This is an equity research report of JSW Steel....
Institutional Research
JSW Steel Ltd Beyond the Ban!!
Kunal Motishaw +91 22 663 99138 VIOLET ARCH Securities Pvt. Ltd. (Erstwhile Alchemy Share & Stock Brokers Pvt. Ltd.)
[email protected]
VIOLET ARCH Research
Index Executive Summary
3
Scenario Analysis
4
Key Assumptions
5
SWOT Analysis
6
Peer Valuation
7
Valuation
7
Key Investment Arguments
8-13
Key Risks and Concerns
14
Company Background
15
Industry Overview
16
Financial Summary
17
JSW Steel Ltd - Company Report
VIOLET ARCH Securities Pvt. Ltd. (Erstwhile Alchemy Share & Stock Brokers Pvt. Ltd.)
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COMPANY REPORT Equity Research l Metal
VIOLET ARCH Research
JSW Steel Ltd Beyond the Ban!!
May 6, 2013
BUY Rs 972
Absolute Rating Target Price Upside
39%
JSW Steel (JSTL) has been the best executor of projects in the domestic ferrous space. The company has increased capacity from a 0.8MTPA in FY00 to 11MTPA (including 1MTPA at Salem) in FY12 translating into a CAGR of 27%. Further, with the acquisition of ISPAT, JSW steel is now the largest steel company in India with an installed capacity of 14.3MTPA. Also, with Supreme Court lifting the iron ore mining ban on Category A & Category B mines, iron ore procurement cost for JSW steel should come down gradually over a period of time. Further, with operational efficiencies at JSW ISPAT expected in the coming quarters, the company is expected to report healthier margins. We initiate coverage on JSW Steel with a BUY rating and a target price of Rs 972, providing a 39% upside from the current level.
Stock data
Market Cap (Rs bn)
160
Investment Argument
Market Cap (USD bn)
3.2
CMP
Rs 700
Reuters Code
JSTL.BO
Bloomberg Code
JSTL IN
Equity Shares o/s (mn)
241.7
Efficient Converter with rich product mix Despite no backward integration (earlier ~20% for iron ore), JSTL has been able to maintain competitive operating margins due to its efficient operations. JSW steel has one of the lowest conversion costs amongst large steel producers with conversion cost of around USD 150/tonne. Further, being a non integrated player, the company is highly susceptible to change in raw material prices thus making it the main beneficiary of falling raw material prices. Further, given the company’s continuous emphasis on value addition, share of semis in total volumes has come down over the years from 22% in FY10 to 5% in FY12. Going forward, we expect the share of semis to remain below 3%.
Lifting of mining ban to improve utilization levels With the positive verdict from the Supreme Court of India on Category ‘A’ & ‘B’ iron ore mines and auctioning of sub-grade ore along with an evolving regulatory framework we expect more supply of ore and sub grade ore. This in turn should lead to a drop in ore prices and benefit steel mills like JSW Steel with captive beneficiation and pelletisation facilities and also improve utilization levels. However, the benefits of the same are expected only from the end of FY14E.
Stock performance (%) 52-week high / low
Rs 894 /566 1M
3M
12M
Absolute
4.7
(17.3)
1.5
Relative
1.2
(14.8)
(11.1)
Shareholding pattern (%) DII, 5
JSW-Ispat - Operating metrics set to improve JSTL had outlined substantial cost savings at JSW Ispat to the tune of Rs3.5bn-5bn annually. As per our understanding, while part of the synergy gains in marketing and power sourcing are already being realized, we think the actual turnaround at JSW ISPAT is not too far, with the full benefits of cost savings from the 55MW power plant fed on BF gas, 1MT coke oven battery 4MT pellet plant and replacement of external gas with coke oven gas expected to gradually contribute. We believe post completion of all these initiatives, JSW ISPAT could see cost savings of ~USD75-80/tonne.
FII, 20
Promoter, 38
Public & others, 37
Valuation Relative stock movement 130 120 110 100 90
JSW Steel
Sensex
Source: Company, Violet Arch Research
JSW Steel Ltd - Company Report
VIOLET ARCH Securities Pvt. Ltd. (Erstwhile Alchemy Share & Stock Brokers Pvt. Ltd.)
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Apr-13
Mar-13
Jan-13
Feb-13
Dec-12
Oct-12
Nov-12
Sep-12
Jul-12
Aug-12
Jun-12
May-12
80 Apr-12
JSTL has corrected 22% since the announcement of the mining ban in the Bellary district (and 16% YTD). At the current valuations of 4.4x FY15E EV/EBITDA, JSTL trades at a discount to its historic EV/EBITDA of 6x, implying value in the stock. We value JSTL at 5xFY15 EV/EBITDA and arrive at a SOTP target price of Rs 972/share, a discount to its historical average due to lack of raw material integration and slow off-take of steel in the domestic market. Delays in securing timely and adequate e-auction ore supplies and starting of mining operations in Category ‘B’ mines pose key downside risk to our estimates. Particulars (Rs mn) FY12 FY13E FY14E FY15E Revenues 341,237 363,874 376,525 421,121 EBITDA 58,575 65,025 66,686 79,018 EBITDA margins (%) 17.2 17.9 17.7 18.8 EBITDA growth (%) 25.6 11.0 2.6 18.5 Adj. Net profit 11,151 16,123 15,556 20,868 Adj. Net profit growth (%) (36.4) 44.6 (3.5) 34.1 Net Profit margins (%) 3.3 4.4 4.1 5.0 FDEPS (Rs) 50.0 66.7 64.4 86.3 FDEPS growth (%) (36.4) 33.5 (3.5) 34.1 P/E (x) 14.0 10.5 10.9 8.1
VIOLET ARCH Research
Scenario Analysis FY15E (Standalone) Realisation (Rs/tonne) Steel Sales Volumes (mn tonnes) Exchange Rate (INR:USD) EBITDA (Rs mn) Inc / Dec from base case (%) EPS (Rs)
Bull Case
Base Case
Bear Case
43,922
41,920
39,732
10
9.1
8.49
49
51
55
103,951
74,365
48,952
39.8
-
(34.2)
165.83
103.44
52.4
Inc / Dec from base case (%)
60.3
-
(49.3)
CMP
700
700
700
Target Price Upside %
1,188
972
514
69.7
38.9
(26.6)
Source: Violet Arch Research
Bull Case
Steel Realizations to be higher at Rs 43,922/tonne on the back of improved international prices and increased domestic demand.
Sales volumes assumed at 10mn tonnes an increase of 10% from our base case assumption and 16.3% over FY14E levels on the back of optimum capacity utilisation and higher demand for steel domestically.
Exchange rate assumed at Rs49/USD.
Base Case
Steel Realizations to average at Rs 41,920/tonne on the back of subdued domestic demand and import parity prices.
Sales volumes assumed at 9.1mn tonnes an increase of 6% from FY14E levels as domestic demand expected to grow by ~7%.
Exchange rate assumed at Rs51/USD.
Bear Case
Steel realizations expected to fall from the current levels and average at Rs 39,732/tonne on the back of a fall in international prices and weak demand.
Sales volumes at 8.49mn tonnes as iron ore supplies get delayed
Exchange rate assumed at Rs53/USD
Impact of 5% change of various Parameters on EBITDA & EPS (FY15E) Exchange rate Iron ore Coking coal Steel Prices
EBITDA 8.4% 4.4% 9.2% 21.4%
EPS 17.8% 9.3% 14.9% 34.3%
Source: Violet Arch Research
JSW Steel Ltd - Company Report
VIOLET ARCH Securities Pvt. Ltd. (Erstwhile Alchemy Share & Stock Brokers Pvt. Ltd.)
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VIOLET ARCH Research
Key Assumptions Steel Sales volumes expected to grow by 4.4% to 8.6mn tonnes in FY14E and 5.8% to 9.1mn tonnes in FY15E.
Blended Realization/tonne expected to fall by 2.35% to Rs 39,584 in FY14E and increase by 5.9% to Rs41,920 in FY15E.
Iron ore cost on a per tonne basis expected to increase by 2.5% to Rs3,381/tonne in FY14E and increase by 3.4% to Rs3,496/tonne in FY15E. It must be noted that iron ore costs increased by 26% in FY13E due to the mining ban in Karnataka.
Blended Coking coal cost to decrease by 4.7% to Rs11,600/tonne in FY14E and increase by 5.8% to Rs12,271/tonne in FY15E.
Exchange rate expected to average at Rs53/USD in FY14E and Rs51/USD in FY15E.
Particulars
FY11
FY12
FY13E
FY14E
FY15E
Steel Sales Volumes (mn tonnes)
6.11
7.77
8.24
8.60
9.10
37,915
41,248
40,508
39,584
41,920
Blended realization (Rs/tonne) Iron Ore (Rs/tonne) Blended coking coal (Rs/tonne) Currency (INR/USD)
2,858
2,620
3,300
3,381
3,496
10,673
13,412
12,173
11,600
12,271
45.5
47.9
54.5
53.0
51.0
Source: Company, Violet Arch Research
Per tonne analysis (Standalone / Rs) Net Sales
FY11
FY12
FY13E
FY14E
FY15E
36,411
43,153
41,502
40,157
42,625
Less:Raw Material
22,179
28,074
26,365
25,506
27,069
Employee Cost
832
850
862
855
847
Power and Fuel
1,838
2,288
2,325
2,137
2,144
Other Expenses TOTAL EBITDA/tonne (Rs) EBITDA/tonne (USD)
4,076
4,677
4,395
4,275
4,390
28,925
35,889
33,948
32,773
34,450
7,486
7,264
7,554
7,384
8,175
165
152
139
139
160
Source: Company, Violet Arch Research
JSW Steel Ltd - Company Report
VIOLET ARCH Securities Pvt. Ltd. (Erstwhile Alchemy Share & Stock Brokers Pvt. Ltd.)
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VIOLET ARCH Research
SWOT Analysis Strengths 1) JSW Steel is amongst the fastest growing steel companies globally with steel capacities increasing by 7x in just 10 years. Besides, JSTL also features amongst the most efficient steel producers globally. 2) This clearly illustrates the Company’s excellent brown field execution and cost management skills.
Threats 1) Sudden drop in steel demand and inability to pass on raw material price increase to end customers would result in a severe dent to profitability on the back of negative impact of higher operating leverage. It must be noted that in FY13, steel demand grew by a mere 4% YoY. 2) As per our understanding, 60% of India’s capacity addition over the next few years is expected to come in the flats segment, with HRC accounting for over 50%. JSTL has high exposure to the flats segment (HRC in particular) which could imply pricing pressure on the majority of its product offerings.
Weaknesses
SWOT Analysis
1) JSW Steel meets 100% of its coking coal and iron ore requirement from external sources. Lack of raw material sufficiency would imply higher costs and in-turn earnings volatility for the company. Further, with the domestic iron ore mining industry facing bans in certain regions, prices domestically have increased as supply has not been able to match demand.
Opportunities 1) As India’s largest steel producer, JSTL will be a key beneficiary of domestic growth and rising steel demand. We estimate steel demand to grow by 6% in FY14E and 7% in FY15E. 2) While the company has currently put its 10 MTPA plant in West Bengal on hold, land acquisition for the same is complete. The company is waiting for iron ore mine allocation there until it puts some meaningful investment into the same. Hence, if JSTL is successful in commissioning of these projects, it will see the company well placed to reap the benefits of rising steel demand.
Source: Violet Arch Research
JSW Steel Ltd - Company Report
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VIOLET ARCH Research
Peer Valuation Company Name Arcelor Mittal
Revenues (Rs bn)
EBITDA (Rs bn)
PAT (Rs bn)
P/E (x)
EV/EBITDA (x)
Mkt Cap (Rs bn)
CY12/ FY13
CY13/ FY14E
CY14/ FY15E
CY12/ FY13
CY13/ FY14E
CY14/ FY15E
CY12/ FY13
CY13/ FY14E
CY14/ FY15E
CY12/ FY13
CY13/ FY14E
CY14/ FY15E
CY12/ FY13
CY13/ FY14E
CY14/ FY15E
1,044
4,501
4,563
4,488
681
638
671
(199)
167
189
-
18.1
16.0
6.1
5.6
4.9
China Steel Corp.
700
374
707
665
37
91
68
11
34
38
46.9
14.5
12.8
6.9
6.8
6.3
JFE Holdings Inc
671
2,102
2,030
1,725
154
186
136
26
(25)
21
23.9
-
30.4
7.6
7.7
6.3
SAIL
266
457
468
569
56
66
91
26
27
38
10.1
9.9
7.1
8.2
7.4
5.6
Tata Steel
310
1,363
1,439
1,380
113
158
155
(7)
31
27
-
7.7
6.0
8.0
5.8
5.6
JSW Steel
169
364
377
421
65
67
79
16
16
21
10.5
10.9
8.1
5.1
5.2
4.4
7.0
6.4
5.5
AVERAGE Source: Bloomberg, Violet Arch Research
JSTL is trading at 4.4x FY15E EV/EBITDA as compared to its peers, which are trading at an average 5.5xCY14E/FY15E EV/EBITDA. Further even other domestic players like SAIL & Tata Steel are trading at a premium as compared to the company.
Valuation JSW steel has corrected 22% since the announcement of the mining ban in the Bellary district (and 16% YTD). At the current valuations of 4.4x FY15E EV/EBITDA, JSTL is trading at a discount to its historic 5-year average EV/EBITDA of 6x, implying value in the stock. Further, with the Chinese macro and bulk commodity outlook looking bleak, we believe that JSW Steel’s nonintegrated (direct beneficiary of a drop in international coking coal prices) nature and efficient operations puts it a sweet spot. Also, we like JSW Steel from a bottom-up approach, wherein we expect its iron ore procurement costs to drop due to demand supply mismatch for iron ore fines in Karnataka, and re-starting of Category ‘B’ mines by end FY14E. In our view this along with increased domestic off take and improvement in operating metrics at JSW Ispat would be the key drivers for the stock going forward. We value JSW Steel based on EV/EBITDA methodology, as it captures the operating dynamics of the business model and also its capital structure. We value JSTL at 5xFY15 EV/EBITDA and arrive at a SOTP target price of Rs 972/share, a discount to its historical average on the back of lack of raw material integration and slow off-take of steel in the domestic market. Delays in securing timely and adequate e-auction ore supplies and re-starting of mining operations in Category ‘B’ mines pose key downside risk to our estimates. We initiate coverage on the stock with a BUY rating. (Rs mn) JSW Steel (Consolidated) Enterprise Value Less :- Net Debt Add:- Investments JSW Energy (5.6% stake) Ispat
Basis EBITDA
30% discount to CMP 0.5x invested equity
Multiple 5.0
FY15E 79,018 395,092 (176,065)
0.7 0.5
4,160 11,785
Target Market Cap Fully Diluted Shares (mn) Target Price (Rs) CMP (Rs) Upside (%)
234,972 241.7 972 700 38.9
Source: Company, Violet Arch Research
JSW Steel Ltd - Company Report
VIOLET ARCH Securities Pvt. Ltd. (Erstwhile Alchemy Share & Stock Brokers Pvt. Ltd.)
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VIOLET ARCH Research
Key Investment Argument Efficient converter with rich product mix Despite no backward integration (earlier ~20% for iron ore), JSTL has been able to maintain competitive operating margins due to its efficient operations. JSW steel has one of the lowest conversion costs amongst large steel producers with conversion cost of around USD 150/tonne. Further, being a non integrated player, the company is highly susceptible to change in raw material prices thus making it the main beneficiary of falling raw material prices. However due to the recent iron ore ban in Karnataka which has just been lifted and will take miners some time to increase output, domestic iron ore prices are expected to remain buoyant and the company is not expected to benefit from falling iron ore prices globally as it will have to buy iron ore at e-auction prices till end FY14. Nevertheless, decline in coking coal prices will benefit JSTL.
JSTL – lowest conversion cost amongst domestic majors 800 700 150
600
339
500
419
400 300
540
200
369
280
100 -
JSW Steel
SAIL
Raw Material
Tata Steel Conversion Cost
Source: Company, Violet Arch Research
JSW Steel Units (Standalone) Particulars
Capacity (MTPA)
Location
Crude Steel
11
Vijaynagar + Salem
Slabs
10
Vijaynagar
Billets
2.75
Vijaynagar + Salem
HRC + plates
6.7+0.32
Vijaynagar + Salem
Rolled Long
2.2
Vijaynagar + Salem
Cold rolled coils
1.8
Vijaynagar
Galvanised coils
0.9
Vasind
Colour Coated Sheets
0.2
Vasind
Captive Power plant (MW)
920
Vijaynagar + Salem + Vasind
Source: Company, Violet Arch Research
JSW Steel, through its timely capacity expansion, has delivered a staggering 27% CAGR in volumes over FY00-FY12. JSTL’s steel making capacity has increased ~4x over FY05-FY12 to 11mtpa, which after the ISPAT merger now stands at 14.3MTPA. With iron ore sourcing likely to improve from end FY14E, we expect the company to benefit from the same. Given the company’s continuous emphasis on value addition, share of semis in total volumes has come down over the years from 22% in FY10 to 5% in FY12. Going forward with value added capacity
JSW Steel Ltd - Company Report
VIOLET ARCH Securities Pvt. Ltd. (Erstwhile Alchemy Share & Stock Brokers Pvt. Ltd.)
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VIOLET ARCH Research coming on stream, we expect the share of semis to remain below 3%. Enhanced product mix has also led to JSTL’s realisation spread over landed HRC prices to remain at ~9% over the past few years.
JSTL’s capacity has grown at a staggering 30% CAGR over the years 12 10 8 6 4 2 0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13E
FY14E
FY15E
Source: Company, Violet Arch Research
Lifting of mining ban to improve utilization levels The blanket ban across the districts of Chitradurga, Tumkur and Bellary in Karnataka practically left JSTL with NMDC as its supply source as procuring iron ore from Orissa and Chhattisgarh is not a viable option due to high logistics costs. Also, this left JSTL highly exposed, given concerns over NMDC’s ability to ramp-up iron ore production in Karnataka (to 1mn tonnes/month). However, with the Supreme Court decision to allow e-auction of iron ore gave the much needed breathing space to JSTL. Now, after clearance by the Supreme Court of Category A & Category B mines, few category A mines have restarted operations with 3 mines starting during 4QFY13, in addition to 6 mines starting earlier. The combined capacity of the 3 new mines stands at ~5.5 MTPA. Further two more mines are expected to restart adding further ~1 mtpa. On the other hand after the introduction of advance e-auction, the company expects NMDC also to supply more iron ore (~9 mtpa) in Karnataka. As far as category ‘B’ mines are concerned, R&R plans for 20 mines have been approved and are under preparation for other mines. Also, 12 mines have accepted all the conditions stipulated by the Supreme Court to consider re-commencement of mining. Hence, all in all, the iron ore availability situation is likely to improve gradually. At 78% utilization levels (our estimate for FY14E), the company would need ~15 mn tonnes of high grade ore. As per our understanding, NMDC should contribute ~9 mn tonnes along with another 6 mn tonnes from category ‘A’ mines. Considering JSW Steel buys ~65% of the fines auctioned, the company can secure ~8 mn tonnes through this route. Further, the company has also has been buying ~2.5 mn tonnes from Orissa and Chhattisgarh. Thus, total availability should be in excess of ~15 mn tonnes giving us the confidence that even without dump ore and category ‘B’ mines, the company should not see a major problem in achieving our estimated utilization level for FY14E.
JSW Steel Ltd - Company Report
VIOLET ARCH Securities Pvt. Ltd. (Erstwhile Alchemy Share & Stock Brokers Pvt. Ltd.)
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VIOLET ARCH Research Iron ore sourcing should not be a major problem going forward
NMDC (9mn tonnes)
Category 'A' mines (6mn tonnes)
JSTL (FY14E)
Fines (8mn tonnes )
~15mn tonnes of high grade ore
Orissa & Chattisgarh (2.5mn tonnes)
Source: Company, Violet Arch Research
In 4QFY13, the Monitoring Committee had auctioned about 6.3 mn tonnes of low-grade ore from the dumps of Mineral Enterprises Limited for an average price of Rs 650/tonne for 53% Fe grade ore. Since the company has technology available to beneficiate low-grade iron ore, it has so far used up to 52% Fe and for the first time the management plans to experiment with even lower grade ore. However, recovery of iron would be in the range of 35-40% and the losses around 60%.
Utilization Levels have steadily improved in recent times 85.0% 80.0% 75.0% 70.0% 65.0% 60.0% 55.0% 50.0% 3QFY13
2QFY13
1QFY13
4QFY12
3QFY12
2QFY12
1QFY12
4QFY11
3QFY11
2QFY11
1QFY11
4QFY10
3QFY10
2QFY10
1QFY10
4QFY09
3QFY09
2QFY09
1QFY09
Source: Company, Violet Arch Research
Also, as per data from Indian Bureau of mines (IBM), 56% of the Karnataka ore inventories have Fe content lower than 62% and fines account for 60% of total inventory volumes. We expect lower bidding for low grade fines/ lumps in the e-auction process given limited domestic pelletisation/sintering facilities. With its captive 20mn tonnes beneficiation and 9mn tonnes pelletisation facility, JSW Steel will be a key beneficiary of the favorable inventory mix.
JSW Steel Ltd - Company Report
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JSW-Ispat - Operating metrics set to improve JSW Ispat will get merged with JSTL and the swap ratio has been fixed at 1:72 implying Ispat share holders will get one share of JSTL for 72 shares held in JSW Ispat. The merger will be effective from 1st July 2012 and is expected to be completed anytime soon as JSTL had guided of completion by end FY13. As part of the merger, JSTL will hive off the downstream capacities of both the entities at Vasind Tarapur and Kalmeshwar into a 100% subsidiary. The total collective capacity of downstream production units is ~1.2mtpa. The Dolvi plant of Ispat has the potential to increase its capacity to ~7.5mtpa from the current 3.3mtpa. However, expansion plans for this brownfield project expansion is at a very nascent stage.
Ispat Merger to make JSW Steel the largest steel company in India JSW Steel
JSW ISPAT
Merged Entity
Crude Steel Capacity (MTPA)
11
3.3
14.3
Expansion Potential (MTPA)
5
4.2
9.2
Corex - 1.6mtpa
BF - 2mtpa
BF-BOF - 9.4mtpa
DRI - 1.6mtpa
Steel making route
Source: Company, Violet Arch Research
While the benefits of marketing synergies (the result of VAT benefits and freight savings) along with reduced power costs (sourcing from JSW Energy vs. MSEDCL) are already being realized, we believe there is more in store on the cost savings front in the coming quarters. We expect benefits from the 55MW captive power plant to flow in immediately, thereby leading to annualized cost savings of around Rs1.8bn per annum. In addition, we expect material improvement in operational metrics at JSW Ispat once its coke oven and pellet plant facilities are commissioned over 2HFY14. Cost Savings
USD/tonne
55 MW Power plant
14
4 MTPA pellet plant
21
1 MTPA coke oven battery
25
Replacement of purchased gas with coke oven gas
22
Total Savings
82
Source: Company, Violet Arch Research
With boiler hydro testing, light up and chemical cleaning at the 55MW power plant already done, we believe the power plant will be commissioned very soon. Waste heat gases recovered from the blast furnace will be utilized to feed the 55MW power plant. And hence cost benefits of the power plant will flow immediately, resulting in annual cost savings of Rs1.8bn ($14/T) translating to a payback of less than two years. On the pellet plant front, JSW Ispat currently procures ~50% of its ore requirement from domestic sources and the rest from imports. With a 1.6MT DRI dependent on pellet feed (~2.7MT) and 2MT BF’s 15% ore requirement met via pellet route (~0.5MT), JSW Ispat will require around 3.5mn tonnes of pellets annually. With commissioning of the pellet plant, we expect JSW Ispat (a port- based facility) to have increased leeway to import fines over domestic sourcing of lumps. With commissioning of the pellet plant, we expect JSW Ispat to realize cost gains to the extent of USD21/t.
JSW Steel Ltd - Company Report
VIOLET ARCH Securities Pvt. Ltd. (Erstwhile Alchemy Share & Stock Brokers Pvt. Ltd.)
11
VIOLET ARCH Research Further, work at the coke oven batteries is in full swing, with the structural frames already in place. We expect the first coke oven battery to be commissioned by the end of 2QFY14 and the second battery by the end of 3QFY14. As per our estimates, the commissioning of the coke oven batteries will see JSW Ispat realize cost gains up to USD25/tonne.
Sales Volumes and EBITDA/tonne set for improvement 6,000
3.2
5,500
3
5,000 2.8
4,500 4,000
2.6
3,500
2.4
3,000 2.2
2,500 2,000
2 FY10*
FY11
FY12
FY13E
EBITDA/tonne (INR)
FY14E
FY15E
Sales Volume (Mn tonnes)
Source: Company, Violet Arch Research
JSW Ispat’s installed steel capacity stands at 3.3MTPA, however given the volume-cost trade off on gas supplies, the company prefers to operate the DRI facility at lower utilization (and BF at full capacity), due to higher gas procurement costs. However, JSW Ispat is expected to increase utilization levels at its DRI facility once it starts substituting the external gas with surplus coke oven gas and once both coke oven batteries are commissioned by 3QFY14. This could result in additional savings to the tune of US$ 22/tonne.
US subsidiaries still in red – however operational improvement seen While JSTL has a profitable steel business in India and has been the fastest growing steel company in the world, in the last few years, it has invested USD900m in US plate & pipe mill, USD250m in Chile iron ore mines, and USD100m in a US coking coal mine. While none of its overseas acquisitions have been profitable and there is no visibility of turnaround, given the global economic slowdown, high cost structure, and strategic / technological disadvantage, the US Plate and pipe mill has shown some gradual improvement. As per our understanding, we do not expect any major surprises from its overseas operations barring the US plate and pipe mill as the company is trying to secure orders and is banking on shale gas output there. Further, the company has been guiding iron ore production of 1- 1.2 mn tonnes from Chile, while coking coal from US is not likely to materialize any time soon.
US Plate & Pipe mill US Plate & Pipe mill
FY09
FY10
FY11
FY12
FY13E
FY14E
FY15E
Plate sales (tonnes)
199,861
119,614
106,936
247,796
254,500
279,500
305,750
Pipe sales (tonnes)
143,608
72,508
45,217
68,010
74,063
80,136
86,627
501
160
141
362
377
412
450
71
(41)
15
56
32
41
69
(37)
(70)
(33)
(18)
(27)
(23)
(15)
Revenues (USD mn) EBITDA (USD mn) PAT (USD mn) Source: Company, Violet Arch Research
JSW Steel Ltd - Company Report
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VIOLET ARCH Research As far as the Chilean iron ore mine is concerned, JSTL has commenced shipments from Chilean iron ore mines with FY12 shipments of 7,42,871 tonne. The mine has annual production capacity of 1mn tonne, which the company is planning to augment to 2.5mn tonnes by FY15E. Chilean iron ore mine is expected to generate EBITDA/tonne of $12/tonne in FY14E and $16/tonne in FY15E as we expect iron ore prices to remain suppressed for next couple of years.
Chile Iron ore mine FY12
FY13E
FY14E
FY15E
Production (mn tonnes)
742,871
727,724
873,269
1,030,458
Shipments (mn tonnes)
593,586
949,088
838,339
989,239
37.8
8.0
12.0
16.0
EBITDA/tonne (USD) Source: Company, Violet Arch Research
In 4QFY10, JSTL acquired a coking coal mine in West Virginia State in USA. The acquisition includes seven coal blocks with initial production capacity of 0.5mtpa. As per initial estimates, the coking coal mine has 123mn tonnes of resource base along with railway load-out and barge facility. While the company has undertaken drilling activities, shipments are yet to commence. Coking coal shipped will be used for JSTL’s Indian operations and as per our understanding, landed cost should be around USD150-155/tonne. Initially, JSTL is expected to produce 0.5mn tonne of coking coal, which will subsequently be increased to 3mn tonnes. We have not factored in any shipments from the mines in our numbers.
JSW Steel Ltd - Company Report
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Key Risks and Concerns Delay in resumption of mining activities in Karnataka JSTL sources 100% of its ore (post mining ban imposed in Karnataka) and coking coal requirement from external sources and remains exposed to volatile raw material costs. We believe that despite Supreme Court lifting the ban on Category A and B mines, improvement in the mining sector has clearly been far slower than anticipated, with only seven Category A mines with a cumulative output of 3.3mn tonnes operational so far. While we remain hopeful that by end FY14, higher ore production leading to increased ore availability will bring down procurement costs for JSW Steel, if the same
Skewed product mix JSTL’s skewed product mix (83% of volumes are flats and semis) vis-à-vis more balance product mix of its domestic peers like Tata Steel and SAIL leaves the company exposed to pricing pressures.
Significant drop in steel prices Global steel market has been looking sluggish for a while and prices have corrected significantly across geographies. In India prices have held up largely due to stable demand and rupee depreciation. However, local currencies of CIS origin countries has depreciated against dollar and this might result in fall in dollar denominated prices there by putting pressure on domestic prices.
Bloated balance sheet At the end of 3QFY13, JSTL’s standalone net debt stood at Rs202bn (as compared to net debt of Rs183bn at the end of 1HFY13). Consolidated net debt including JSW Ispat stands at Rs265bn, excluding acceptances of Rs80bn. Further, in-case the company is unable to turnaround ISPAT to the extent desired and steel demand and prices weaken further, there could be a serious risk to the company’s balance sheet.
Excess supply from domestic sources and imports Steel production in China and CIS origin countries has been on higher side. Due to suppressed demand growth in these regions the excess steel might find its way in countries like India. Further, around 18mn tonne of incremental capacity is coming up in India over next 18-24 months most of which will be in flat steel segment and could put pressure on prices.
JSW Steel Ltd - Company Report
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Company Background JSW Steel is part of the O.P.Jindal Group. The group has a presence across various sectors – Steel, Energy, Minerals, Port & Infrastructure, Cement, Aluminium and IT. JSW Steel is India’s largest and amongst the most efficient steel producers globally. JTLS has manufacturing facilities located across three states in India and has a plate/pipe mill in USA. JSTL also acquired a stake in Ispat Industries Ltd, with which it became India’s largest steel producer with a combined capacity of 14.3 MTPA. It has tied up with JFE Steel Corp, Japan, to manufacture the high grade automotive steel. JSWS has mining assets in Chile, USA and Mozambique. By 2020, it aims to produce 34mt of steel annually with planned Greenfield integrated steel plants in West Bengal and Jharkhand.
FY12 sales mix MS Slabs 10.2% 9.6% HR Coils/Steel Plates/Sheets 9.4%
1.3%
HR Steel Plates CR Coils/Sheets
7.9% 50.5% 7.5%
Galvanised/Galvalum Coils/Sheets Colour coating Coils/Sheets Steel Billets & Blooms
3.7% Long Rolled Products Source: Company, Violet Arch Research
JSW Steel Ltd - Company Report
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Industry Overview Slowdown in developed economies and China to weigh on steel demand With major economies across the world facing slowdown, the demand for steel is expected to remain sluggish. Demand scenario is particularly weak in developed economies; Euro Zone in particular. China being the largest producer and consumer of steel is also witnessing its economy cooling off after witnessing GDP growth in excess of 9% in past few years. The World Steel Association (WSA) has recently cut steel demand growth estimates by 90bps to 1.2% for CY12 and by 30bps to 2.9% for CY13 as EU27, CIS, Nafta and Middle East are now expected to grow slower. We continue to believe that global steel demand growth will be even slower, with growth rate of 1.6% for world, 2% for China and 2.5% for India in CY13.
Raw material prices to remain weak In response to falling demand, coking coal and iron ore prices have come down by almost 50% from their recent highs. Coking coal prices have come down from $335/tonne to $170180/tonne at present. Iron ore prices are now trading near $130/tonne as lower demand from China and higher supplies from iron ore producing countries have put pressure on prices. In absence of any meaningful pickup in steel demand, we expect iron price to remain soft and may come down further in the event of increased supply from India, which has been limited due to ongoing mining issues and 30% export tax.
Steel prices have corrected… rupee depreciation keeping import parity in check Combination of declining demand and falling raw material prices has resulted into decline in steel prices globally. Steel prices world over have come down by 6-12% in CY12. Chinese HRC export prices have come down by ~8%. However, steel prices in India have been resilient as rupee depreciation has kept domestic to imported steel prices parity in check. Despite prices holding firm as compared to a fall in global prices, domestic prices are still at marginal discount to landed prices. We expect domestic flat steel prices unlikely to drop significantly, though they may see marginal correction given the increased imports from countries like Japan and South Korea with whom India has signed free trade agreement there by making imports cost competitive.
Domestic steel consumption set to increase India’s steel demand growth averaged at around 9.4% over FY03-FY11 but demand tapered down to 6.5% in FY12 and further down to around 4% in FY13, largely due to higher interest rates and slowing Indian economy. Historically, over FY98-FY2012, steel consumption to GDP growth multiple has been 1.1x, with the highest being reported at 1.9x in FY03. As per our understanding of the multiplier, the same gets higher when GDP growth is above 8% and goes upto 1.6x the GDP, while during lower GDP growth phase up to 5% the multiplier dips to 0.5x. Going forward, based on the GDP forecast of 5.8% in FY14E and 7% in FY15E, steel consumption based on multiplier of 1.0x is expected to grow at ~6% in FY14E and 7% in FY15E respectively.
JSW Steel Ltd - Company Report
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Financial Summary Income Statement
Cash Flow Statement
Y/E 31 Mar (Rs mn) Revenue YoY growth (%) EBITDA YoY growth (%) EBITDA margin
FY12
FY13E
FY14E
FY15E
341,237
363,874
376,525
421,121
Y/E 31 Mar (Rs mn)
FY12
FY13E
FY14E
FY15E
PBT
19,934
27,282
25,608
33,767
Interest
14,273
19,065
20,618
23,577
Depreciation
19,332
21,214
23,122
24,470
(4,265)
20,063
1,630
3,881
42.8
6.6
3.5
11.8
58,575
65,025
66,686
79,018
25.6
11.0
2.6
18.5
Change in working capital Tax
17.2
17.9
17.7
18.8
Depreciation
19,332
21,214
23,122
24,470
Cash flow from operations
Interest expenses
14,273
19,065
20,618
23,577
Change in fixed assets
3,213
2,536
2,662
2,796
Change in investments
19,934
27,282
25,608
33,767
Cash flow from investments
(49,075)
5,002
8,331
7,618
10,556
Change in equity capital
Other non operating income PBT Provision for tax Minority interest and ext. items
Change in debt
PAT (adjusted)
11,151
16,123
15,556
20,868
YoY growth (%)
(36.4)
44.6
(3.5)
34.1
3.3
4.4
4.1
5.0
PAT margin
Dividends paid
8,331
7,618
10,556
76,465
60,926
72,796
55,810
55,000
50,000
40,000
(6,735)
(1,508)
-
-
(53,492)
(50,000)
(40,000)
-
186
-
-
28,995
15,963
30,000
30,000
1,958
4,549
4,159
5,763
Interest paid
14,273
19,065
20,618
23,577
Cash flow from financing
12,722
(7,465)
5,222
659
Net cash flow
Balance Sheet
5,002 41,872
5,519
15,508
16,148
33,455
Opening cash balance
27,397
32,916
48,423
64,572
Closing cash balance
32,916
48,423
64,572
98,027
FY12
FY13E
FY14E
FY15E
50.0
66.7
64.4
86.3
Financial Ratios
Y/E 31 Mar (Rs mn)
FY12
FY13E
FY14E
FY15E
Equity Share Capital
2,231
2,417
2,417
2,417
Per share Ratios (Rs)
Pref Shares
2,790
2,790
2,790
2,790
Basic EPS
Reserves & surplus
162,081
173,656
185,052
200,157
Fully diluted EPS
50.0
66.7
64.4
86.3
Shareholders' fund
167,713
179,473
190,870
205,974
Book value
751.7
742.5
789.7
852.2
Total Debt
198,128
214,091
244,091
274,091
Cash earnings per share
136.6
154.5
160.0
187.6
30,412
30,412
30,412
30,412
7.5
16.1
14.7
20.4
Total Capital Employed
398,430
426,153
467,550
512,654
Key Ratios
Gross Block
414,455
469,455
514,455
549,455
ROE
6.6
9.0
8.2
10.1
88,451
109,665
132,787
157,257
ROCE
9.8
10.3
9.3
10.6
326,004
359,790
381,668
392,198
ROIC
12.7
12.7
12.3
13.8
28,018
28,018
33,018
38,018
354,022
387,808
414,687
430,217
Debt-equity
1.2
1.2
1.3
1.3
Goodwill
12,440
10,932
10,932
10,932
Interest coverage ratio
2.7
2.3
2.1
2.3
Investments
20,896
20,896
20,896
20,896
Turnover Ratios
Cash
32,916
48,423
64,572
98,027
Asset turnover ratio (x)
0.9
0.9
0.8
0.8
Trade Receivables
15,394
14,954
15,474
17,306
Debtors (days)
16.5
15.0
15.0
15.0
Loans & Advances
47,900
29,110
30,122
33,690
Inventory (days)
74.9
80.0
80.0
80.0
184.8
185.0
185.0
185.0
Deferred Tax Liability
Less: Acc. Depreciation Net Block Capital WIP Net Fixed Assets
Inventories
Y/E 31 Mar
Dividend per share
Gearing Ratio (x)
57,983
65,501
67,910
74,981
Creditor (days)
Total Current Asset
154,192
157,988
178,077
224,004
Valuation (x)
Current Liab. & Prov.
143,120
151,471
157,042
173,395
P/E (Fully Diluted)
11,072
6,517
21,035
50,610
398,430
426,153
467,550
512,654
Net Current Asset Total Assets
14.0
10.5
10.9
8.1
P/BV
0.9
0.9
0.9
0.8
EV/EBITDA
5.5
5.1
5.2
4.4
EV/Sales
0.9
0.9
0.9
0.8
M-cap/Sales
0.5
0.5
0.4
0.4
JSW Steel Ltd - Company Report
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Notes
JSW Steel Ltd - Company Report
VIOLET ARCH Securities Pvt. Ltd. (Erstwhile Alchemy Share & Stock Brokers Pvt. Ltd.)
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Notes
JSW Steel Ltd - Company Report
VIOLET ARCH Securities Pvt. Ltd. (Erstwhile Alchemy Share & Stock Brokers Pvt. Ltd.)
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Upside >20%
Buy
Upside between 0% and 20% Downside up to 20%
Overweight Underweight
Downside >20%
Sell
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JSW Steel Ltd - Company Report
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