>JSW STEEL LIMITED (ICICI SECURITIES)

Fading lustre

JSW Steel’s (JSWS) Q1FY10 results were much below Street and I-Sec estimates (adjusting for extraordinary forex gain). Adjusted standalone net profits decreased 77% YoY to Rs1.04bn. The revenue increase was muted at 19% QoQ and 6% YoY, despite 61% YoY and 24.5% QoQ volume growth. This was mainly owing to 3% QoQ and 34% YoY drop in blended realisations. Margins improved sequentially to US$112/te from US$57/te on reduction in coking coal prices. Consolidated reported PAT declined 15% YoY. Adjusted for extraordinary income, consolidated reported loss was Rs198mn. Though the management has guided for strong 72% YoY volume upside in FY10, we believe significant volume risks exist owing to GP/GC exports and domestic market share gain in rebars and wire rods. We will shortly revisit our estimates. Maintain HOLD.

■ Margin outlook partially improves. Reduced coking coal prices to US$129/te from US$300/te have helped improve Q1FY10 EBITDA margin ~800bps QoQ to 18.6%. But margin was below Street estimates on high-cost coking coal & iron ore inventories. We expect margins to improve in Q2FY10 as the full impact of reduction in coking coal contract price comes in. Also, Rs2,000/te rise in HRC prices in Q2FY10 and reduced sales of semis (from 23.5% in Q1FY10) with the commissioning of the bloom caster in Vijaynagar will help boost margins. However, margin expansion will be partially offset by: i) increasing spot iron ore prices, currently at US$90/te, which will form ~40% of JSWS’ requirement in FY10E and ii) US$22/te impact coming from carry-over coking coal volumes.

■ Volumes, the key risk. JSWS continues with its niche positioning strategy of increasing incremental volumes from the recently completed 2.8mtpa expansion in Vijaynagar. While management has guided for 6.1mtpa sales in FY10, we estimate it to be 5.5-5.7mtpa. Monthly exports of value-added products at ~45,000tpa and monthly sales of domestic wire rods of ~55,000tpa are at risk. Also, sales from the US will be subdued. Pipe capacity in the US is currently running at 30% utilisation.

■ Upside priced in. JSWS continues to moderate its debt gearing, with consolidated and standalone D/E declining 6.7% QoQ and 5.6% QoQ to 1.67x and 1.17x respectively. The stock trades at FY10E P/E & EV/E of 5.6x & 5.3x respectively, leaving little scope for further re-rating. Maintain HOLD on the back of volume and margin uncertainty and increased leverage.

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