JSW Steel, BUY

JSW Steel, BUY

Price Rs1,115 Target Price 1,583

Marching forward to 10mtpa

JSW announced lower than expected 3QFY08 results. The net sales stood at Rs 25.6bn (yoy up 11.4%, qoq up 2.8%) but EBITDA declined to Rs7.38bn (yoy down 7.3%, qoq down 11.7%). EBITDA margin took a hit due to significant rise in iron ore and coke prices resulting in EBITDA margin declining by 581bps on yoy basis and 471bps on sequential basis to 28.8%. The company reported Adj. PAT of Rs3.3bn (yoy down 9.4%, qoq down 16.5%) . Adj. net margin also dropped to 12.8% (down 293bps yoy and 296bps qoq). However, steel prices are expected to move up in the current quarter and we expect increase in EBITDA and net margin in 4QFY08. The company’s current expansion plans are running ahead of schedule and it has also made significant progress in securing captive sources of iron ore and coking coal to overcome the raw material pricing pressure. The company expects to start shipping coking coal from its captive mine at Mozambique from Dec 2008 onwards and is likely to open up the new Hadimmapade iron ore mine (around 20-25km from the plant) in next 6-12 months. We expect the company to increase its iron ore sufficiency by 58% and become partly captive for coking coal from FY10 onwards. We continue to remain positive on the long term growth story of JSW to reach 10mtpa by CY2010 and its quest to increase raw material sufficiency. We remain positive on the steel cycle. At the CMP of Rs1,115 the stock is trading at 7x FY10E FDEPS of Rs158.3 and EV/EBITDA of 4.9x on FY10 valuation. We maintain a BUY on JSW with a revised target price of Rs1,583 (upside of 42% from CMP).

MK, 25 February 2008, Sensex – 17,349