>JSW Steel (CITI)

Sell: 4Q Loss; Margins Collapse

■ 4Q disappoints — JSTL reported standalone PAT of Rs492m. Adjusting for the FCCB buyback & forex gains, net loss for 4Q was Rs258m vs profit of Rs4.4bn in 4QFY08. EBITDA margin came in at 11% vs 27% in 4QFY08 and 15% in 3QFY09, impacted by 13% yoy decline in realizations and higher costs. Sales volumes rose 5% yoy to 1.06m tonnes. FY09 adj PAT fell 44% yoy to Rs9.3bn.

■ High opening inventory — 4Q EBITDA/t fell to $67 vs $188 last year and $122 in 3QFY09. Even though JSTL had contracted coking coal at $175/t for most of its 4Q off-take (vs $305/t for FY09), the quarter was impacted by significant high-cost opening inventory. ~8% of coking coal contracted at $305/t in FY09 is yet to be lifted and JSTL is in negotiations to spread it over the next 2-3 yrs.

■ US platemill to be shut — The US plate/pipe mills are operating at 10-15% utilization and reported a 4Q loss of $61m and a $37m loss for FY09.

■ Stretched balance sheet — Standalone debt is Rs101bn and cons. debt is Rs146bn (standalone D/E 1.2x; cons D/E 1.8x). While JSTL has breached its standalone debt covenant of 3.25x Debt/EBITDA (3.3x as on 31 March 09), most of its lenders have approved the relaxation of these covenants.

■ Volume estimates — JSTL has enhanced capacity to 7.8mtpa (+63%) and expects FY10 volumes to rise 78% - which appears to be an onerous target. We expect 51% growth.

■ Sell — While steel stocks have appreciated substantially, the risk of supply restarts and downside to prices persists. Hence, we prefer less leveraged plays.

To see full report: JSW STEEL