>JSW STEEL LIMITED(MORGAN STANLEY)

1QF10 Result: Earnings Recovery Begins; Stay OW

Quick Comment – Impact on our views: We maintain our OW stance on the stock despite its strong performance in the last six months, since we feel that JSW’s strong volume growth and improvement in its balance sheet will push up valuations as steel prices show signs of improvement.

Strong Rebound in EBITDA margin in 1QF10: JSW reported good standalone adjusted 1QF10 PAT of Rs1.7bn compared to Rs3.8bn in 1QF09 and a loss of Rs491m in 4QF09. EBITDA at Rs7.2bn was 37% above our estimates as EBITDA margin rebounded to 18.6% compared to 9.4% last quarter

What we liked:
⇒ Raw material per ton declined by 32% YoY and 3% QoQ to Rs1,7868 per ton. Captive Coke consumption increased from 55% in 1QF09 to 87%.

⇒ EBITDA per ton expanded sequentially from Rs3,144 to Rs,5259 per ton aided by a 7% decline in average production cost per ton (without inventory change impact).

⇒ Production Volume increased ~40% YoY and QoQ to 1.38mt in 1QF10 keeping JSW well on track to achieve 6mt in F10. Sales Volume increased 62% YoY to 1.32mt.

⇒ Consolidated Net Debt to Equity dropped from 1.79 at 4QF09 end to 1.64 at 1QF10 end. Also, JSW has received covenant waivers on US$325m of loans.

What we did not like:
⇒ Average Steel Realization fell 3% sequentially to Rs2,9477 per ton with a sharp jump in proportion of semi finished steel (from 10% in 4QF09 to 24% in 1QF10).

⇒ Plate and Pipe Mill performance continues to be a drag on performance with capacity utilization falling below 10% in 1QF10. At the EBITDA level, US operations yielded a loss of Rs589m.

To see full report: JSW STEEL