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21 October 2014

2QFY15 Results Update | Sector: Metals

JSW Steel

Sanjay Jain ([email protected]); +91 22 3982 5412

Dhruv Muchhal ([email protected]); +91 22 3027 8033

BSE SENSEX S&P CNXCMP: INR1,176 TP: INR1,678 Buy

26,576 7,928

Bloomberg JSTL IN

Equity Shares (m) 241.7M.Cap. (INR b) / (USD b) 284.2/4.6

2-Week Range (INR) 1,365/805

1, 6, 12 Rel. Per (%) -7/-11/13

Financials & Valuation (INR Billion)

Y/E MAR 2015E 2016E 2017E

Net Sales 563.4 592.9 634.5

EBITDA 112.6 113.1 123.2

dj PAT 32.4 33.2 38.9

EPS (INR) 133.6 136.2 159.6

Gr. (%) 288.4 2.0 17.2

RoE (%) 13.9 12.6 13.1

RoCE (%) 11.8 11.2 11.8

P/E (x) 8.8 8.6 7.4

P/BV (x) 1.1 1.0 0.9

EV/EBITDA 6.2 6.1 5.4

Operating efficiencies continue to drive growth

JSTL posted a good set of numbers, driven by operating efficiencies and highervolumes. Consolidated pre-tax profit before exceptional items grew 10% QoQ (and

35% YoY), in line with our estimate. Growth was driven by lower coking coal cost,

efficiency gains from higher coke oven and pellet utilization, offset partly by lower net

blended realization (-2% QoQ). Consolidated EBITDA grew 8% QoQ to INR28.1b,

helped by better performance at subsidiaries. Highlights:

While sales growth (4% QoQ) was below our estimate on lower-than-expected

realization, EBITDA was ahead (up 6% QoQ to INR26.2b) on higher efficiency

gains. The coke oven plant operated at 73% utilization while the pellet plant

operated at 65% utilization.

Standalone sales volume grew 7% QoQ along with improvement in value add mixto 33% (from 29% in 1Q). Auto sales grew 13% QoQ.

EBITDA for subsidiary businesses grew 28% QoQ, driven by improved profitability

at Coated Products (despite lower realization) and Amba River Coke.

It took an investment write-off of INR1.9b – INR1.6b for its investment in US plate

mill and INR0.3b for advances relating to de-allocation of coal blocks.

Auction of category-C iron ore mines in Karnataka is expected before March 31.

We believe JSTL is well positioned, with market leadership in flat products, timely

investment in value addition, and operating efficiencies. It is the strongest contender

for closed category-C iron ore mines in Karnataka, whenever they come for sale. Thestock trades at an undemanding EV of 6.1x FY16E EBITDA. Maintain Buy.

Investors are advised to refer through disclosures made at the end of the Research Report.



21 October 2014 2

JSW Steel

Consolidated adjusted PAT grew 15% QoQ to INR 7.1b driven by increase in

sales volumes (+7% QoQ) and operating efficiencies. EBITDA grew 8% QoQ to

INR28.8b, despite decline in standalone net realization, on coking coal cost

savings and operating efficiencies from higher coke oven and pellet plant

utilization. Subsidiary businesses continued to perform well with EBITDA

increasing 28% QoQ to INR1.9 b. The company took an investment write-off of

INR 1.9b – INR 1.6b for its investment in US plate mill and INR 0.3b for advances

relating to coal blocks de-allocation.

Net sales grew 5% QoQ to INR 138.9b with higher volumes partly offset by lower

realization (-2% QoQ)

Standalone: EBITDA/t broadly flat despite lower realization

Standalone adjusted PAT grew 11% QoQ (and 33% YoY) to INR 8.8b driven by

increase in volumes (+7% QoQ) and higher other income (+22% QoQ). Blended

EBITDA/t was broadly flat QoQ at USD142, despite the 2% decline in blended

realization, benefiting from operating efficiencies.

Standalone sales volumes grew 7% QoQ (lower 2% YoY) to 3.07mt. Value added

product mix improved further in the quarter to 33% from 29% in 1QFY15,

reaching the management target well ahead of time. Auto sales rose 13% QoQ,

as the company continued to gain market share. Auto sales now represent 15%

of its total India steel sales volume as against 14% in 1Q and 10% in 2QFY14.

Retail sales were also 10% higher QoQ.

Operating cost efficiency was driven by higher coke oven utilization (73%) and

pellet utilization (65%). Coking coal cost was USD15/t lower QoQ, and guided to

be largely unchanged at USD135-140/t for 3Q.

Significant increase in inventory was due to logistics issues at Salem and Dolvi

which is guided to stabilize in H2.

Management mentioned that some of the ‘C’ category mines in Karnataka could

be auctioned before March 2015. It would participate in the auction.

Exhibit 1: Standalone: Realization (INR/T) was stable

Source: MOSL, Company

Exhibit 2: EBITDA per ton continues to improve


4 2 , 9

3 7

4 1 , 2

2 1

3 8 , 3

4 2

3 8 , 6

8 4

3 6 , 6

9 9

3 6 , 6

9 5

3 8 , 8

4 6

4 0 , 2

8 8

4 0 , 0

9 1

3 9 , 2

6 2

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

2 , 5

6 9

2 , 5

2 6

2 , 6

1 0

2 , 8

2 8

2 , 5

5 0

3 , 1

3 0

3 , 0

8 0

3 , 1

0 0

2 , 8

8 0

3 , 0

7 0

8,230

6,457 5,527 6,674 6,859 7,137 7,478 8,052 8,545 8,534

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

Volumes (Kt) EBITDA (INR/T)



21 October 2014 3

JSW Steel

Subsidiaries: coated and plate mill drive performance

Subsidiary businesses EBITDA grew 28% QoQ to INR 1.9b as they maintained

their good performance in the quarter. The increase was driven by improved

profitability in coated and Ambariver coke division, partly offset by lower

profitability in Chile iron ore business.

Coated business EBITDA/t grew to INR 2,634 despite the lower realization which

we estimate was driven by better mix. Coated division sales volume was at

410kt while realization came at INR 58,634/t.

Chile business was under pressure from decline in iron ore prices. Realization

declined to USD83/t from USD99/t in 1Q.

Subsidiaries (INR Million)

Y/E March FY14 FY15 FY14 FY15E FY15E vs Est

1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE 2QE (%)

Net Sales 9,125 14,982 16,583 18,530 17,077 18,413 18,932 19,522 59,220 73,944 19,642 -6

EBITDA 1,303 1,141 1,062 323 1,506 1,925 2,066 2,049 3,829 7,546 1,544 25

JSW coated 790 780 790 940 950 1,080 911 920 3,300 3,861 987 9

US Mills 34 -127 -107 -248 240 152

Chile iron ore 48 332 324 82 -21 -106

Ambariver coke 125 410

US coal & adj. -20 -21 55 -450 212 388

PAT -2,476 -4,266 -4,125 -5,435 -1,633 -1,613 -1,958 -1,974 -16,303 -7,691 -1,388 16

Exhibit 3: Subsidiaries: EBITDA (INR m)


Exhibit 4: JSW Coated: margins improving with product mix


Earnings outlook remains robust; Maintain BUY

JSW Steel is now driving benefit of investments in Dolvi coke oven & pellet plant

and Vijaynagar 2.3mtpa CRM-2. Dolvi coke oven and pellet plants are now fully

commissioned. Further benefit will accrue in subsequent quarters with 100%

substitution of 3rd

party purchase of coke and pellets.

1st

phase of 2.3mtpa CRM-2 has been commissioned (PLTCM in Oct 2013, CGL in

March 2014 and CAL-1 in April 2014). 2nd

phase i.e. CAL-2 is expected to be

commissioned by 1QFY165.

Margins are likely to improve driven by full benefit of captive coke and pellets,

higher share of VASPs. Demand is expected to be stronger in 2HFY15.

Although there are challenges in sourcing iron ore post closure of iron ore mines

in Odisha and no further improvement in Karnataka’s iron ore production, JSW

steel is now bridging the gap at Vijaynagar through imports. The cost of

imported ore is higher, but lower impurities (e.g. alumina) in imports help in

780 790 940 950 1,080

361 272

-617

556845

2QFY14 3QFY14 4QFY14 1QFY15 2QFY15

JSW Coated Others

390 420 440 400 410

2,000 1,881

2,1362,375

2,634

2QFY14 3QFY14 4QFY14 1QFY15 2QFY15

Volumes (Kt) EBITDA (INR/T)

Demand acceleration will

drive margins



21 October 2014 4

JSW Steel

reduced consumption of coke and energy thereby offsetting certain amount of

higher cost of ore.

Capex spend in 1H was at INR 31b while for full year was maintained at INR 75b.

Net debt (excluding acceptances) has increased by INR17.4b. Adjusting for

acceptances, net has increased by INR24.9b.

Consolidated EBITDA is upgraded by 1% for FY15-FY17 as we incorporate 2Q

numbers.

EPS is cut by 4%-1% for FY15-17 on higher depreciation charge.

The target price is marginally increased to INR1,678/share based on FY16

estimates. Stock is trading at FY16E EV/EBITDA of 6.1x. Maintain Buy.

JSW STEEL: Target price calculations

Year 2013 2014 2015E 2016E 2017E

A. S/A volumes 8.9 11.9 12.4 12.9 13.9

B. EBITDA per ton 7,105 7,405 8,504 8,119 8,228

C. S/A EBITDA (AxB) 63,088 87,826 105,026 104,335 113,958

D. Sub. EBITDA 1,951 3,829 7,546 8,746 9,235

E. Cons. EBITDA (C+D) 65,039 91,655 112,572 113,082 123,193

F. Target EV/EBITDA (x) 6.5 6.5 6.5

G. Target EV (FxG) 731,717 735,031 800,756

less: Net Debt (Rs m) 292,123 424,082 418,900 400,502 380,450

add: CWIP 65,972 90,972 85,972 70,972 60,972

Equity value 398,789 405,500 481,278

No. of shares 242 242 242

Target price 1,650 1,678 1,991



21 October 2014 5

JSW Steel

JSW Steel: an investment profile Company descriptionJSW Steel (JSTL) demonstrated excellent project

execution skills over the past decade, growing its annual

capacity 6x to 10m tons through brownfield expansions

at Vijaynagar. With the acquisition of Ispat Industries

and Salem Steel, it controls annual capacity of 14.3m

tons. Its main production facilities are located in

proximity to rich iron ore reserves in Karnataka. It has

investments in iron ore and coal mining in Americas. Its

other overseas investments include plate and pipe mill

operations and coal mines in the US.

Key investment arguments

JSTL has the lowest conversion cost due to

operational efficiencies. Its strategic location near

the iron ore rich Bellary-Hospet belt helps it to keepiron ore purchase costs low.

JSTL is investing in low cost projects to increase

capacity to 18mtpa.

Investment in 2.3mtpa PLTCM will help in

substituting imports in auto segment and enhance

margin.

Key investment risks

High dependence on external sources for raw

material can put significant pressure on marginsand earnings growth.

Recent developments

Promoters have purchased 5.5m shares through

open market operation since 1st

April 2014.

Valuation and view

We believe JSW Steel is well positioned with market

leadership in flat products, timely investment in

value addition & operating efficiencies.

JSW Steel is the strongest contender for closed “C”

category iron ore mines in Karnataka whenever they

come for sale.

Stock trades at undemanding EV/EBTIDA of 6.1x in

view of strong growth ahead. Maintain Buy.

Sector outlook We believe that Indian steel demand growth has hit

bottom in FY14. We expect Indian steel demand

growth to accelerate to 4% in FY15 and 6% in FY16.

The conversion spreads for steel mills are expanding

on global demand (ex-China) growth and oversupply

of iron ore and coking coal.

Comparative valuations

JSW Steel Tata Steel SAIL

P/E (x) FY15E 8.8 12.0 9.1

FY16E 8.6 8.3 8.7

P/BV (x) FY15E 1.1 1.4 0.7

FY16E 1.0 1.2 0.7

EV/Sales (x) FY15E 1.2 0.8 1.2

FY16E 1.2 0.8 1.1

EV/EBITDA (x) FY15E 6.2 6.6 7.6

FY16E 6.1 6.1 6.7

EPS: MOSL forecast v/s consensus (INR)

MOSL Consensus Variation

Forecast Forecast (%)

FY15 133.6 108.1 23.6

FY16 136.2 126.0 8.1

Target price and recommendation

Current Target Upside Reco.

Price (INR) Price (INR) (%)

1,176 1,678 42.7 Buy

Shareholding pattern (%)

Sep-14 Jun-14 Sep-13

Promoter 39.3 38.5 36.3

DII 3.7 3.2 6.3

FII 20.4 21.4 17.2

Others 36.6 36.9 40.3

Note: FII Includes depository receipts

Stock performance (1-year)



21 October 2014 6

JSW Steel

Financials and valuation

Income statement (INR Billion)

Y/E Mar 2014 2015E 2016E 2017E

Net Sales 512.2 563.4 592.9 634.5

Change (%) 34.0 10.0 5.2 7.0

EBITDA 91.7 112.6 113.1 123.2

EBITDA Margin (%) 17.9 20.0 19.1 19.4

Depreciation 31.8 34.1 36.2 38.2

EBIT 59.8 78.5 76.9 85.0

Interest 30.5 35.0 37.1 38.4

Other Income 0.9 2.3 3.2 3.4

Extraordinary items -17.1 -0.2 0.0 0.0

PBT 13.1 45.6 42.9 50.0

Tax 9.2 12.7 9.2 10.6

Tax Rate (%) 70.3 27.8 21.3 21.2

Reported PAT 3.9 32.9 33.8 39.4

Adjusted PAT 21.0 33.1 33.8 39.4

Change (%) 37.9 57.7 2.0 16.7

Min. Int. & Assoc. Share -0.4 -0.5 -0.6 -0.6Adj Cons PAT 8.3 32.3 32.9 38.6

Balance sheet (INR Billion)

Y/E Mar 2014 2015E 2016E 2017E

Share Capital 2.4 2.4 2.4 2.4

Reserves 217.0 244.9 274.4 309.6

Net Worth 219.4 247.3 276.8 312.0

Debt 431.4 432.5 432.5 432.5

Deferred Tax 21.2 24.8 25.4 26.0

Total Capital Employed 673.7 705.7 735.3 770.6

Gross Fixed Assets 691.2 781.2 841.2 901.2

Less: Acc Depreciation 217.7 251.8 288.0 326.2Net Fixed Assets 473.5 529.4 553.2 575.0

Capital WIP 91.0 86.0 71.0 61.0

Investments 5.9 5.9 5.9 5.9

Current Assets 206.0 223.5 248.0 276.6

Inventory 81.6 92.6 97.5 104.3

Debtors 22.9 23.2 24.4 26.1

Cash & Bank 7.3 13.6 32.0 52.0

Loans & Adv, Others 94.2 94.2 94.2 94.2

Curr Liabs & Provns 102.7 139.1 142.8 147.9

Curr. Liabilities 33.1 69.5 73.1 78.2

Provisions 69.7 69.7 69.7 69.7

Net Current Assets 103.3 84.4 105.2 128.7

Total Assets 673.7 705.7 735.3 770.6

E: MOSL Estimates

Ratios

Y/E Mar 2014 2015E 2016E 2017E

Basic (INR)

EPS 34.4 133.6 136.2 159.6

Cash EPS 164.9 273.4 284.9 316.5

Book Value 907.5 1,022.9 1,145.1 1,290.6

DPS 11.0 11.0 11.0 12.0

Payout (incl. Div. Tax.) 37.4 10.5 10.3 8.8

Valuation(x)

P/E 34.2 8.8 8.6 7.4

Cash P/E 7.1 4.3 4.1 3.7

Price / Book Value 1.3 1.1 1.0 0.9

EV/Sales 1.4 1.2 1.2 1.0

EV/EBITDA 7.7 6.2 6.1 5.4

Dividend Yield (%) 0.9 0.9 0.9 1.0

Profitability Ratios (%)

RoE 10.4 13.9 12.6 13.1

RoCE 10.3 11.8 11.2 11.8Turnover Ratios (%)

Asset Turnover (x) 0.9 0.8 0.8 0.8

Debtors (No. of Days) 16.3 15.0 15.0 15.0

Inventory (No. of Days) 58.1 60.0 60.0 60.0

Creditors (No. of Days) 28.7 56.2 55.6 55.8

Leverage Ratios (%)

Net Debt/Equity (x) 2.0 1.7 1.6 1.4

Cash flow statement (INR Billion)

Y/E Mar 2014 2015E 2016E 2017E

OP/(Loss) before Tax 29.4 43.5 39.7 46.6

Depreciation 31.8 34.1 36.2 38.2Others -0.9 -2.3 -3.2 -3.4

Interest 30.5 35.0 37.1 38.4

Direct Taxes Paid -2.6 -9.1 -8.6 -10.0

(Inc)/Dec in Wkg Cap -46.6 25.1 -2.4 -3.4

CF from Op. Activity 41.6 124.3 98.0 105.5

(Inc)/Dec in FA & CWIP -56.9 -85.0 -45.0 -50.0

(Pur)/Sale of Invt 0.0 0.0 0.0 0.0

Others 0.9 2.3 3.2 3.4

CF from Inv. Activity -56.0 -82.7 -41.8 -46.6

Inc/(Dec) in Net Worth 0.0 0.0 0.0 0.0

Inc / (Dec) in Debt 36.5 1.1 0.0 0.0

Interest Paid -30.5 -35.0 -37.1 -38.4

Divd Paid (incl Tax) -3.1 -3.4 -3.4 -3.4CF from Fin. Activity 3.8 -35.0 -37.3 -38.3

Inc/(Dec) in Cash -10.7 6.6 18.9 20.6

Add: Opening Balance 18.0 7.3 13.6 32.0

Closing Balance 7.3 13.9 32.5 52.5



21 October 2014 7

JSW Steel

N O T E S



21 October 2014 8

JSW Steel

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Disclosure of Interest Statement JSW STEEL

Analyst ownership of the stock No Analyst Certification

The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or

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