>JSW Steel (KARVY)

Surpassing Tata Steel as the largest private sector steel player in India

JSW Steel has come back on track to deliver a healthy crude steel production performance in Q4FY2009 after the complete disappointment on production and sales volume front during Q3FY2009. Volumes have been showing an uptrend but we believe there could be negative surprise of lower steel price realization as compared to consensus estimates. On account of price performance and overhang of lower price realizations, we downgrade our rating from BUY to Market performer.

Production update for Q4FY2009 and outlook for FY2010E: After commissioning of new blast furnace capacity of 2.8 mn tonnes in February 2009, JSW Steel has now become India's largest private sector steel company with total steel making capacity of 7.8 mn tonnes. Earlier it was Tata Steel with steel making capacity of 6.8 mn tonnes. The 2.8 mn tonne expansion project has been commissioned in a record 31 months.

Indian and global steel price might correct further due to lower raw material prices: We expect iron ore contracts and coking coal contracts to be negotiated at ~ 50%-60% lower than the contract rates of FY2009. Iron ore contracts might be finalized at US$50 per tonne and coking coal at US$120 per tonne for FY2010E. This is likely to put further pressure on steel prices going forward.

Despite being largely non-integrated, JSW Steel is a low cost producer: JSW Steel's cost of production is lower than that of Tata Steel (India), which is remarkable considering that its level of integration is much lower than that of Tata Steel (India). While Tata Steel (India) is 100% integrated for iron ore supplies and 70% for coking coal supplies, JSW Steel is integrated for only 25% of iron ore. However, JSW's employee and other costs per tonne are
significantly lower than those of Tata Steel.

Domestic producers gain as imports reduce: Though there was a sharp jump in imports in November 2008 due to the wide differential between Indian domestic prices and the import price from CIS countries, Indian companies could counter the flow of imports by cutting HRC prices by US$100/t in December 2008. Going forward, we believe that the preference for domestic producers over imports could continue due to the benefits like less order to delivery time, no requirement of letter of credit, lack of any exchange rate risks, etc.

Valuation: For FY09E, we expect adjusted profit to decline by 36.5% to Rs 11,787 mn. Our EPS estimate for FY2009 comes to Rs 59. Our FY2010E EPS is Rs 82 based on sales volume of 6.2 mn tonnes in FY2010E. We maintain our target price of Rs 334 at which the stock would quote at P /E of 4.1x and EV / EBIDTA of 4.6x based on FY2010E. Due to the recent surge in the stock price, we change our rating from BUY to Marketperformer.

To see full report: JSW Steel