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JSW Steel 3QFY2013 performance highlights and results update

Contributed by Angel Broking

JSW Steel’s 3QFY2013 standalone top-line came in lower than our expectation; however, the bottom-line was slightly better than our expectation. We maintain our Neutral recommendation on the stock.

Realization dips more than our expectations: JSW Steel’s standalone net sales grew by 5.3% yoy to Rs.8,275cr, below our estimate of Rs.8,521cr due to lower-than-expected realizations. Net sales growth was driven by an increase in steel volumes (+13.7% yoy to 2.17mn tonne), although the same was partially offset by a decline in realizations (-9.5% yoy to Rs.38,804/tonne).

Higher interest costs hit PAT: JSW Steel’s EBITDA increased only 4.9% yoy to Rs.1,314cr on account of decrease in realizations. Interest expenses grew by 61.3% yoy to Rs.455cr. Hence, the adjusted net profit (excluding exceptional items) de-grew by 30.6% yoy to Rs.464cr (our estimate was of Rs.451cr).

Slow ramp up in iron ore mines in Karnataka: JSW Steel stated that 6 “A” category mines, with a capacity of 3.3mtpa, have opened up while another 4 mines with a capacity of 1.8mtpa are at various stages of approvals. For “B” category mines, 20 mines received R&R approvals; however, there is no clarity on timelines of production from these mines.

Outlook and valuation: JSW Steel aims to raise utilization levels at its Vijaynagar plant during FY2014. However, we believe increasing steel production meaningfully during FY2014 would remain a challenge until there is significant rise in iron ore supplies from Karnataka mines. Although we expect iron ore supplies in Karnataka to improve gradually during FY2014, there is lack of clarity on the timelines and production from category “B” mines. Moreover, we opine that JSW Ispat’s merger with JSW Steel is likely to be value-destructive for JSW Steel’s shareholders. The stock is currently trading at 4.9x FY2014 EV/EBITDA. We maintain our Neutral view on the stock.