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Recommendations India

JSW Steel 3QFY2014 performance highlights and results update

January 30, 2014, Thursday, 06:15 GMT | 01:15 EST | 10:45 IST | 13:15 SGT
Contributed by Angel Broking

JSW Steel’s standalone 3QFY2014 top-line and bottom-line were above our estimates due to better-than-expected realization. However, given the fair valuation, we recommend a Neutral rating on it.
Volumes disappoint, but realizations better than expected: JSW Steel’s standalone net sales stood at Rs.11,731cr, above our estimate of Rs.11,358cr due to better-thanexpected sales realization. The company’s sales realization stood at Rs.38,089/tonne, while its sales volumes stood at 3.1mn tonne (lower than our expectation of 3.2mn tonne).
EBITDA/tonne up only Rs.341/tonne: Despite a Rs.1,960/tonne qoq increase in realization, the EBITDA grew by only Rs.341/tonne qoq due to higher iron ore and hedging costs. The adjusted net profit stood at Rs.652cr (above our estimate of Rs.618cr). FY2014 sales volumes to exceed previous guidance: The company now expects sales volumes to exceed the earlier given guidance of 11.6mn tonne for FY2014.
Outlook and valuation: Despite low steel demand in India, domestic steel majors (including JSW Steel) have managed to report strong volume numbers during the last six months on the back of 1) import substitution arising out of higher cost of imported steel and 2) increase in steel exports – both of which are a result of INR depreciation against the USD. However, looking ahead, we do not expect meaningful increases in steel prices over the coming one year. Also, we believe increasing steel production meaningfully from the current run-rate during FY2015 would remain a challenge for JSW Steel given the slow ramp up in production from iron ore miners in Karnataka. Further, JSW Steel is trading at a fair valuation of 4.7x FY2015 EV/ EBITDA in our view. Hence, we recommend a Neutral rating on the stock.

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