Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited •Incorporating JSW Ispat and Chile iron ore mines in estimates We are introducing JSW Ispat (erstwhile Ispat Industries) and Chile iron ore mines in our estimates. We expect JSW Ispat to report EBITDA/t of USD 71/t in FY12 and USD 90/t in FY13. Shipments have commenced from Chilean iron ore mines. We expect volumes of 0.8 mt in FY12 (management guidance 1 mt) and 1 mt in FY13 (management guidance 2 mt), potentially contributing ~USD 32 mn and USD 30 mn to FY12 and FY13 estimated EBITDA, respectively. Management guiding for FY12 EBITDA/t of USD 170-180 JSW Steel has guided for USD 170-180/t of EBITDA in FY12 as a result ofincreased captive coke, iron ore beneficiation and reduced coke rate/hard coking coal proportion. We retain our assumption of USD 177/t. Q4FY11 EBITDA/t is likely to be over USD 200/t. 3.2 mtpa expansion delayed to mid May; guidance retained at 9 mt The 3.2 mtpa expansion which was expected to be completed by the end ofMarch 2011 is now likely to get over in May 2011. Certain facilities (casters, converters, ladle furnaces) have started trial runs. However, the blast furnace is delayed. Despite the delay, manageme nt is guiding for 9 mt of volumes in FY12. We retain our assumption for FY12 at 8.5 mt. Prefer to value JSW Ispat on replacement cost basis We use the replacement cost method to value JSW Ispat. We assign a 40% discount to the equity valuation based on replacement cost method to arrive at a fair value of INR 53/share of JSW Steel. Our valuation of JSW Ispat is 41% less than the investment made by JSW Steel (INR 21.6 bn) in JSW Ispat Outlook and valuations: Positive, maintain ‘BUY’ We like JSW Steel for its volume growth and low conversion cost. While, JSW Ispat will be a drag on valuations, this could be partially offset by the Chile iron ore mines (valuation: INR 28/share). We increase our FY12 and FY13 estimated EBITDA by 3% and 4%, respectively, but lower our EPS estimates by 6% and 2.5% for FY12 and FY13 respectively, after incorporating Chilean iron ore mines and JSW Ispat. We retain‘BUY/ SO’ with a fair value of INR 1,190/share. India Equity Research | Metals and Mining Company Update JSW STEELRevision in estimatesApril 11, 2011 Reuters: JSTL.BO Bloomberg: JSTL IN EDELWEISS 4D RATINGS Absolute RatingBU Y Rating Relative to SectorOutperformer Risk Rating Relative to SectorMediumSector Relative to MarketOverweight Note: Please refer last page of the report for rating explanation MARKET DATACMP : INR 957 52 -wee k range (INR) : 1,40 0 / 751 Share in issue (mn) : 223.1 M cap (I NR bn/USD mn) : 214 /4,808 Avg. Daily Vol. BSE/NSE (‘000): 1,769.9 SHARE HOLDING PATTERN (%) Promoters*: 37.7 MFs, FIs & Banks : 5.2 FIIs : 26.1 Others : 31.0 * Promoters pledged shares (% of share in issue) : 15.5 PRICE PERFORMANCE (%) Stock Nif ty EW Metal s and Mining Index 1 month 4.1 6.7 4.9 3 months (13.5) (2.8) (5.6) 12 mont hs (2 1. 8) 1 0. 1 (1 1. 8) Prasad Baji +91 22 4040 7415 [email protected]Faisal Memon +91 22 6623 3478 [email protected]Financials (Consolidated) Year to March FY09 FY10 FY11E FY12E Revenues (INR mn) 159,348 189,572 236,345 379,259 Rev. growth (%) 27.9 19.0 24.7 60.5 EBITDA (INR mn) 21,871 40,707 46,563 74,707 Adjusted net profit (INR mn) 1,712 14,980 15,092 26,921 Basic shares outstanding (mn) 187 187 241 241 Diluted EPS (INR) 10.4 81.3 64.0 111.9 EPS growth (%) (87.6) 681.5 (21.3) 75.0 Diluted P/E (x) 94.2 12.0 15.3 8.8 EV/EBITDA (x) 15.8 8.4 8.9 6.1 ROAE (%) 3.6 19.4 12.1 14.5
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•
Incorporating JSW Ispat and Chile iron ore mines in estimates
We are introducing JSW Ispat (erstwhile Ispat Industries) and Chile iron ore
mines in our estimates. We expect JSW Ispat to report EBITDA/t of USD 71/t in
FY12 and USD 90/t in FY13. Shipments have commenced from Chilean iron ore
mines. We expect volumes of 0.8 mt in FY12 (management guidance 1 mt) and
Metals and Mining 3.2 mtpa expansion at Vijaynagar delayed to mid May; volume guidance
retained at 9 mt
The 3.2 mtpa expansion, which was expected to be completed by the end of March 2011,
is now likely to get over in May 2011. Certain facilities (casters, converters, ladle
furnaces) have started trial runs. However, the blast furnace is delayed. Despite the
delay, management is guiding for 9 mt of volumes in FY12. We retain our assumption for
FY12 at 8.5 mt.
EBITDA/t guidance of USD 170-180/t in FY12
Management has reiterated their view of achieving USD 170-180/t of EBITDA in FY12,
despite the pressure of increased coking coal prices. The cost push of coking coal is
expected to be negated by the possible savings accruing from the increased contribution
of captive coke (currently 85%, expected 100% in FY12), higher iron ore beneficiation
capacity, reduced coke rate and lower proportion of hard coking coal (lower 500bps) in
blast furnace.
The proportion of iron ore fines is expected to increase from 65% to 85% in FY12, while
coke rate is targeted to be reduced by 50kg/t. This would result in cost savings of USD
25-30/t.
Our current EBITDA/t estimate for FY12 is USD 177/t and we retain the same.
Shipment from Chile iron ore mines have started
Reserves and production
The Chile iron ore mines contain reserves of ~150 mt in 1% area (total area is ~26,245
Ha). Shipments have started with management guiding for 1 mt in FY12 and 2 mt in
FY13. We are incorporating 0.8 mt and 1 mt in FY12 and FY13, respectively.
Investment in the mines
JSW Steel acquired a 70% interest in these mines for a consideration of ~USD 250 mn in
2008. The agreement also provides JSW the right to use the existing Caldera port. The
company has made an investment of USD 25-30 mn till date and the likely investment inthe next two years is expected to be USD 70-75 mn. The FOB cash cost is expected to
be USD 65/t (63% Fe grade), with freight cost of USD 10-15/t and royalty cost of ~USD
4-5/t. The cash cost also includes the cost of beneficiation.
Incorporating Chile mines in our estimates
We believe that commissioning of these mines will provide financial hedge to the
company as it currently has only ~20% integration from its captive iron ore mines in
India. At current iron ore prices, the mines can potentially deliver ~INR 1.5 bn (JSW
Steel’s share) to the EBITDA. We include the mines in our valuation, assigning it value of
Estimating JSW Ispat’s EBITDA at USD 71/t in FY12 and USD 90/t in FY13
Considering higher raw material costs and delay in synergy benefits, our estimated
EBITDA of USD 90/t in FY13 is lower than the earlier anticipated EBITDA/t of USD 130/t.
Post the shutdown in December 2010, the capacities of JSW Ispat have ramped up
significantly and are currently operating at 80-90% utilisation levels. The management
expects volumes of 3 mtpa (90% utilization) from these facilities. However, we are
considering volumes of 2.8 mt for FY12 as well as FY13.
On the cost savings initiatives, though sourcing of iron ore (lumps and fines) from
Karnataka has already started, sourcing of power from JSW Energy, pellets from JSW
Steel and coke from JSL are yet to materialise and we expect delays on this front.
Management expects EBITDA of USD 80-90/t in FY12. We estimate JSW Ispat to report
EBITDA/t of USD 71/t and USD 90/t in FY12 and FY13, respectively.
Backward integration plans proposed
JSW Ispat has undertaken a INR 31.4 bn capex to set up backward integration facilitiesto gain better control over cost. The facilities being implemented are a 110 MW power
plant, a 3 mtpa pellet plant and a 1 mtpa coke oven plant. Besides, the company will
also expand its capacity from 3.3 mtpa to 4.0 mtpa at an investment of INR 14 bn
(included in INR 31.4 bn).
However, progress on this is slow and we expect it to be delayed from the target
commissioning date of FY13 end.
Table 1: Planned capex at JSW Ispat for backw ard integration
Source: Company, Edelweiss research
Current facilities of JSW Ispat: A snapshot
JSW Ispat’s 3.3 mtpa HRC plant produces HRC through the gas-based DRI (1.6 mtpa) –
We roll forward to FY13 to value JSW Steel’s consolidated business (ex-JSW Ispat),
to arrive at a fair valuation of INR 1,190/share. We assign 6x to steel business’ estimated EBITDA of INR 76.1 bn in FY13 and ascribe 5x to the Chilean iron ore
business (contributes ~INR 28/share to JSW Steel’s fair valuation).
We apply a 22% discount to the expected CWIP at end of FY12 of ~INR 40 bn for
the West Bengal project and ~INR 10 bn for the CRM expansion in Vijaynagar, as
they are due to be completed in FY14.
• JSW I spat: Valuation based on replacement cost method
We prefer to value JSW Ispat on a replacement cost method, as valuing it on
earnings basis provides negative valuation. We consider a replacement value of USD
1,000/t for JSW Ispat’s acquisition of 3.3 mt, which corresponds to an equity
valuation of INR 49.7 bn. The debt considered in our valuation includes acceptances
of INR 18.8 bn. To this, we apply a 40% discount to account for the expected weak
earnings and high debt. We arrive at a fair value of INR 29.8 bn, translating into
contribution of INR 53/share of JSW Steel (considering the 43% stake).
Our valuation of JSW Ispat is at a 41% discount to the investment made by JSW
Steel in JSW Ispat (INR 21.6 bn), equivalent to INR 89.5/share.
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Cove r age g r oup ( s ) o f s t ocks by p r im a r y ana lys t ( s ) : Meta ls and M in ing
Bhushan Steel, Coal India, Hindalco Industries, Hindustan Zinc, Jindal Steel & Power, JSW Steel, National Aluminium Company, PrakashIndustries, Steel Authority of India, Sesa Goa, Sterlite Industries (India), Tata Steel, Usha Martin
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe
Rating Distribution* 118 51 17 189* 3 stocks under review
Market Cap (INR) 111 61 17
> 50bn Between 10bn and 50 bn < 10bn
Date Company Title Price (INR) Recos
Buy Hold Reduce Total
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