1 JSW Steel Strong operational performance; forex loss drags bottomline PhillipCapital (India) Pvt. Ltd. METALS: Quarterly Update 30 October 2013 Exports and restocking demand helped JSW Steel report strong operational performance and beat estimates. Higher volumes were also aided by power & fuel cost savings driven by 55MW CPP at Dolvi. Improvement in iron ore availability from Karnataka and commissioning of the pellet plant and coke oven batteries at Dolvi will further drive the profitability for the company. The strong performance was impacted by higher forex losses during the quarter. We downgrade our FY14 and FY15 EPS by 3.6% and 11% respectively to Rs and Rs We retain our Neutral rating on the stock however lower our target price to Rs 792 to factor in higher than expected debt. Q2FY14 results highlights Standalone revenues stood at Rs113.1bn, 3.9% above estimates. Higher than expected sales volumes led to the estimate beat. Sales volumes for the quarter stood at 3.13mn tonnes, 4.9% above estimates. Higher exports (0.84mn tonnes) and restocking demand (inventory down by 0.293mn tonnes) boosted volumes during the quarter. Realisation for the quarter stood at Rs36,129 per tonne, 0.9% below estimates. Changing product mix with higher proportion of HRC compared to Q1FY14 saw the drop in realisations. Consolidated net revenues for the quarter stood at Rs128.0bn, 3.8% below estimates. Higher revenues in standalone business are more than offset by lower than expected revenues from subsidiaries. Standalone operating profit for the quarter stood at Rs 22.3bn, 10.5% above estimates. Higher volumes, lower power & fuel (benefit of 55MW power plant at Dolvi) cost partially offset by higher raw materials and other expenses (higher freight cost due to jump in exports). Standalone OP per tonne stood at Rs6,570, 3.2% above estimates. Consolidated operating profit stood at Rs23.5bn, 10.4% above estimates. JSW Steel Coated products reported an ebidta of Rs 780mn, 4.5% below estimates. Chilean operations reported an Ebidta of US$ 5.34mn, 147% above our estimates. This was offset by the operating loss of US$ 2mn in the US operations against our profit estimate of US$ 1.6mn. Consolidated Depreciation/ Interest for the quarter stood at Rs8.0/ 7.6bn, 5.9%/ 4.3% above estimates. Other income stood at Rs511mn, 160.5% above estimates. Dividend received from JSW Energy led to higher other income against estimates. Consolidated net loss stood at Rs1.2bn. It includes forex loss of Rs8.5bn against our expectation of Rs1.8bn. Adjusting forex loss, net profit stood at Rs7.4bn, 10.5% above estimates. Forex loss included MTM losses on unhedged acceptances (around 24% as on Sep 2013) and the loss on forward covers (US$1175mn) which were booked at around Rs during August The company does not expect any MTM losses going forward as the balance acceptances are hedged during October Valuations: At CMP of Rs 848, the stock trades at a P/E of 8.3x FY14E EPS of Rs & 7.0x FY15E EPS of Rs It trades at an Ev/Ebidta of 5.8x FY14E & 5.0x FY15E. Neutral JSTL IN CMP RS 848 TARGET RS 792 ( 6.6%) Company Data O/S SHARES (MN) : 242 MARKET CAP (RSBN) : 205 MARKET CAP (USDBN) : WK HI/LO (RS) : 894 / 452 LIQUIDITY 3M (USDMN) : 15.4 FACE VALUE (RS) : 10 Share Holding Pattern, % PROMOTERS : 35.8 FII / NRI : 38.3 FI / MF : 5.6 NON PROMOTER CORP. HOLDINGS : 6.7 PUBLIC & OTHERS : 13.1 Price Performance, % 1mth 3mth 1yr ABS REL TO BSE Price Vs. Sensex (Rebased values) Apr 10 Mar 11 Feb 12 Jan 13 JSW Steel BSE Sensex Source: PhillipCapital India Research Other Key Ratios Rs mn FY13 FY14E FY15E Net Sales 382, , ,818 EBIDTA 65,039 88, ,449 Net Profit 13,933 24,636 28,910 EPS, Rs PER, X EV/EBIDTA, x ROE, % Source: PhillipCapital India Research Est. Dhawal Doshi ( ) Dharmesh Shah ( ) Please refer to Disclosures and Disclaimers at the end of the Research Report.
2 Quarterly results Consolidated Y/E Mar, Rs mn Q2FY14 Q2FY13 % chg Q1FY14 % chg H1FY14 H1FY13 % chg Sales 127,963 94, % 101, % 229, , % Other Operating Income 1, % 1, % 3, % Total Operating Income 129,838 95, % 102, % 232, , % Operating Expenditure 106,358 79, % 83, % 190, , % Raw Materials 78,212 61, % 58, % 136, , % Employee Cost 3,143 2, % 3, % 6,489 5, % Power & Fuel Cost 9,966 5, % 9, % 19,476 10, % Other expense 15,037 10, % 12, % 27,572 22, % Operating profits 23,480 15, % 18, % 42,274 34, % OPM (%) 18.1% 16.1% 18.3% 18.2% 17.7% Other Income % % % Depreciation 8,025 5, % 7, % 15,529 10, % Interest 7,564 4, % 7, % 14,743 9, % EBT 8,401 5, % 4, % 12,705 14, % Non recurring Gain/(Loss) 8,510 (4,238) 8, % 17,128 1,711 PBT (109) 9, % (4,314) 97.5% (4,422) 13, % Tax 1,190 3, % (321) 470.3% 869 4, % Effective Tax Rate 35.2% 7.5% 19.6% 37.3% Net Profit (1,299) 6, % (3,992) 67.5% (5,291) 8, % Minority Interest (105) (131) 19.9% (136) 22.7% (240) (122) 97.4% Profit from Associates 39 (492) 107.9% % 77 (390) 119.8% Exceptional items 1,100 (497) Consolidated Profit (1,156) 6, % (3,818) 69.7% (4,974) 7, % PAT Margin (%) 0.9% 7.3% 3.7% 2.1% 3.8% Source: Company, PhillipCapital India Research International operations USA operations: Revenues for the quarter stood at US$75.8mn, 5.4% above estimates. Higher volumes of plate and pipe mill operations led to higher revenues against estimates. However, it was partly offset by lower realisations. Sales volumes for plate/ pipe mill operations stood at 80,031/8,466 tonnes, +11.4%/ +8.8% against estimates. The USA operations has reported operating/ net loss for the quarter at US$ 2/ US$ 17mn against our estimates of US$ 1.6mn and US$ 12.8mn for operating profit and net loss respectively. USA Operations Q2FY14 Q2FY13 % chg Q1FY14 % chg H1FY14 H1FY13 % chg Production Plate Mill 92,328 79, % 91, % 183, , % Pipe Mill 8,521 29, % 8, % 16,954 51, % Sales Plate Mill 80,031 53, % 81, % 161, , % Pipe Mill 8,466 24, % 9, % 18,059 48, % Source: Company, PhillipCapital India Research Chilean operations: Production/ sales volumes of iron ore for the quarter stood at 215,224/ 219, 500 tonnes, 20.8%/ 36.9% above estimates. Sales/ OP for the quarter stood at US$26.4/ 5.3mn, 35.4%/ 147.3% above estimates. The Company has maintained its guidance of 12mn tonnes and 11.55mn tonnes of crude steel production and saleable steel sales respectively in FY14. It implies production and sales volumes of 6.16 and 5.87mn tonnes respectively in H2FY14. The Company has guided for 3mn tonnes exports volumes for FY14. 2 of 7
3 The Company revised it capex guidance downward to Rs40bn in FY14 against earlier guidance of Rs50bn. The company has defered the spending on coke oven and sinter plants which were to be used for the de bottlenecking project. Consolidated net debt as on 30th September, 2013 stood at Rs303.7bn. Cash and Cash equivalents as on 30th September 2013 stood at Rs13.8bn. Project updates o The Company re commissioned corex 1 and waste heat recovery system at sinter plant 3 at Vijaynagar in Sep o Mill scale Briquetting plant at Vijaynagar and 6000TPD lime calcination plant at Dolvi commissioned in Aug o First coil from Cold rolling Mill 2 is produced in Oct Commissioning of Phase I and II of new CRM mill (2.3mtpa) is maintained for FY14 and FY15 respectively. o SMS 3 and Bar Rod Mill 2 at Vijaynagar are targeted to be commissioned in FY15. o Commissioning date of 4mtpa pellet plant and 1mtpa coke oven plant at Dolvi is maintained in FY14. o New Galvanizing line and Up gradation of TM 2 mill at Tarapur were commissioned in Sep Railway siding project at Vasind is commissioned in Aug of 7
4 Financials Income Statement Y/E Mar, Rs mn FY12 FY13 FY14E FY15E Net sales 343, , , ,818 Growth, % Total income 343, , , ,818 Operating expenses 282, , , ,369 EBITDA (Core) 61,019 65,039 88, ,449 Growth, % Margin, % Depreciation 19,332 22,375 30,232 33,244 EBIT 41,687 42,664 58,507 71,206 Growth, % Margin, % Interest paid 14,273 19,675 30,053 34,072 Other Non Operating Income ,686 1,855 Non recurring Items 15,353 4,302 17,128 0 Pre tax profit 10,568 17,740 13,167 39,158 Tax provided 5,002 8,453 5,985 10,559 Profit after tax 5,566 9,288 7,182 28,600 Others (Minorities, Associates) Net Profit 5,377 9,631 7,509 28,910 Growth, % 18.2 (32.8) Net Profit (adjusted) 20,730 13,933 24,636 28,910 Unadj. shares (m) Wtd avg shares (m) Balance Sheet Y/E Mar, Rs mn FY12 FY13 FY14E FY15E Cash & bank 30,470 16,534 29,623 44,253 Debtors 14,620 21,063 29,038 33,412 Inventory 57,893 54,952 75,752 80,189 Loans & advances 48,763 58,772 92, ,107 Other current assets Total current assets 151, , , ,238 Investments 20,896 17,500 6,536 7,843 Gross fixed assets 427, , , ,865 Less: Depreciation 88, , , ,844 Add: Capital WIP 28,018 58,544 40,000 41,000 Net fixed assets 366, , , ,021 Total assets 539, , , ,102 Valuation Ratios & Per Share Data FY12 FY13 FY14E FY15E Per Share data EPS (INR) Growth, % 18.2 (32.8) Book NAV/share (INR) FDEPS (INR) CEPS (INR) CFPS (INR) (12.1) DPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) (0.0) (0.0) Working capital days (14.0) (14.0) Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) Dividend cover (x) Total debt/equity (%) Net debt/equity (%) Valuation PER (x) Price/Book (x) Yield (%) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) Current liabilities 134, , , ,544 Provisions 2,963 3,932 2,125 2,337 Total current liabilities 137, , , ,881 Non current liabilities 234, , , ,395 Total liabilities 372, , , ,276 Paid up capital 2,231 2,231 2,417 2,400 Reserves & surplus 162, , , ,251 Shareholders equity 166, , , ,825 Total equity & liabilities 539, , , ,102 Source: Company, PhillipCapital India Research Estimates 4 of 7
5 Recommendation Chart N (TP 926) B (TP 1122) 500 N (TP 732) N (TP 642) S (TP 724) S (TP 600) N (TP 765) N (TP 689) N (TP 716) N (TP 792) N (TP 818) B (TP 673) 300 1/3/2011 5/16/20119/22/2011 2/2/2012 6/12/201210/19/20122/28/20137/10/2013 Source: PhillipCapital India Research 5 of 7
6 Management Vineet Bhatnagar (Managing Director) (91 22) Jignesh Shah (Head Equity Derivatives) (91 22) Research Automobiles Deepak Jain (9122) Banking, NBFCs Manish Agarwalla (9122) Sachit Motwani, CFA, FRM (9122) Consumer, Media, Telecom Naveen Kulkarni, CFA, FRM (9122) Ennette Fernandes (9122) Vivekanand Subbaraman (9122) Cement Vaibhav Agarwal (9122) Economics Anjali Verma (9122) Sales & Distribution Kinshuk Tiwari (9122) Ashvin Patil (9122) Shubhangi Agrawal (9122) Kishor Binwal (9122) Sidharth Agrawal (9122) Dipesh Sohani (9122) Engineering, Capital Goods Ankur Sharma (9122) Infrastructure & IT Services Vibhor Singhal (9122) Varun Vijayan (9122) Metals Dhawal Doshi (9122) Dharmesh Shah (9122) Mid caps Kapil Bagaria (9122) Oil&Gas, Agri Inputs Gauri Anand (9122) Deepak Pareek (9122) Saurabh Rathi (9122) Dilesh Doshi (Sales Trader) (9122) Suniil Pandit (Sales Trader) (9122) Rajesh Ashar (Sales Trader) (9122) Pharma Surya Patra (9122) Retail, Real Estate Abhishek Ranganathan, CFA (9122) Neha Garg (9122) Quant Shikha Khurana (9122) Sr. Manager Equities Support Rosie Ferns (9122) Mayur Shah (Execution) (9122) Contact Information (Regional Member Companies) SINGAPORE Phillip Securities Pte Ltd 250 North Bridge Road, #06 00 Raffles City Tower, Singapore Tel : (65) Fax: (65) JAPAN Phillip Securities Japan, Ltd 4 2 Nihonbashi Kabutocho, Chuo ku Tokyo Tel: (81) Fax: (81) THAILAND Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok Thailand Tel (66) Fax: (66) UNITED STATES Phillip Futures Inc. 141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building Chicago, IL USA Tel (1) Fax: (1) MALAYSIA Phillip Capital Management Sdn Bhd B 3 6 Block B Level 3, Megan Avenue II, No. 12, Jalan Yap Kwan Seng, Kuala Lumpur Tel (60) Fax (60) INDONESIA PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia Tel (62) Fax: (62) FRANCE King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance Paris France Tel (33) Fax : (33) AUSTRALIA PhillipCapital Australia Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia Tel: (61) Fax: (61) INDIA PhillipCapital (India) Private Limited No. 1, C Block, 2 nd Floor, Modern Center, Jacob Circle, K. K. Marg, Mahalaxmi Mumbai Tel: (9122) Fax: (9122) HONG KONG Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) Fax: (852) CHINA Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai Tel (86) Fax: (86) UNITED KINGDOM King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS Tel (44) Fax: (44) SRI LANKA Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka Tel: (94) Fax: (94) of 7
7 Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may or may not match or may be contrary at times with the views, estimates, rating, target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd. which is regulated by SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only and neither the information contained herein nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment or derivatives. The information and opinions contained in the Report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication to future performance. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax and financial advisors and reach their own regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. In no circumstances it be used or considered as an offer to sell or a solicitation of any offer to buy or sell the Securities mentioned in it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which we believe are reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request. Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst s personal views about all of the subject issuers and/or securities, that the analyst have no known conflict of interest and no part of the research analyst s compensation was, is or will be, directly or indirectly, related to the specific views or recommendations contained in this research report. The Research Analyst certifies that he /she or his / her family members does not own the stock(s) covered in this research report. Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it or its affiliates may hold either long or short positions in such securities. PhillipCapital (India) Pvt. Ltd does not hold more than 1% of the shares of the company(ies) covered in this report. Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic or political factors. Past performance is not necessarily indicative of future performance or results. Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorized use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety. Caution: Risk of loss in trading in can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd. which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a 6(b)(4) of the U.S. Securities andexchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a 6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker dealer, Marco Polo Securities Inc. ("Marco Polo").Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer PhillipCapital (India) Pvt. Ltd. Registered office: 2nd Floor, C Block, Modern Centre, Mahalaxmi, Mumbai of 7