Edelweiss Report on Ispat

8/6/2019 Edelweiss Report on Ispat

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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

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 of

increased 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 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.

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 STEEL

Revision in estimates April 11, 2011

Reuters: JSTL.BO Bloomberg: JSTL IN

EDELWEISS 4D RATINGS

Absolute Rating BUY

Rating Relative to Sector Outperformer

Risk Rating Relative to Sector Medium

Sector Relative to Market Overweight

Note:Please refer last page of the report for rating explanation

MARKET DATA CMP : INR 957

52-week range (INR) : 1,400 / 751Share in issue (mn) : 223.1

M cap ( INR 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 (%)

Sto ck N ifty EW Met als and

Mining Index

1 month 4.1 6.7 4.9

3 months (13.5) (2.8) (5.6

12 months (21.8) 10.1 (11.8

Prasad Baj

+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



2 Edelweiss Securities Limited

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

INR ~28/share.



Edelweiss Securities Limited 3

JSW Steel

JSW Ispat

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) –

blast furnace (2 mtpa) – EAF (4.2 mtpa) – thin slab casting – hot strip mill (HSM) (3.3

mtpa) route. The plant has adequate land to house the proposed projects of 110 MW

captive power plant, 1 mtpa coke oven, and 3 mtpa pellet plant and expansion from 3.3

mtpa to 4 mtpa.

Key advantages of the plant are:

Proximity to flat steel consumers in a radius of 110 km, including the automobile hub of

Pune and re-rollers.

• Low employee base of 3,500 keeps staff cost low.

• Gas-based process provides better quality DRI compared to coal-based process.

• Shore-based plant reduces internal freight and facilitates export of HRC (though

proportion is low at 6%). Captive jetty of 12 mtpa capacity for both in-bound and

out-bound logistics with up to 3 mtpa excess capacity available for commercial use.

Facility (INR mn)

110 MW power plant 4,900

3 mtpa pellet plant 6,000

1 mtpa coke plant 5,000

Other cost saving capex 1,320

Enhancement of capacity from 3.3 to 4 mtpa 14,180

Total 31,400




Metals and Mining • The adoption of DRI-BF-EAF route reduces power consumption in EAF by over 50%

(however, coke has become an even bigger issue) while thin slab casting reduces

conversion cost by obviating need for reheating and improving yield.

• EAF (con arc based) can accept all possible metallic inputs – hot metal, DRI

andscrap in any proportion (though productivity is not the same across various

mixes).

Table 2: Current capacities at JSW Ispat


Valuations

JSW Steel: Rolling forw ard to FY13; fair value of INR 1,190/ share

• JSW Steel consolidated (ex-Ispat); valuation at 6x FY13E EV/ EBITDA

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.

DRI Hot metal HRC Sinter

Capacity (MT) 1,600,000 2,000,000 3,300,000 2,800,000

Capacity (TPD) 4,748 5,714 9,429 8,000




JSW Steel

Table 3: Fair valuation of INR 1,190 based on SOTP


* Debt includes acceptances of INR 50.5 bn

EV/EBITDA valuation for JSW Steel (ex-JSW Ispat) FY13E

Applicable multiple (x) 6.00

Steel business EBITDA (INR mn) 76,084

Applicable multiple (x) 5.00

Chile iron ore mines EBITDA (INR mn) 1,367Enterprise value (INR mn) 463,339

Less:Net debt- previous FY (INR mn)* 223,795

Add: CWIP - previous FY (INR mn) 38,934

Less:Preference capital (INR mn) 2,790

Less:Minority interest (INR mn) 2,187

Market cap (INR mn) 273,502

No. of shares (mn) 241

Fair value per share (INR) (Steel+ Chile iron ore) 1,137

Replacement cost method valuation for JSW Ispat FY13E

Capacity of JSW Ispat (mt) 3.3

Replacement cost (USD/t) 1,000

EV (USD mn) 3,300

EV (INR mn) 148,500

Debt (INR mn) 98,800

Equity valuation (INR mn) 49,700

Discount factor (%) 40.0%

Equity valuation at discount (INR mn) 29,820

Stake of JSW in Ispat (%) 43.0%

Value of JSW stake in Ispat (INR mn) 12,831

Per share of JSW (INR) 53

JSW investment (INR mn) 21,570

JSW investment per share (INR) 89.5

Discount at above valn -40.5%

Value of JSW including JSW Ispat 1,190

Current market share (INR) 979

Upside (%) 21.5




Metals and Mining JSW Steel: Revising estimates (Ex-JSW Ispat)

We are lowering our FY12E EBITDA and PAT by ~1.6% and 2.2%, respectively, since we

have lowered the expected EBITDA from US operations from USD 71 mn to USD 16 mn.

Our EBITDA/t estimate for JSW steel (standalone), however, stands unchanged at USD

177/t in FY12. The interest and depreciation charges for the Chilean iron ore operations

are already a part of the existing capital charges and, hence, will have minimal

incremental impact.

Table 4: Revising JSW Steel’s (ex-JSW I spat) EBITDA downwards by 1.6% for FY12 and 1.7% for FY13


Introducing JSW Ispat: EBITDA/t to be lower than earlier anticipated

We initially anticipated JSW Ispat to report EBITDA/t of USD 130/t in FY13. However,

after incorporating the higher coking coal price assumptions, detailed review of financials

and delay in synergy benefits, we now estimate JSW Ispat to report an EBITDA/t of USD

71/t and USD 90/t in FY12 and FY13, respectively.

We are considering volumes of 2.8 mt against management guidance of 3 mt for FY12

and FY13. Though the company has already started sourcing iron ore fines and lumps

from Karnataka instead of sourcing high cost iron ore, other synergy benefits such as

pellets from JSW Steel, coke from JSL and power from JSW Energy will take time to flow

in. Moreover, the increased hard coking coal cost in FY12, from USD 251/t to USD 292/t,

will also have its impact. As a result we expect a modest EBITDA/t of USD 71/t and USD

90/t in FY12 and FY13, respectively.

Also, we believe interest cost will remain high in FY12 and FY13 as a result of delay in

debt restructuring and higher interest rate scenario. We estimate interest cost of INR 8.1

bn (management guidance of INR 7.2 bn) in FY12 and INR 8.2 bn in FY13. We expect

JSW Ispat to report a net loss of INR 1.3 bn in FY12 and to break-even at the PAT level

in FY13.

New Old % change New Old % change

JSW Steel Consolidated- Ex JSW I spat

Crude steel production (mt) 9.0 9.0 0.0 9.7 9.7 0.0

Finished steel production (mt) 8.5 8.5 0.0 9.2 9.2 0.0

Net blended realisation (INR/tonne) 37,805 36,402 3.9 37,666 36,267 3.9

Net blended realisation (USD/tonne) 822 791 3.9 819 788 3.9

EBITDA (INR/tonne) 8,124 8,143 (0.2) 8,155 8,166 (0.1)

EBITDA (USD/tonne) 177 177 (0.2) 177 178 (0.1)

Consolidated financialsRevenue (INR mn) 333,530 328,173 1.6 362,915 355,560 2.1

EBITDA (INR mn) 71,145 72,331 (1.6) 77,451 78,811 (1.7)

Adjusted PAT (INR mn) 28,017 28,645 (2.2) 32,142 32,421 (0.9)

EPS ( INR) 116.4 119.1 (2.2) 133.6 134.8 (0.9)

FY12E FY13E




JSW Steel

Table 5: JSW-Ispat to break-even at net level in FY 13


Financial Snapshot: JSW w ith Ispat

Incorporating JSW Ispat and Chile operations in our estimates results in a 3.3% and 4%

increase in our FY12 and FY13 EBITDA estimate, to INR 74.7 bn and INR 81.8 bn. As per

management guidance, JSW Ispat’s financials have been proportionately incorporated

considering JSW Steel’s ~43% stake.

However, higher capital charges at JSW Ispat result in lowering of net profit by 6% for

FY12 (INR 26.9 bn) and 2.5% to for FY13 (INR 31.6 bn).

Table 6: Revising consolidated net profit downw ards by 6% for FY12 and 2.5% for FY13


FY12E FY13E Y-o-Y (%)

JSW Ispat

Volumes (mt) 2.8 2.8 0.0

Net blended realisation (INR/tonne) 37,794 38,013 0.6

Net blended realisation (USD/tonne) 822 826 0.6

Revenue (INR mn) 106,298 106,914 0.6

EBITDA (INR mn) 8,279 10,506 26.9

Net profit (INR mn) (1,347) 148 NM

EBITDA (INR/tonne) 3,275 4,156 26.9

EBITDA (USD/tonne) 71 90 26.9

With JSW

Ispat and ChilePrevious % change

With JSW

Ispat and ChilePrevious % change

JSW Steel

Consolidated financials

Revenue (INR mn) 379,259 328,173 15.6 408,909 355,560 15.0

EBITDA (INR mn) 74,707 72,331 3.3 81,970 78,811 4.0Adjusted PAT (INR mn) 26,921 28,645 (6.0) 31,613 32,421 (2.5)

EPS ( INR) 111.9 119.1 (6.0) 131.4 134.8 (2.5)

FY12E FY13E




Metals and Mining Company Description

JSW, part of the USD 8 bn O.P. Jindal Group, was incorporated as Jindal Vijaynagar Steel

(JVSL). It began operations in 1999 with the commissioning of the first Corex-2000

module in India (third in the world after Posco in South Korea and Isicor in South Africa),

with a capacity to produce 0.8 mn tonnes of hot metal. In FY05, the company merged

group company JISCO (Jindal Iron and Steel Company), which had a strong presence in

downstream products such as CR and GP/GC products. In FY06, the company merged

Euro Ikon, Euro Coke, and JSW Power and was renamed JSW Steel, transforming into an

integrated steel manufacturer. The current steel capacity of JSW Steel is 7.8 mtpa, which

includes 6.8 mtpa capacity at Vijaynagar and 1 mtpa capacity at Salem that caters

exclusively to the long product segment.

Investment Theme

Global steel demand is showing definite signs of revival. Flat steel prices have increased

in the past 6 months, both globally and in India. JSW has expanded rapidly to emerge as

India’s second largest steel producer in terms of capacity and is adding 3mtpa more next

year. It continues to focus on the domestic market and increasing its penetration in

semi-rural and rural areas by opening retail outlets.

Key Risks

• Delays in completion of brownfield expansion

• Weakness in global steel demand leading to lower international prices




JSW Steel

Financial Statements (Consolidated)

Income statement (INR mn)

Year to March FY09 FY10 FY11E FY12E FY13E

Net revenue 159,348 189,572 236,345 379,259 408,909

Accretion to stock (3,609) (171) 0 0 0

Raw material costs 107,750 112,483 142,459 230,245 248,058

Employee expenses 5,186 4,795 5,346 7,570 8,141

Power and freight 8,038 10,475 13,040 20,645 4,344

SGA and other expenses 20,113 21,282 28,936 46,092 66,396

Total operating expenses 137,478 148,865 189,782 304,552 326,939

EBITDA 21,871 40,707 46,563 74,707 81,970

Depreciation and amortisation 9,878 12,987 15,258 20,675 22,974

EBIT 11,993 27,720 31,305 54,032 58,997

Interest expenses 11,556 11,080 9,946 17,255 18,989

Other income 2,717 5,360 2,055 3,850 7,854

Profit before tax 3,153 22,000 23,415 40,627 47,862

Provision for tax 726 6,467 7,535 13,425 15,909

Core profit 2,427 15,533 15,879 27,202 31,953

Profit after tax 2,427 15,533 15,879 27,202 31,953

Minority interest (205) (332) (149) (194) (177)

Share of profit of associates 117 111 147 258 296

Profit after minority interest 2,516 15,755 15,881 27,138 31,835

FCCB interest post-tax 804 774 789 217 221

Adjusted PAT 1,712 14,980 15,092 26,921 31,613

Basic shares outstanding (mn) 187 187 241 241 241

Basic EPS 10.4 81.3 64.0 114.0 133.9

Diluted shares (mn) 187 187 241 241 241

Diluted EPS 10.4 81.3 64.0 111.9 131.4

Dividend per share (INR) 1 10 10 10 10Dividend payout (%) 20.3 15.1 19.5 11.2 9.7

Tax rate (%) 23.0 29.4 32.2 33.0 33.2

Common size metrics- as % of net revenues


Operating expenses 86.3 78.5 80.3 80.3 80.0

Depreciation 6.2 6.9 6.5 5.5 5.6

Interest expenditure 7.3 5.8 4.2 4.5 4.6

EBITDA margins 13.7 21.5 19.7 19.7 20.0

Net profit margins 1.5 8.2 6.7 7.2 7.8

Growth metrics (% )


Revenues 27.9 19.0 24.7 60.5 7.8

EBITDA (39.0) 86.1 14.4 60.4 9.7

PBT (87.0) 597.7 6.4 73.5 17.8

Net profit (85.4) 539.9 2.2 71.3 17.5

EPS (87.6) 681.5 (21.3) 75.0 17.4




Metals and Mining Balance sheet (INR mn)

As on 31st March FY09 FY10 FY11E FY12E FY13E

Equity capital- Voting shares 2,481 2,481 3,016 3,016 3,016

Preference shares 2,889 2,790 7,109 7,109 7,109

Reserves & surplus 72,669 87,300 174,969 199,471 228,744

Shareholders funds 78,039 92,571 185,095 209,596 238,870

Secured loans 134,708 134,541 171,978 202,172 233,923

Unsecured loans 30,794 27,190 28,650 29,063 29,510

Borrowings 165,502 161,730 200,628 231,236 263,434

Minority interest 2,732 2,187 2,037 1,843 1,665

Deferred tax liability 14,213 19,650 19,650 19,650 19,650

Sources of funds 260,487 276,138 407,410 462,324 523,618

Gross block 223,889 267,921 392,651 467,651 480,942

Depreciation 40,798 53,393 95,040 115,716 138,689

Net block 183,092 214,528 297,611 351,936 342,253

CWIP 95,852 69,562 76,992 83,859 138,208

Total fixed assets 278,943 284,090 374,603 435,795 480,460

Investments 3,966 6,282 7,416 7,674 7,971

Deferred tax asset 1,445 2,802 6,950 6,950 6,950

Goodwill 7,831 8,992 11,709 11,709 11,709

Loans and advances 12,428 16,038 22,854 30,842 33,257

Inventories 29,246 28,667 47,128 66,199 73,910

Sundry debtors 3,991 6,964 11,405 15,993 17,214

Cash and equivalents 5,093 3,030 24,768 8,689 21,509

Other current assets 172 0 9,181 9,181 9,181

Total current assets 50,929 54,700 115,336 130,905 155,071

Sundry creditors and others 81,799 78,078 105,310 126,119 133,562

Provisions 829 2,649 3,305 4,599 4,990

Total CL & provisions 82,628 80,727 108,614 130,718 138,552

Net current assets (31,699) (26,027) 6,722 187 16,519

Miscellaneous expenditure 0 0 9 9 9Uses of funds 260,487 276,138 407,410 462,324 523,618

Book value per share (BV) (INR) 402 480 740 842 963

Free cash flow metrics (INR mn)


Net profit 2,516 15,755 15,881 27,138 31,835

Depreciation 9,878 12,987 15,258 20,675 22,974

Others 5,369 10,165 (11,277) 27,743 6,216

Gross cash flow 17,762 38,906 19,862 75,556 61,025

Less: Changes in W. C. 28,161 (5,293) 22,934 (30,477) 2,922

Operating cash flow 45,924 33,613 42,796 45,079 63,947

Less: Capex (59,735) (27,537) (73,427) (90,860) (80,058)

Free cash flow (13,812) 6,076 (30,631) (45,781) (16,111)

Cash flow statement


Operating cash flow 45,924 33,613 42,796 45,079 63,947

Financing cash flow 12,363 (5,762) 69,970 11,491 11,440

Investing cash flow (58,409) (29,323) (95,397) (75,860) (65,058)

Net cash flow (122) (1,471) 17,370 (19,290) 10,329

Capex (59,735) (27,537) (73,427) (90,860) (80,058)

Dividends paid (3,404) (570) (3,153) (3,153) (3,153)

Share issuance/(buyback) 0 0 75,182 0 0



Edelweiss Securities Limited

11

JSW Steel

Ratios


ROAE (%) 3.6 19.4 12.1 14.5 14.9

ROACE (%) 5.1 10.5 9.3 12.6 12.2

Inventory (days) 89 94 97 90 103

Debtors (days) 11 11 14 13 15

Payable (days) 218 260 235 183 191

Cash conversion cycle (days) (118) (155) (124) (80) (73)

Debt/EBITDA 7.6 4.0 4.3 3.1 3.2

Current ratio 0.6 0.7 1.1 1.0 1.1

Debt/ Equity 2.1 1.7 1.1 1.1 1.1

Adjusted debt/Equity 2.1 1.7 1.1 1.1 1.1

Turnover


Fixed assets turnover (x) 1.0 1.0 0.9 1.2 1.2

Total asset turnover (x) 0.7 0.7 0.7 0.9 0.8

Equity turnover (x) 2.0 2.2 1.7 1.9 1.8

Du pont analysis


NP margin (%) 1.7 8.4 6.8 7.3 7.9

Total assets turnover 0.7 0.7 0.7 0.9 0.8

Leverage multiplier 3.1 3.3 2.6 2.3 2.3

ROAE (%) 3.6 19.4 12.1 14.5 14.9

Valuation parameters


Diluted EPS (INR) 10.4 81.3 64.0 111.9 131.4

Y-o-Y growth (%) (87.6) 681.5 (21.3) 75.0 17.4

CEPS (INR) 67.5 154.8 130.7 200.9 230.3Diluted P/E (x) 94.2 12.0 15.3 8.8 7.5

Price/BV(x) 2.4 2.0 1.3 1.2 1.0

Market cap/Sales (x) 1.1 1.0 1.0 0.6 0.6

EV/Sales (x) 2.2 1.8 1.7 1.2 1.2

EV/EBITDA (x) 15.8 8.4 8.9 6.1 5.8

Dividend yield (%) 0.1 1.0 1.0 1.0 1.0




Metals and Mining

Company Absolute

reco

Relative

reco

Relative

risk

Company Absolute

reco

Relative

reco

Relative

Risk

Bhushan Steel BUY SO H Coal India HOLD SU M

Hindalco Industries BUY SO M Hindustan Zinc BUY SO L

Jindal Steel & Power HOLD SP M JSW Steel BUY SO M

National Aluminium Company REDUCE SU M Prakash Industries BUY SO M

Sesa Goa REDUCE SU M Steel Authority of India HOLD SU L

Sterlite Industries (India) BUY SP M Tata Steel BUY SO M

Usha Martin BUY SO M

RATING & INTERPRETATION

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings CriteriaSector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe

within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return



Edelweiss Securities Limited

JSW Steel

Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021. Board: (91-22) 2286 4400, Email: [email protected]

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Head Research [email protected] +91 22 6623 3411

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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Recent Research

05-Apr-11 Sesa Goa Export ban removal:Positive, but factored in;EdelFlash

315 Reduce

01-Apr-11 Hindalco

Industries

Mahan financial closure;

EdelFlash

209 Buy

17-Mar-11 Tata Steel Raises perpetual bonds:avoids equity dilution;EdelFlash

JSW Steel EW Indices

Buy Buy

Buy

BuyBuy

600800

1,000

1,200

1,400

A p r - 1 0

M a y - 1 0

J u n - 1 0

J u l - 1 0

A u g - 1 0

S e p - 1 0

O c t - 1 0

N o v - 1 0

D e c - 1 0

J a n - 1 1

F e b - 1 1

M a r - 1 1

A p r - 1 1

( I N R )

400

650

900

1,150

1,400

7-Jan-10 7-Jul-10 7-Jan-11

J S W Steel Ltd.

EW Metals and Mining Index

Nifty

Edelweiss Report on Ispat

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