JSW STEEL Controlled costs

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1 RESULT UPDATE JSW STEEL Controlled costs India Equity Research Metals and Mining JSW Steel (JSW) reported standalone EBITDA of ~INR13bn, ~20% above our estimate. This was led by volumes and operating cost/t being ~10.5% and ~5% respectively better than our estimates, though realisations disappointed. With iron ore situation gradually improving in Karnataka (6 mines restarted) and our view of a pick-up in Indian steel demand in FY14, we see JSW s production rising 9% YoY in FY14E. JSW has cut capex for FY13 by 30% while its gross debt has peaked in the near term. Rohne coking coal block of 250mt reserves (JSW share: 69%) receiving stage-i forest clearance is a long term positive. We retain our forward estimates and maintain BUY/SO with TP of INR976/share. Higher volumes and controlled costs boost EBITDA EBITDA at INR13.1bn was ~20 % above estimate led by sales volume being 10.5% higher while operating cost/t was ~5% below estimates. Realisations disappointed, declining 6.5% QoQ (our estimate of 3.5%), led by demand weakness, 12% QoQ decline in value-added products and a ~17% QoQ decline in non-steel operating revenues. Adjusted PAT, at INR4.6bn, was above estimate of INR2.9bn led by reversal of excess tax-provisioning in H1FY13 even as capital charges were ~6% above estimates. Improving iron ore sourcing and steel demand Karnataka iron ore situation is improving gradually with 6 mines having restarted, 4 more expected to start in Q4FY13 and increasing NMDC production. About 12 to 20 mines, under Category B, are expected to start in FY14. Low grade iron ore dumps may also be auctioned. On hopes of government policy actions and interest rate cuts, JSW expects Indian steel demand and prices to improve in FY14. Outlook and valuations: Volume warrior; maintain BUY We believe JSW will benefit from increased iron ore availability and higher margins over Q3FY13 levels led by firm steel prices and benign costs. FY14E production to rise 9% YoY. Peaking of gross debt is a near term positive while clearance for the Rohne coal block is a long term positive. We retain our forward earnings estimates and maintain BUY/SO recommendation/rating with a target price of INR976. At CMP, the stock trades at 5.5x FY14E EV/EBITDA. Financials (Standalone) (INR mn) Q3FY13 Q3FY12 % change Q2FY13 % change FY12 FY13E FY14E Net revenue 82,925 78, ,709 (6.5) 321, , ,256 EBITDA 13,136 12, ,252 (13.9) 50,405 61,535 80,435 Adj. PAT 4,641 6,683 (30.6) 3, ,468 20,616 31,069 Adj. EPS (INR) (30.6) Dil. P/E (x)* EV/EBITDA (x)* ROAE (%)* Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. * Consolidated EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector BUY Edelweiss Securities Limited Outperformer Risk Rating Relative to Sector Medium Sector Relative to Market Overweight MARKET DATA (R: JSTL.BO, B: JSTL IN) CMP : INR 871 Target Price : INR week range (INR) : 939 / 566 Share in issue (mn) : M cap (INR bn/usd mn) : 194/ 3,603 Avg. Daily Vol.BSE/NSE( 000) : 1,943.2 SHARE HOLDING PATTERN (%) Current Q2FY13 Q1FY13 Promoters * MF's, FI's & BK s FII's others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) Stock Nifty : 15.5 EW Metals and Mining Index 1 month months (1.5) 12 months Prasad Baji prasad.baji@edelweissfin.com Navin Sahadeo navin.sahadeo@edelweissfin.com January 28, 2013

2 Metals and Mining Other highlights for the quarter Continued volume growth: against all odds Crude steel production increased ~8% YoY and steel sales volume increased ~14% YoY. Within that, flats saw an increase of ~15% YoY while volume for longs increased by ~18% YoY. Table 1: Total sales volume up ~14% YoY and flat QoQ (mt) Q3FY13 Q3FY12 Y-o-Y (%) Q2FY13 Q-o-Q (%) Production Crude steel (3.6) Flat products Long products Sales Volume Total Sales (0.0) Flat products Long products VAP (CR/GI) (9.8) 0.4 (11.9) Semis (20.0) 0.1 (27.3) Blended realisation/t (INR) 38,214 41,281 (7.4) 40,861 (6.5) Blended EBITDA/t (INR) 6,054 6,565 (7.8) 7,025 (13.8) Table 2: Per ton analysis Per ton Analysis (USD) Q3FY13 Q3FY12 % change Q2FY13 % change Blended realisation (13.0) 740 (4.6) Raw material (14.4) 472 (3.4) Staff costs (11.8) 15 (6.9) Other expenses (7.4) 85 (2.7) Total expenditure (12.9) 613 (3.1) EBITDA (13.3) 127 (12.1) Source: Company, Edelweiss research Key takeaways from the JSW Steel Q3FY13 earnings concall Steel demand expected to pick-up in India and globally in 2013 JSW believes Indian steel demand and general economy should improve in FY14 led by govt. actions and interest rate cuts by RBI. This should support/boost steel prices. Inventories at steel players may be high but considering low end-sector inventories the system level inventories are stable and not a concern. Iron ore situation in Karnataka gradually improving 6 Category A iron ore mines (~3.3mtpa capacity) have commenced operations while another 4 mines (~1.8mtpa capacity) are expect to start by end of FY13. JSW is hopeful of favourable decision w.r.t. Category B mines in the next Supreme Court hearing on February 1, R&R plans are approved for 20 mines and 12 mines have accepted all conditions stipulated by the Supreme Court for restart of mining. NMDC production is also increasing and in FY14, JSW expects them to produce 10mtpa (currently ~7mtpa). Overall, for FY14, JSW expects a total production of 23mtpa of iron 2 Edelweiss Securities Limited

3 JSW Steel ore in Karnataka (JSW share: 65-70%) leaving a shortfall of 7mtpa for enabling 100% steel capacity utilization. JSW plans to source balance through low-grade dumps in Karnataka or from outside the state. Retains FY13 production guidance JSW has retained FY13 crude steel production guidance at 8.5mt (9MFY13 actual: 6.4mt) while our estimate is lower at 8mt. Finished steel volumes are likely to be slightly short of 9mt (including re-rolling volumes sourced from JSW Ispat). Cuts FY13 capex; gross debt has peaked JSW indicated FY13E capex at INR42bn (9MFY13 actual : INR32bn) which is lower than earlier guidance of INR60bn. Gross debt increased from ~INR169bn at end of Q2FY12 to ~INR186bn at the end of Q3FY13 led by increase in capex loans of INR12bn and long term working capital loan of INR10bn. JSW Steel indicated that gross debt has peaked since future increase of INR20bn would be matched by repayments of equivalent amount. For FY14 to FY15, combined capex would be INR90bn, mainly on the CRM expansion of 2.3mtpa, steel debottlenecking expansion of 2mpta, iron ore beneficiation and additional downstream expansion (including electrical steel capacity of 0.2mtpa and colour coated steel expansion from 0.925mtpa to 1.2mtpa) Rohne coking coal receives forest clearance but production 2 years away The Rohne coking coal block has received stage-i forest clearance (FC). The mining plan is for 8mtpa of which JSW s share is 69% (~5.6mtpa) which post washing would be only 2mtpa. Considering the various milestones of land acquisition and stage-ii FC, production is months in future. Other points The exceptional items totaling to INR3,274mn include INR2,674mn on account of forex losses and INR600mn due to provisioning for the investment in the US operations. In Q4FY13, coking coal cost is expected to reduce USD10-15/t while iron ore costs are likely to be stable. 3 Edelweiss Securities Limited

4 Metals and Mining Financial snapshot (Standalone) (INR mn) Year to March Q3FY13 Q3FY12 % change Q2FY13 % change YTD13 FY13 FY14 Net revenues 82,925 78, ,709 (6.5) 262, , ,256 Dec/(inc) in stock 158 (1,434) NM (5,349) NM (7,065) Raw material 53,379 53, ,894 (13.8) 173, , ,339 Power & fuel 4,926 4, ,959 (0.7) 15,005 Staff costs 1,604 1, ,759 (8.8) 5,104 6,880 7,977 Other expenses 9,721 8, ,195 (4.6) 29,642 52,000 57,505 Total expenditure 69,788 66, ,458 (5.0) 215, , ,820 EBITDA 13,136 12, ,252 (13.9) 46,116 61,535 80,435 Interest 4,546 2, , ,820 16,255 18,883 Depreciation 4,975 4, , ,465 19,988 22,093 Other income NM 783 NM 2,071 2,948 3,100 PBT 4,181 5,271 (20.7) 7,015 (40.4) 20,903 28,241 42,560 Tax (460) (1,412) NM 3,016 NM 3,652 7,625 11,491 Current taxes - (1,412) NM 3,016 NM 4,112 7,625 11,491 Adj. PAT 4,641 6,683 (30.6) 3, ,251 20,616 31,069 Extraordinary items - loss/(gain) 3,274 5,001 (34.5) (4,224) NM 4,971 4,971 - Reported net profit 1,367 1,682 (18.7) 8,223 NM 12,280 15,645 31,069 Equity capital 2,231 2,231 2,231 2,231 2,231 2,231 no. of shares (mn) (FV INR 10) Adj. EPS (INR) (30.6) as % of net revenues Raw material Power & fuel Staff costs Other expenses EBITDA Reported net profit Tax rate (11.0) (26.8) Edelweiss Securities Limited

5 Company Description JSW Steel JSW, part of the USD8bn O.P. Jindal Group, was incorporated as Jindal Vijaynagar Steel (JVSL). It began operations in 1999 with the commissioning of the first Corex-2000 module in India (third in the world after Posco in South Korea and Isicor in South Africa), with a capacity to produce 0.8mn tonnes of hot metal. In FY05, the company merged group company JISCO (Jindal Iron and Steel Company), which had a strong presence in downstream products such as CR and GP/GC products. In FY06, the company merged Euro Ikon, Euro Coke, and JSW Power and was renamed JSW Steel, transforming into an integrated steel manufacturer. The current steel capacity of JSW Steel is 11 mtpa, which includes 10 mtpa capacity at Vijaynagar and 1 mtpa capacity at Salem that caters exclusively to the long product segment. Investment Theme Global steel demand is showing mixed signals with strong growth in China and weakening demand in the developed world. Steel prices are expected to be range bound with steel margins expanding led by declining raw material cost. JSW has expanded rapidly to emerge as India s second largest steel producer in terms of capacity and has added 3.2 mtpa capacity in Q2FY12. It continues to focus on the domestic market and increasing its penetration in semi-rural and rural areas by opening retail outlets. Key Risks Delay in restart of private iron ore mining in Karnataka. Weakness in global steel demand leading to lower international prices. 5 Edelweiss Securities Limited

6 Metals and Mining Financial Statements Key Assumptions Year to March FY12 FY13E FY14E FY15E Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Sector HRC price - Europe (net, USD/t) HRC price - India (net, INR '000/t) Hard coking coal price (FOB, USD/t) Soft coking coal price (FOB, USD/t) PCI coal Iron Ore (CFR)(China) India steel demand growth (%) Company Crude steel prodn volumes(mt) Slabs (mt) HRC (mt) Other flat products (mt) Long Rolled Products (mt) Total Sales Volume (mt) HRC realization (INR/t) 38,128 41,596 41,446 42,318 CRC realization (INR/t) 43,535 48,096 47,946 48,818 Long Products realization (INR/t) 41,860 43,596 43,446 44,318 GPGC realization (INR/t) 50,328 52,596 52,446 53,318 Iron Ore cost (INR/t) 2,936 3,558 3,177 3,000 Coal/Coke (INR/t) 13,020 15,513 14,912 15,778 Average Interest rate (%) Average Depreciation rate (%) Tax rate (%) Dividend payout ratio (%) Net borrowings (INR mn) 218, , , ,178 Capex (INR mn) 40,802 41,000 52,200 30,000 Debtor days Inventory days Payable days Cash conversion cycle (days) (32) (31) 2 22 Income statement (INR mn) Net revenue 343, , , ,603 Materials costs 223, , , ,756 Employee costs 8,464 6,880 7,977 8,149 Total SG&A expenses 37,399 33,312 39,089 42,753 EBITDA 61,019 63,921 83,128 89,953 Depreciation & Amortization 19,332 21,524 23,629 24,379 EBIT 41,687 42,397 59,499 65,574 Other income 769 1,111 1,266 1,340 Interest expenses 14,273 19,198 21,330 22,021 Profit before tax 28,183 24,310 39,435 44,893 Provision for tax 5,002 6,878 10,871 12,330 Net profit 23,181 17,432 28,564 32,562 Profit after minority interest 5,377 9,873 28,257 32,648 Adjusted PAT 13,399 15,891 28,257 32,648 Shares outstanding (mn) Diluted EPS (INR) Dividend per share (INR) Dividend payout (%) Tax rate (%) Common size metrics EBITDA margins Net profit margins Growth ratios (%) Revenues 43.8 (3.2) EBITDA Net profit (20.0) Edelweiss Securities Limited

7 JSW Steel Balance sheet (INR mn) As on 31st March FY12 FY13E FY14E FY15E Equity capital 2,842 2,842 2,842 2,842 Reserves & surplus 161, , , ,080 Shareholders funds 164, , , ,922 Minority interest (BS) 2,177 2,002 1,858 1,709 Preference capital 2,790 2,790 2,790 2,790 Short term debt 13,758 13,758 13,758 13,758 Long term debt 133, , , ,964 Deferred tax liability 30,412 30,412 30,412 30,412 Sources of funds 347, , , ,554 Tangible assets 325, , , ,762 Intangible assets CWIP (incl. intangible) 28,317 44,317 74,517 84,517 Total net fixed assets 353, , , ,667 Goodwill on consolidation 12,440 12,440 12,440 12,440 Non current investments 18,856 18,856 18,856 18,856 Other non current assets 3,306 3,306 3,306 3,306 Current Investments 2,040 2,040 2,040 2,040 Cash and equivalents 30,470 33,498 21,532 39,101 Inventories 57,893 66,380 74,303 77,406 Trade receivables 15,394 22,901 23,150 24,780 Loans and advances 47,900 47,900 47,900 47,900 Total current assets (ex cash) 123, , , ,126 Trade payable 97,052 87,056 79,206 72,503 Others current liabilities 97,438 97,438 97,438 97,438 Total current liabilities & 194, , , ,941 Net current assets (ex cash) (71,264) (45,273) (29,251) (17,815) Uses of funds 347, , , ,554 Book value per share (INR) ,052.9 Free cash flow (INR mn) Net profit 5,377 9,873 28,257 32,648 Depreciation 19,332 21,524 23,629 24,379 Others 13,305 28,211 22,089 21,998 Gross cash flow 45,746 59,608 73,975 79,025 Less: Changes in WC 10,622 25,991 16,022 11,436 Operating cash flow 35,124 33,617 57,953 67,590 Less: Capex 40,802 41,000 52,200 30,000 Free cash flow (5,678) (7,383) 5,753 37,590 Cash flow metrics Operating cash flow 35,124 33,617 57,953 67,590 Investing cash flow (50,372) (42,454) (52,652) (30,063) Financing cash flow - 11,865 (17,267) (19,958) Net cash flow - 3,029 (11,966) 17,569 Capex (40,802) (41,000) (52,200) (30,000) Dividends paid (3,501) (2,937) (2,937) (2,937) Profitability & efficiency ratios ROAE (%) ROACE (%) Inventory day Debtors days Payable days Cash conversion cycle (days) (33) (31) 2 22 Current ratio Debt/EBITDA Debt/Equity Adjusted debt/equity Operating ratios Total asset turnover Fixed asset turnover Equity turnover Valuation parameters Diluted EPS (INR) Y-o-Y growth (%) (20.0) CEPS (INR) Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%) Market cap/sales (x) Peer comparison valuation Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%) Name (USD mn) FY13E FY14E FY13E FY14E FY13E FY14E JSW Steel 3, ArcelorMittal 29, Cia Siderurgica Nacional SA 8, Hyundai Steel Co 6, JFE Holdings Inc 11, POSCO 29, ThyssenKrupp AG 12, Source: Bloomberg, Edelweiss research 7 Edelweiss Securities Limited

8 Metals and Mining Additional Data Directors Data Sajjan Jindal Chairman & Managing Direcor Seshagiri Rao M V S Joint Managing Director & Group CFO Dr. Vinod Nowal Director & CEO Jayant Acharya Director (Commercial& Marketing) Dr. Rajneesh Goel Nominee director of KSIIDC Yasushi Kurokawa Nominee director of JFE Steel Corporation, Japan Zarin Daruwala Nominee director of ICICI Bank Ltd Dr. S. K. Gupta Director Anthony Paul Pedder Director Vijay Kelkar Director Sudipto Sarkar Director Kannan Vijayaraghavan Director Uday M. Chitale Director Auditors - Delloitte Haskins & Sells Holding - Top 10 Perc. Holding Perc. Holding M.M. Warburg Bank (Schweiz) AG 5.56 Life Insurance Corp. of India 1.87 The Vanguard Group, Inc Dimensional Fund Advisors, Inc BlackRock Fund Advisors 0.42 Birla Sun Life Asset Management Co. Ltd HSBC Global Asset Management (UK) Ltd Dreyfus Investment Advisors, Inc UTI Asset Management Co. Ltd JF Asset Management Ltd *as per last available data Bulk Deals Data Acquired / Seller B/S Qty Traded Price No Data Available *in last one year Insider Trades Reporting Data Acquired / Seller B/S Qty Traded 12 Mar 2012 JSW Investments Pvt. Ltd. Buy Mar 2012 JSW Investments Pvt. Ltd. Buy Mar 2012 JSW Investments Pvt. Ltd. Buy Mar 2012 JSW Investments Pvt. Ltd. Buy *in last one year 8 Edelweiss Securities Limited

9 RATING & INTERPRETATION Company Absolute reco Relative reco Relative risk Company Absolute reco Relative reco Relative Risk Bhushan Steel REDUCE SU M Coal India BUY SO M Hindalco Industries BUY SO M Hindustan Zinc BUY SP L Jindal Steel & Power BUY SP M JSW Steel BUY SO M National Aluminium Company REDUCE SU M Sesa Goa BUY SP M Steel Authority of India BUY SP L Sterlite Industries (India) BUY SO M Tata Steel BUY SO M Usha Martin HOLD SU M ABSOLUTE RATING Ratings Expected absolute returns over 12 months Buy More than 15% Hold Between 15% and - 5% Reduce Less than -5% RELATIVE RETURNS RATING Ratings Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return Sector Underperformer (SU) Stock return < 0.75 x Sector return Sector return is market cap weighted average return for the coverage universe within the sector RELATIVE RISK RATING Ratings Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector Risk ratings are based on Edelweiss risk model SECTOR RATING Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return 9 Edelweiss Securities Limited

10 Metals and Mining Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91-22) , Vikas Khemani Head Institutional Equities Nischal Maheshwari Co-Head Institutional Equities & Head Research Nirav Sheth Head Sales Coverage group(s) of stocks by primary analyst(s): Metals and Mining Bhushan Steel, Coal India, Hindalco Industries, Hindustan Zinc, Jindal Steel & Power, JSW Steel, National Aluminium Company, Steel Authority of India, Sesa Goa, Sterlite Industries (India), Tata Steel, Usha Martin Recent Research Date Company Title Price (INR) Recos 25-Jan-13 Sesa Goa Merger holds the key; Result Update 21-Jan-13 Bhushan Steel Marginal beat on EBITDA led by controlled costs; Result Update 21-Jan-13 Hindustan Zinc Upside from rising volumes; Result Update 183 Buy 433 Reduce 130 Buy Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Hold Reduce Total Rating Interpretation Rating Expected to Rating Distribution* *- stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Buy Hold Reduce appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period 10 Edelweiss Securities Limited

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