Sell stocks of JSW Steel; target of Rs 568

“JSW Steel’s standalone net sales increased 34.3% YoY to Rs95.4bn primarily on account of sales volume growth. Sales volume of saleable steel grew 33.3 % YoY and 21.1% QoQ to 2.31mn tonnes. Crude steel production grew 25.7% YoY to 2.07mn tones. JSW Steel’s standalone EBITDA declined 0.1% YoY and increased 31.9% QoQ to 16.5bn. The QoQ increase in EBITDA is primarily on account of higher sales volume and lower raw material costs. EBITDA margins improved 140 bps QoQ to 17.3%”

“During the quarter, there were mark-to-market foreign exchange gains of Rs2bn on acceptances related to raw material. With the rupee depreciating back to above 54 levels against the dollar, forex gains related to acceptances and foreign exchange borrowings would get reversed. Infact with the rupee’s downward trend sustaining on account of an escalating current account deficit and muted capital inflows, unrealised FX losses on acceptances in Q2FY12 would likely get realised as they come up for payment. Also, rupee depreciating beyond Rs53 is likely to result in further mark-to-market losses on foreign exchange borrowings and acceptances that cumulatively occurred till Q3FY12.”

“JSW Steel’s subsidiaries’ performance were a mixed bag. The US operations posted an improved performance, with the capacity utilisation of the plate mill and pipe mill rising to 44% and 16% in Q4FY12 as compared to 28% and 13% in Q3FY12. The US operations posted a net profit of $27.7mn in Q4FY12 as compared to a net loss of $10.1mn in Q3FY12; however, the profit is on account of an one-off insurance claim. The iron ore operations in Chile reported a net loss of $0.85mn on account of lower volumes at 101199 tonnes (down 31.6% QoQ). Although JSW Ispat’s losses decreased to Rs1.4bn in Q4FY12 as compared to a net loss of Rs3.1bn in Q3FY12, in our opinion, it is far away from a turnaround as capex projects (captive coke, power and pellet) to improve competitiveness would take over 2-3 years. Overall, subsidiaries continue to be a drag on JSW Steel’s consolidated results. JSW Steel’s adjusted standalone net profit declined 26.6% YoY and increased 263.0% QoQ to Rs6.1bn. The YoY decline was on account of higher interest and depreciation costs. JSW Steel’s consolidated adjusted net profit declined 23.4% YoY and increased 164.6% QoQ to Rs6.1bn.”

“Going forward, with the rupee likely to remain under pressure, unrealised foreign exchange losses on acceptances would materialise. Inadequate iron ore availability, likely foreign exchange losses, slowing domestic investment growth and high debt would continue to weigh on JSW Steel going forward. We reduce our EV/EBITDA multiple to value consolidated JSW Steel (ex-Ispat Industries) from 5x FY13E to 4.5x, which gives a value of Rs536.7. To this, we add the value of its investment in Ispat Industries at Rs31.7 (0.3x the equity investment). Our fair value for JSW Steel comes at Rs568. We decrease our target price per share for JSW Steel by 19.0% to Rs568 from Rs701, implying a potential downside of ~4.3% from the last closing price. The risk-reward tradeoff for JSW Steel remains unfavourable. We maintain our Sell rating on JSW Steel,” says Aditya Birla Money research report.