 Total Fixed Assets 58, , , ,997.5 Investments Inventory 11, , , ,550.5 Debtors 2, , , ,461.7 Loans and Advances 8, , , ,254.7 Other Current Assets , ,349.0 Cash 1, , ,321.6 Total Current Assets 24, , , ,937.5 Current Liabilities 23, , , ,308.6 Provisions Total Current Liabilities 24, , , ,586.5 Net Current Assets , ,351.0 Others Assets 1, , , ,231.4 Application of Funds 61, , , ,398.3 Cash flow statement ( crore) (Year-end March) FY15 FY16 FY17E FY18E Profit after Tax 1, , ,197.6 Add: Depreciation 3, , , ,495.8 (Inc)/dec in Current Asset -2, , , ,262.3 Inc/(dec) in CL&Provisions 6, , , Others , CF from operating activities 9, , ,722.4 (Inc)/dec in Investments (Inc)/dec in Fixed Assets -7, , , ,000.0 Others CF from investing activities -7, , , ,050.0 Issue/(Buy back) of Equity Inc/(dec) in loan funds , ,000.0 Dividend paid & dividend tax Inc/(dec) in Sec. premium Others CF from financing activities , ,632.7 Net Cash flow 1, , , Opening Cash , ,016.4 Closing Cash 1, , ,321.6 Key ratios (Year-end March) FY15 FY16 FY17E FY18E Per share data ( ) Adj EPS Cash EPS BV , ,124.1 DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income Adj PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) Adj RoE Adj RoCE RoIC Valuation Ratios (x) P/E 17.5 NM 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) FY15 FY16 FY17E FY15 FY16 FY17E FY15 FY16 FY17E FY15 FY16 FY17E FY15 FY16 FY17E Hindalco Industries Hold Hindustan Zinc Hold JSW Steel Hold NM NMDC Hold SAIL Sell NA Vedanta Hold Tata Steel Hold NM NM 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, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 10

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