Buy Call JSW Steel Limited : Fairwealth Securities Limited
JSW Steel Limited (JSWSL) is the second largest private sector steel maker in India. The company provides for a broad range of products which include Hot Rolled Product, Cold Rolled Product, Galvanized Product and Pre-painted Galvanized Product. The company consists of the most modern, eco-friendly steel plants with the latest technologies for both upstream & downstream processes.
KEY INVESTMENT RATIONALE:
Leading Player in Steel Manufacturing: JSW Steel, the flagship company of the JSW Group, is the largest integrated private steel manufacturer in India in terms of installed capacity. It is the leading manufacturer of cold rolled, galvanized and colour coated steel with manufacturing facilities at Vasind & Tarapur in Maharashtra. JSW Steel is the largest manufacturer and exporter of galvanized steel in India with its products exported to more than 100 countries.
Strong growth expected in Steel Industry: The industry is expected to grow at a pace of 9.1% till FY15 considering the scenario that Indian Infrastructure and other Industries are going to absorb the supply and also considering international demand to increase mainly due to increase in prices in China.
Expansion to facilitate growth: JSW steel has entered into a joint venture with UK's Severfield and has launched a new plant which will have an annual capacity of 35,000 tonnes of fabricated steel. The company has also recently sought a new coking coal mine in Jharkhand for its new steel plant which would be set up in the same state and would have an annual capacity of 10mt.
Valuation: At the current price of Rs. 1165, the stock is trading at just 15.14x and 9.91x times of our estimated FY11E & FY12E earning. We thus recommend an "Accumulate" with a target price of Rs. 1293.
Industry growth prospects: The steel industry is slated to add 729,000 tonnes of fresh production capacity at a cost of Rs 240,000cr by March 2013. The largest contributor is expected to be Jindal Steel and Power. It has plans to commission 128,000 tonnes of manufacturing capacity by March 2013. JSW Steel will increase its capacity by 8,560,000 tonnes, SAIL by 7,260,000 tonnes, Tata Steel by 3,300,000 tonnes and Bhushan Steel and Essar Steel by 2,720,000 tonnes each. We expect the Indian Steel industry to grow 10-12% in coming 2-3 years.
Additional capacity to improve growth prospects: The company has successfully commissioned the Phase I (3.5 Mtpa) of one of the largest new Hot Strip Mill at Vijaynagar. The mill has initiated commercial production on April 10, and it would enable the company to convert all slabs into value added HR Coils on its stabilization. On completion of Phase II, the capacity of mill will go up to 5Mtpa. The expansion project execution work is progressing in full swing to expand the crude steel capacity to 10Mtpa by 2020.
JSW Steel plans to set up a 300MW power plant at Vijaynagar. The procedure for which is expected to be commissioned in FY 2011.
The company also expects initial production of 1mt in first year (2010-11) which can be ramped up to 3mt by 3rd year. The first year of production has already started in Oct 2010. Additional capex is expected to be Rs500cr for ramping up. Thus JSW Steel is expected to generate huge revenues once the mining starts initial production.
Reduction in Debt to improve overall growth: JSW Steel has tied-up with JFE Corporation of Japan and will be setting up an autosteel line at its Vijayanagar steel plant. After selling a portion of its equity to Japanese steel maker JFE, JSW's balance sheet has improved significantly mainly because of the repayment of debt which has resulted in the reduction of debt of the company considerably. The company has repaid Rs 2600cr of debt in the September quarter, which reduced its debt-equity ratio to 0.8 from 1.6 in the previous quarter. Interest cost was down 13% in the quarter and is expected to remain lower as the company has repaid a significant amount of its high-cost debt.
Value-added segment to improved Realization: The future growth of JSW will largely be fuelled by the current capacity expansion plans. Its 3.2mt expansion project at Vijaynagar is on the verge of completion, which will increase the company's steel production capacity to 11MTPA by March 2011. JSW Steel's board approved implementation of the West Bengal Project comprising 4.5mtpa Steel plant, 660MW power plant and development of coal and coking coal mines with a project cost of Rs16000cr. This project is planned to be completed by FY14. This would result in company's growth not only in steel production but also in power and coal mines.
The company is slowly ramping up its value-added steel production in the H1 of FY11. The company sold 20% more of its flat-rolled steel and posted 52% jump in sales for its long rolled steel, both part of the finished steel category.
Cost reduction through acquisition of coal mines: The company has recently acquired coking coal assets in USA in West Virginia along with Railway Load out and barge facility and has finalized the acquisition of the mine, where the likely resources is around 123mt. One of the mine is operational and others to be operational over 24 months.
The total coking coal requirement of the company is estimated at 5mt per annum at current capacity. The proposed coking coal from US will give integration to the extent of 20% in the first year and goes further at enhanced capacity of 11mt to 35%.
We expect with 20-25% interaction of coking coal would improved its EBIDTA margins by 125-150bps, thereby resulting in improved earning visibility in near future.
JSW-Severfield have joined hands for India's first fabricated steel plant: Considering the huge potential in the infrastructure growth in India especially in the structural steel space JSW Steel and UK's top steel Severfield have launched a new plant which will have investments of almost Rs 1000cr in two years. The annual capacity of the 50-50 JV is expected to be 35,000mtpa. The JSW- Severfield project would be financed in the 2:1 debt-equity ratio and is expected to generate an annual revenue of around Rs 400cr. The target market will initially be commercial structures and simple highway bridges.
Availability of Coal: Coal is one of the most significant aspect of Steel production and limited availability of coal will always be a key concern and issue for the company. Another important concern regarding coal is the rising price of coal in the past few years and the expectation is that the cost of acquisition of coal by steel manufacturers will continue to increase.
New Mining Policy a Concern: Recently, it has been proposed in the draft Mines and Minerals (Development and Regulation) Bill, 2010 that the mining companies should share 26% of profits with local inhabitants and persons displaced by the mining activity. In the event of acceptance of this proposal by the government and implementation of the same, the company may witness a substantial negative impact on its financial position considering that the company is looking for mining fields in Jharkhand and has mines in Toranagallu (Bellary).
Volatility in prices and global scenario: Global factors such as world steel demand and pricing scenario plays a crucial role in Steel industry. The increasing price of iron ore is also having a negative effect on the pricing policy and profit margins of the company. Further the decline in China's export, the largest exporter of steel is also affecting the price volatility in the industry.
Production at US Subsidiary a major issue; US plate and pipe mill operated at 13% and 7%, respectively during the quarter with production at 37699 tonnes and 9495 tonnes, respectively. It reported revenue of around Rs 162Cr and EBITDA of Rs 4.05Cr. On a net level, it reported loss of Rs 58.5Cr. Management expects operations to remain under pressure, given the lack of orders and intense competition.