JSW Steel Equity Research Report

8
JSW Steel Ltd

Beyond the Ban!!

Kunal Motishaw
+91 22 663 99138
kunal.motishaw@violetarch.com

Institutional Research
VIOLET ARCH Securities Pvt. Ltd. (Erstwhile Alchemy Share & Stock Brokers Pvt. Ltd.)

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VIOLET ARCH Research

JSW Steel Ltd - Company Report


Index
Executive Summary 3
Scenario Analysis 4
Key Assumptions 5
SWOT Analysis 6
Peer Valuation 7
Valuation 7
Key Investment Arguments 8-13
Key Risks and Concerns 14
Company Background 15
Industry Overview 16
Financial Summary 17

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COMPANY REPORT

JSW Steel Ltd
Beyond the Ban!!

Equity Research l Metal
May 6, 2013
JSW Steel (JSTL) has been the best executor of projects in the domestic ferrous space. The
company has increased capacity from a 0.8MTPA in FY00 to 11MTPA (including 1MTPA at Salem)
in FY12 translating into a CAGR of 27%. Further, with the acquisition of ISPAT, JSW steel is now
the largest steel company in India with an installed capacity of 14.3MTPA. Also, with Supreme
Court lifting the iron ore mining ban on Category A & Category B mines, iron ore procurement
cost for JSW steel should come down gradually over a period of time. Further, with operational
efficiencies at JSW ISPAT expected in the coming quarters, the company is expected to report
healthier margins. We initiate coverage on JSW Steel with a BUY rating and a target price of Rs
972, providing a 39% upside from the current level.
Investment Argument
Efficient Converter with rich product mix
Despite no backward integration (earlier ~20% for iron ore), JSTL has been able to maintain
competitive operating margins due to its efficient operations. JSW steel has one of the lowest
conversion costs amongst large steel producers with conversion cost of around USD 150/tonne.
Further, being a non integrated player, the company is highly susceptible to change in raw
material prices thus making it the main beneficiary of falling raw material prices. Further, given
the companys continuous emphasis on value addition, share of semis in total volumes has come
down over the years from 22% in FY10 to 5% in FY12. Going forward, we expect the share of
semis to remain below 3%.
Lifting of mining ban to improve utilization levels
With the positive verdict from the Supreme Court of India on Category A & B iron ore mines
and auctioning of sub-grade ore along with an evolving regulatory framework we expect more
supply of ore and sub grade ore. This in turn should lead to a drop in ore prices and benefit steel
mills like JSW Steel with captive beneficiation and pelletisation facilities and also improve
utilization levels. However, the benefits of the same are expected only from the end of FY14E.
JSW-Ispat - Operating metrics set to improve
JSTL had outlined substantial cost savings at JSW Ispat to the tune of Rs3.5bn-5bn annually. As
per our understanding, while part of the synergy gains in marketing and power sourcing are
already being realized, we think the actual turnaround at JSW ISPAT is not too far, with the full
benefits of cost savings from the 55MW power plant fed on BF gas, 1MT coke oven battery 4MT
pellet plant and replacement of external gas with coke oven gas expected to gradually
contribute. We believe post completion of all these initiatives, JSW ISPAT could see cost savings
of ~USD75-80/tonne.
Valuation
JSTL has corrected 22% since the announcement of the mining ban in the Bellary district (and
16% YTD). At the current valuations of 4.4x FY15E EV/EBITDA, JSTL trades at a discount to its
historic EV/EBITDA of 6x, implying value in the stock. We value JSTL at 5xFY15 EV/EBITDA and
arrive at a SOTP target price of Rs 972/share, a discount to its historical average due to lack of
raw material integration and slow off-take of steel in the domestic market. Delays in securing
timely and adequate e-auction ore supplies and starting of mining operations in Category B
mines pose key downside risk to our estimates.
Particulars (Rs mn) FY12 FY13E FY14E FY15E
Revenues 341,237 363,874 376,525 421,121
EBITDA 58,575 65,025 66,686 79,018
EBITDA margins (%) 17.2 17.9 17.7 18.8
EBITDA growth (%) 25.6 11.0 2.6 18.5
Adj. Net profit 11,151 16,123 15,556 20,868
Adj. Net profit growth (%) (36.4) 44.6 (3.5) 34.1
Net Profit margins (%) 3.3 4.4 4.1 5.0
FDEPS (Rs) 50.0 66.7 64.4 86.3
FDEPS growth (%) (36.4) 33.5 (3.5) 34.1
P/E (x) 14.0 10.5 10.9 8.1
Source: Company, Violet Arch Research

Stock data
CMP Rs 700
Reuters Code JSTL.BO
Bloomberg Code JSTL IN
Equity Shares o/s (mn) 241.7
Market Cap (Rs bn) 160
Market Cap (USD bn) 3.2

Stock performance (%)
52-week high / low Rs 894 /566
1M 3M 12M
Absolute 4.7 (17.3) 1.5
Relative 1.2 (14.8) (11.1)

Shareholding pattern (%)

Relative stock movement

Promoter, 38
Public &
others, 37
FII, 20
DII, 5
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JSW Steel Sensex
Absolute Rating
BUY
Target Price
Rs 972
Upside 39%

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Scenario Analysis
FY15E (Standalone) Bull Case Base Case Bear Case
Realisation (Rs/tonne) 43,922 41,920 39,732
Steel Sales Volumes (mn tonnes) 10 9.1 8.49
Exchange Rate (INR:USD) 49 51 55
EBITDA (Rs mn) 103,951 74,365 48,952
Inc / Dec from base case (%) 39.8 - (34.2)
EPS (Rs) 165.83 103.44 52.4
Inc / Dec from base case (%) 60.3 - (49.3)
CMP 700 700 700
Target Price 1,188 972 514
Upside % 69.7 38.9 (26.6)
Source: Violet Arch Research
Bull Case
Steel Realizations to be higher at Rs 43,922/tonne on the back of improved international
prices and increased domestic demand.
Sales volumes assumed at 10mn tonnes an increase of 10% from our base case assumption
and 16.3% over FY14E levels on the back of optimum capacity utilisation and higher
demand for steel domestically.
Exchange rate assumed at Rs49/USD.
Base Case
Steel Realizations to average at Rs 41,920/tonne on the back of subdued domestic demand
and import parity prices.
Sales volumes assumed at 9.1mn tonnes an increase of 6% from FY14E levels as domestic
demand expected to grow by ~7%.
Exchange rate assumed at Rs51/USD.
Bear Case
Steel realizations expected to fall from the current levels and average at Rs 39,732/tonne
on the back of a fall in international prices and weak demand.
Sales volumes at 8.49mn tonnes as iron ore supplies get delayed
Exchange rate assumed at Rs53/USD

Impact of 5% change of various Parameters on EBITDA & EPS
(FY15E) EBITDA EPS
Exchange rate 8.4% 17.8%
Iron ore 4.4% 9.3%
Coking coal 9.2% 14.9%
Steel Prices 21.4% 34.3%

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Key Assumptions
Steel Sales volumes expected to grow by 4.4% to 8.6mn tonnes in FY14E and 5.8% to 9.1mn
tonnes in FY15E.
Blended Realization/tonne expected to fall by 2.35% to Rs 39,584 in FY14E and increase by
5.9% to Rs41,920 in FY15E.
Iron ore cost on a per tonne basis expected to increase by 2.5% to Rs3,381/tonne in FY14E
and increase by 3.4% to Rs3,496/tonne in FY15E. It must be noted that iron ore costs
increased by 26% in FY13E due to the mining ban in Karnataka.
Blended Coking coal cost to decrease by 4.7% to Rs11,600/tonne in FY14E and increase by
5.8% to Rs12,271/tonne in FY15E.
Exchange rate expected to average at Rs53/USD in FY14E and Rs51/USD in FY15E.

Particulars FY11 FY12 FY13E FY14E FY15E
Steel Sales Volumes (mn tonnes) 6.11 7.77 8.24 8.60 9.10
Blended realization (Rs/tonne) 37,915 41,248 40,508 39,584 41,920
Iron Ore (Rs/tonne) 2,858 2,620 3,300 3,381 3,496
Blended coking coal (Rs/tonne) 10,673 13,412 12,173 11,600 12,271
Currency (INR/USD) 45.5 47.9 54.5 53.0 51.0

Per tonne analysis (Standalone / Rs) FY11 FY12 FY13E FY14E FY15E
Net Sales 36,411 43,153 41,502 40,157 42,625
Less:-

Raw Material 22,179 28,074 26,365 25,506 27,069
Employee Cost 832 850 862 855 847
Power and Fuel 1,838 2,288 2,325 2,137 2,144
Other Expenses 4,076 4,677 4,395 4,275 4,390
TOTAL 28,925 35,889 33,948 32,773 34,450
EBITDA/tonne (Rs) 7,486 7,264 7,554 7,384 8,175
EBITDA/tonne (USD) 165 152 139 139 160

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SWOT Analysis


SWOT
Analysis

Strengths
1) JSW Steel is amongst the fastest growing
steel companies globally with steel
capacities increasing by 7x in just 10 years.
Besides, JSTL also features amongst the
most efficient steel producers globally.
2) This clearly illustrates the Companys
excellent brown field execution and cost
management skills.

Weaknesses
1) JSW Steel meets 100% of its coking coal
and iron ore requirement from external
sources. Lack of raw material sufficiency
would imply higher costs and in-turn
earnings volatility for the company.
Further, with the domestic iron ore mining
industry facing bans in certain regions,
prices domestically have increased as
supply has not been able to match
demand.

Opportunities
1) As Indias largest steel producer, JSTL will be
a key beneficiary of domestic growth and rising
steel demand. We estimate steel demand to
grow by 6% in FY14E and 7% in FY15E.
2) While the company has currently put its 10
MTPA plant in West Bengal on hold, land
acquisition for the same is complete. The
company is waiting for iron ore mine allocation
there until it puts some meaningful investment
into the same. Hence, if JSTL is successful in
commissioning of these projects, it will see the
company well placed to reap the benefits of
rising steel demand.

Threats
1) Sudden drop in steel demand and inability
to pass on raw material price increase to end
customers would result in a severe dent to
profitability on the back of negative impact of
higher operating leverage. It must be noted
that in FY13, steel demand grew by a mere 4%
YoY.
2) As per our understanding, 60% of Indias
capacity addition over the next few years is
expected to come in the flats segment, with
HRC accounting for over 50%. JSTL has high
exposure to the flats segment (HRC in
particular) which could imply pricing pressure
on the majority of its product offerings.

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Peer Valuation
Company Name
Mkt
Cap
(Rs bn)
Revenues (Rs bn) EBITDA (Rs bn) PAT (Rs bn) P/E (x) EV/EBITDA (x)
CY12/
FY13
CY13/
FY14E
CY14/
FY15E
CY12/
FY13
CY13/
FY14E
CY14/
FY15E
CY12/
FY13
CY13/
FY14E
CY14/
FY15E
CY12/
FY13
CY13/
FY14E
CY14/
FY15E
CY12/
FY13
CY13/
FY14E
CY14/
FY15E
Arcelor Mittal 1,044 4,501 4,563 4,488 681 638 671 (199) 167 189 - 18.1 16.0 6.1 5.6 4.9
China Steel Corp. 700 374 707 665 37 91 68 11 34 38 46.9 14.5 12.8 6.9 6.8 6.3
JFE Holdings Inc 671 2,102 2,030 1,725 154 186 136 26 (25) 21 23.9 - 30.4 7.6 7.7 6.3
SAIL 266 457 468 569 56 66 91 26 27 38 10.1 9.9 7.1 8.2 7.4 5.6
Tata Steel 310 1,363 1,439 1,380 113 158 155 (7) 31 27 - 7.7 6.0 8.0 5.8 5.6
JSW Steel 169 364 377 421 65 67 79 16 16 21 10.5 10.9 8.1 5.1 5.2 4.4
AVERAGE

7.0 6.4 5.5
Source: Bloomberg, Violet Arch Research
JSTL is trading at 4.4x FY15E EV/EBITDA as compared to its peers, which are trading at an
average 5.5xCY14E/FY15E EV/EBITDA. Further even other domestic players like SAIL &
Tata Steel are trading at a premium as compared to the company.
Valuation
JSW steel has corrected 22% since the announcement of the mining ban in the Bellary district
(and 16% YTD). At the current valuations of 4.4x FY15E EV/EBITDA, JSTL is trading at a discount
to its historic 5-year average EV/EBITDA of 6x, implying value in the stock. Further, with the
Chinese macro and bulk commodity outlook looking bleak, we believe that JSW Steels non-
integrated (direct beneficiary of a drop in international coking coal prices) nature and efficient
operations puts it a sweet spot.
Also, we like JSW Steel from a bottom-up approach, wherein we expect its iron ore
procurement costs to drop due to demand supply mismatch for iron ore fines in Karnataka, and
re-starting of Category B mines by end FY14E. In our view this along with increased domestic
off take and improvement in operating metrics at JSW Ispat would be the key drivers for the
stock going forward. We value JSW Steel based on EV/EBITDA methodology, as it captures the
operating dynamics of the business model and also its capital structure. We value JSTL at 5xFY15
EV/EBITDA and arrive at a SOTP target price of Rs 972/share, a discount to its historical average on
the back of lack of raw material integration and slow off-take of steel in the domestic market. Delays
in securing timely and adequate e-auction ore supplies and re-starting of mining operations in
Category B mines pose key downside risk to our estimates. We initiate coverage on the stock with a
BUY rating.
(Rs mn) Basis Multiple FY15E
JSW Steel (Consolidated) EBITDA 5.0 79,018
Enterprise Value

395,092
Less :- Net Debt

(176,065)

Add:- Investments

JSW Energy (5.6% stake) 30% discount to CMP 0.7 4,160
Ispat 0.5x invested equity 0.5 11,785

Target Market Cap

234,972
Fully Diluted Shares (mn)

241.7
Target Price (Rs)

972
CMP (Rs)

700
Upside (%)

38.9

8




Key Investment Argument
Efficient converter with rich product mix
Despite no backward integration (earlier ~20% for iron ore), JSTL has been able to maintain
competitive operating margins due to its efficient operations. JSW steel has one of the lowest
conversion costs amongst large steel producers with conversion cost of around USD 150/tonne.
Further, being a non integrated player, the company is highly susceptible to change in raw
material prices thus making it the main beneficiary of falling raw material prices. However due
to the recent iron ore ban in Karnataka which has just been lifted and will take miners some
time to increase output, domestic iron ore prices are expected to remain buoyant and the
company is not expected to benefit from falling iron ore prices globally as it will have to buy iron
ore at e-auction prices till end FY14. Nevertheless, decline in coking coal prices will benefit JSTL.
JSTL lowest conversion cost amongst domestic majors


JSW Steel Units (Standalone)
Particulars Capacity (MTPA) Location
Crude Steel 11 Vijaynagar + Salem
Slabs 10 Vijaynagar
Billets 2.75 Vijaynagar + Salem
HRC + plates 6.7+0.32 Vijaynagar + Salem
Rolled Long 2.2 Vijaynagar + Salem
Cold rolled coils 1.8 Vijaynagar
Galvanised coils 0.9 Vasind
Colour Coated Sheets 0.2 Vasind
Captive Power plant (MW) 920 Vijaynagar + Salem + Vasind
JSW Steel, through its timely capacity expansion, has delivered a staggering 27% CAGR in
volumes over FY00-FY12. JSTLs steel making capacity has increased ~4x over FY05-FY12 to
11mtpa, which after the ISPAT merger now stands at 14.3MTPA. With iron ore sourcing likely to
improve from end FY14E, we expect the company to benefit from the same. Given the
companys continuous emphasis on value addition, share of semis in total volumes has come
down over the years from 22% in FY10 to 5% in FY12. Going forward with value added capacity
540
369
280
150
339
419
-
100
200
300
400
500
600
700
800
JSW Steel SAIL Tata Steel
Raw Material Conversion Cost

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coming on stream, we expect the share of semis to remain below 3%. Enhanced product mix has
also led to JSTLs realisation spread over landed HRC prices to remain at ~9% over the past few
years.
JSTLs capacity has grown at a staggering 30% CAGR over the years

Lifting of mining ban to improve utilization levels
The blanket ban across the districts of Chitradurga, Tumkur and Bellary in Karnataka practically
left JSTL with NMDC as its supply source as procuring iron ore from Orissa and Chhattisgarh is
not a viable option due to high logistics costs. Also, this left JSTL highly exposed, given concerns
over NMDCs ability to ramp-up iron ore production in Karnataka (to 1mn tonnes/month).
However, with the Supreme Court decision to allow e-auction of iron ore gave the much needed
breathing space to JSTL. Now, after clearance by the Supreme Court of Category A & Category B
mines, few category A mines have restarted operations with 3 mines starting during 4QFY13, in
addition to 6 mines starting earlier. The combined capacity of the 3 new mines stands at ~5.5
MTPA. Further two more mines are expected to restart adding further ~1 mtpa. On the other
hand after the introduction of advance e-auction, the company expects NMDC also to supply
more iron ore (~9 mtpa) in Karnataka. As far as category B mines are concerned, R&R plans for
20 mines have been approved and are under preparation for other mines. Also, 12 mines have
accepted all the conditions stipulated by the Supreme Court to consider re-commencement of
mining.
Hence, all in all, the iron ore availability situation is likely to improve gradually. At 78%
utilization levels (our estimate for FY14E), the company would need ~15 mn tonnes of high
grade ore. As per our understanding, NMDC should contribute ~9 mn tonnes along with another
6 mn tonnes from category A mines. Considering JSW Steel buys ~65% of the fines auctioned,
the company can secure ~8 mn tonnes through this route. Further, the company has also has
been buying ~2.5 mn tonnes from Orissa and Chhattisgarh. Thus, total availability should be in
excess of ~15 mn tonnes giving us the confidence that even without dump ore and category B
mines, the company should not see a major problem in achieving our estimated utilization level
for FY14E.

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FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

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Iron ore sourcing should not be a major problem going forward

In 4QFY13, the Monitoring Committee had auctioned about 6.3 mn tonnes of low-grade ore
from the dumps of Mineral Enterprises Limited for an average price of Rs 650/tonne for 53% Fe
grade ore. Since the company has technology available to beneficiate low-grade iron ore, it has
so far used up to 52% Fe and for the first time the management plans to experiment with even
lower grade ore. However, recovery of iron would be in the range of 35-40% and the losses
around 60%.
Utilization Levels have steadily improved in recent times

Also, as per data from Indian Bureau of mines (IBM), 56% of the Karnataka ore inventories have
Fe content lower than 62% and fines account for 60% of total inventory volumes. We expect
lower bidding for low grade fines/ lumps in the e-auction process given limited domestic
pelletisation/sintering facilities. With its captive 20mn tonnes beneficiation and 9mn tonnes
pelletisation facility, JSW Steel will be a key beneficiary of the favorable inventory mix.
JSTL (FY14E)
~15mn tonnes of
high grade ore
NMDC (9mn
tonnes)
Category 'A'
mines (6mn
tonnes)
Orissa &
Chattisgarh
(2.5mn tonnes)
Fines (8mn
tonnes )
50.0%
55.0%
60.0%
65.0%
70.0%
75.0%
80.0%
85.0%
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JSW-Ispat - Operating metrics set to improve
JSW Ispat will get merged with JSTL and the swap ratio has been fixed at 1:72 implying Ispat
share holders will get one share of JSTL for 72 shares held in JSW Ispat. The merger will be
effective from 1st July 2012 and is expected to be completed anytime soon as JSTL had guided
of completion by end FY13. As part of the merger, JSTL will hive off the downstream capacities
of both the entities at Vasind Tarapur and Kalmeshwar into a 100% subsidiary. The total
collective capacity of downstream production units is ~1.2mtpa. The Dolvi plant of Ispat has the
potential to increase its capacity to ~7.5mtpa from the current 3.3mtpa. However, expansion
plans for this brownfield project expansion is at a very nascent stage.
Ispat Merger to make JSW Steel the largest steel company in India

JSW Steel JSW ISPAT Merged Entity
Crude Steel Capacity (MTPA) 11 3.3 14.3
Expansion Potential (MTPA) 5 4.2 9.2
Steel making route Corex - 1.6mtpa BF - 2mtpa

BF-BOF - 9.4mtpa DRI - 1.6mtpa


While the benefits of marketing synergies (the result of VAT benefits and freight savings) along
with reduced power costs (sourcing from JSW Energy vs. MSEDCL) are already being realized,
we believe there is more in store on the cost savings front in the coming quarters. We expect
benefits from the 55MW captive power plant to flow in immediately, thereby leading to
annualized cost savings of around Rs1.8bn per annum. In addition, we expect material
improvement in operational metrics at JSW Ispat once its coke oven and pellet plant facilities
are commissioned over 2HFY14.
Cost Savings USD/tonne
55 MW Power plant 14
4 MTPA pellet plant 21
1 MTPA coke oven battery 25
Replacement of purchased gas with coke oven gas 22
Total Savings 82
With boiler hydro testing, light up and chemical cleaning at the 55MW power plant already
done, we believe the power plant will be commissioned very soon. Waste heat gases recovered
from the blast furnace will be utilized to feed the 55MW power plant. And hence cost benefits
of the power plant will flow immediately, resulting in annual cost savings of Rs1.8bn ($14/T)
translating to a payback of less than two years. On the pellet plant front, JSW Ispat currently
procures ~50% of its ore requirement from domestic sources and the rest from imports. With a
1.6MT DRI dependent on pellet feed (~2.7MT) and 2MT BFs 15% ore requirement met via pellet
route (~0.5MT), JSW Ispat will require around 3.5mn tonnes of pellets annually. With
commissioning of the pellet plant, we expect JSW Ispat (a port- based facility) to have increased
leeway to import fines over domestic sourcing of lumps. With commissioning of the pellet plant,
we expect JSW Ispat to realize cost gains to the extent of USD21/t.

12




Further, work at the coke oven batteries is in full swing, with the structural frames already in
place. We expect the first coke oven battery to be commissioned by the end of 2QFY14 and the
second battery by the end of 3QFY14. As per our estimates, the commissioning of the coke oven
batteries will see JSW Ispat realize cost gains up to USD25/tonne.
Sales Volumes and EBITDA/tonne set for improvement

JSW Ispats installed steel capacity stands at 3.3MTPA, however given the volume-cost trade off
on gas supplies, the company prefers to operate the DRI facility at lower utilization (and BF at
full capacity), due to higher gas procurement costs. However, JSW Ispat is expected to increase
utilization levels at its DRI facility once it starts substituting the external gas with surplus coke
oven gas and once both coke oven batteries are commissioned by 3QFY14. This could result in
additional savings to the tune of US$ 22/tonne.
US subsidiaries still in red however operational improvement seen
While JSTL has a profitable steel business in India and has been the fastest growing steel
company in the world, in the last few years, it has invested USD900m in US plate & pipe mill,
USD250m in Chile iron ore mines, and USD100m in a US coking coal mine. While none of its
overseas acquisitions have been profitable and there is no visibility of turnaround, given the
global economic slowdown, high cost structure, and strategic / technological disadvantage, the
US Plate and pipe mill has shown some gradual improvement.
As per our understanding, we do not expect any major surprises from its overseas operations
barring the US plate and pipe mill as the company is trying to secure orders and is banking on
shale gas output there. Further, the company has been guiding iron ore production of 1- 1.2 mn
tonnes from Chile, while coking coal from US is not likely to materialize any time soon.
US Plate & Pipe mill
US Plate & Pipe mill FY09 FY10 FY11 FY12 FY13E FY14E FY15E
Plate sales (tonnes) 199,861 119,614 106,936 247,796 254,500 279,500 305,750
Pipe sales (tonnes) 143,608 72,508 45,217 68,010 74,063 80,136 86,627
Revenues (USD mn) 501 160 141 362 377 412 450
EBITDA (USD mn) 71 (41) 15 56 32 41 69
PAT (USD mn) (37) (70) (33) (18) (27) (23) (15)
2
2.2
2.4
2.6
2.8
3
3.2
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
6,000
FY10* FY11 FY12 FY13E FY14E FY15E
EBITDA/tonne (INR) Sales Volume (Mn tonnes)

13




As far as the Chilean iron ore mine is concerned, JSTL has commenced shipments from Chilean
iron ore mines with FY12 shipments of 7,42,871 tonne. The mine has annual production
capacity of 1mn tonne, which the company is planning to augment to 2.5mn tonnes by FY15E.
Chilean iron ore mine is expected to generate EBITDA/tonne of $12/tonne in FY14E and
$16/tonne in FY15E as we expect iron ore prices to remain suppressed for next couple of years.
Chile Iron ore mine

FY12 FY13E FY14E FY15E
Production (mn tonnes) 742,871 727,724 873,269 1,030,458
Shipments (mn tonnes) 593,586 949,088 838,339 989,239
EBITDA/tonne (USD) 37.8 8.0 12.0 16.0
In 4QFY10, JSTL acquired a coking coal mine in West Virginia State in USA. The acquisition
includes seven coal blocks with initial production capacity of 0.5mtpa. As per initial estimates,
the coking coal mine has 123mn tonnes of resource base along with railway load-out and barge
facility. While the company has undertaken drilling activities, shipments are yet to commence.
Coking coal shipped will be used for JSTLs Indian operations and as per our understanding,
landed cost should be around USD150-155/tonne. Initially, JSTL is expected to produce 0.5mn
tonne of coking coal, which will subsequently be increased to 3mn tonnes. We have not
factored in any shipments from the mines in our numbers.

14




Key Risks and Concerns
Delay in resumption of mining activities in Karnataka
JSTL sources 100% of its ore (post mining ban imposed in Karnataka) and coking coal
requirement from external sources and remains exposed to volatile raw material costs. We
believe that despite Supreme Court lifting the ban on Category A and B mines, improvement in
the mining sector has clearly been far slower than anticipated, with only seven Category A
mines with a cumulative output of 3.3mn tonnes operational so far. While we remain hopeful
that by end FY14, higher ore production leading to increased ore availability will bring down
procurement costs for JSW Steel, if the same
Skewed product mix
JSTLs skewed product mix (83% of volumes are flats and semis) vis--vis more balance product
mix of its domestic peers like Tata Steel and SAIL leaves the company exposed to pricing
pressures.
Significant drop in steel prices
Global steel market has been looking sluggish for a while and prices have corrected significantly
across geographies. In India prices have held up largely due to stable demand and rupee
depreciation. However, local currencies of CIS origin countries has depreciated against dollar
and this might result in fall in dollar denominated prices there by putting pressure on domestic
prices.
Bloated balance sheet
At the end of 3QFY13, JSTLs standalone net debt stood at Rs202bn (as compared to net debt of
Rs183bn at the end of 1HFY13). Consolidated net debt including JSW Ispat stands at Rs265bn,
excluding acceptances of Rs80bn. Further, in-case the company is unable to turnaround ISPAT
to the extent desired and steel demand and prices weaken further, there could be a serious risk
to the companys balance sheet.
Excess supply from domestic sources and imports
Steel production in China and CIS origin countries has been on higher side. Due to suppressed
demand growth in these regions the excess steel might find its way in countries like India.
Further, around 18mn tonne of incremental capacity is coming up in India over next 18-24
months most of which will be in flat steel segment and could put pressure on prices.

15




Company Background
JSW Steel is part of the O.P.Jindal Group. The group has a presence across various sectors
Steel, Energy, Minerals, Port & Infrastructure, Cement, Aluminium and IT. JSW Steel is Indias
largest and amongst the most efficient steel producers globally. JTLS has manufacturing facilities
located across three states in India and has a plate/pipe mill in USA. JSTL also acquired a stake in
Ispat Industries Ltd, with which it became Indias largest steel producer with a combined
capacity of 14.3 MTPA. It has tied up with JFE Steel Corp, Japan, to manufacture the high grade
automotive steel. JSWS has mining assets in Chile, USA and Mozambique. By 2020, it aims to
produce 34mt of steel annually with planned Greenfield integrated steel plants in West Bengal
and Jharkhand.

FY12 sales mix


9.6%
50.5%
3.7%
7.5%
7.9%
1.3%
9.4%
10.2%
MS Slabs
HR Coils/Steel Plates/Sheets
HR Steel Plates
CR Coils/Sheets
Galvanised/Galvalum Coils/Sheets
Colour coating Coils/Sheets
Steel Billets & Blooms
Long Rolled Products

16




Industry Overview
Slowdown in developed economies and China to weigh on steel demand
With major economies across the world facing slowdown, the demand for steel is expected to
remain sluggish. Demand scenario is particularly weak in developed economies; Euro Zone in
particular. China being the largest producer and consumer of steel is also witnessing its
economy cooling off after witnessing GDP growth in excess of 9% in past few years. The World
Steel Association (WSA) has recently cut steel demand growth estimates by 90bps to 1.2% for
CY12 and by 30bps to 2.9% for CY13 as EU27, CIS, Nafta and Middle East are now expected to
grow slower. We continue to believe that global steel demand growth will be even slower, with
growth rate of 1.6% for world, 2% for China and 2.5% for India in CY13.
Raw material prices to remain weak
In response to falling demand, coking coal and iron ore prices have come down by almost 50%
from their recent highs. Coking coal prices have come down from $335/tonne to $170-
180/tonne at present. Iron ore prices are now trading near $130/tonne as lower demand from
China and higher supplies from iron ore producing countries have put pressure on prices. In
absence of any meaningful pickup in steel demand, we expect iron price to remain soft and may
come down further in the event of increased supply from India, which has been limited due to
ongoing mining issues and 30% export tax.
Steel prices have corrected rupee depreciation keeping import parity in check
Combination of declining demand and falling raw material prices has resulted into decline in
steel prices globally. Steel prices world over have come down by 6-12% in CY12. Chinese HRC
export prices have come down by ~8%. However, steel prices in India have been resilient as
rupee depreciation has kept domestic to imported steel prices parity in check. Despite prices
holding firm as compared to a fall in global prices, domestic prices are still at marginal discount
to landed prices. We expect domestic flat steel prices unlikely to drop significantly, though they
may see marginal correction given the increased imports from countries like Japan and South
Korea with whom India has signed free trade agreement there by making imports cost
competitive.
Domestic steel consumption set to increase
Indias steel demand growth averaged at around 9.4% over FY03-FY11 but demand tapered
down to 6.5% in FY12 and further down to around 4% in FY13, largely due to higher interest
rates and slowing Indian economy. Historically, over FY98-FY2012, steel consumption to GDP
growth multiple has been 1.1x, with the highest being reported at 1.9x in FY03. As per our
understanding of the multiplier, the same gets higher when GDP growth is above 8% and goes
upto 1.6x the GDP, while during lower GDP growth phase up to 5% the multiplier dips to 0.5x.
Going forward, based on the GDP forecast of 5.8% in FY14E and 7% in FY15E, steel consumption
based on multiplier of 1.0x is expected to grow at ~6% in FY14E and 7% in FY15E respectively.

17




Financial Summary
Income Statement

Y/E 31 Mar (Rs mn) FY12 FY13E FY14E FY15E
Revenue 341,237 363,874 376,525 421,121
YoY growth (%) 42.8 6.6 3.5 11.8
EBITDA 58,575 65,025 66,686 79,018
YoY growth (%) 25.6 11.0 2.6 18.5
EBITDA margin 17.2 17.9 17.7 18.8
Depreciation 19,332 21,214 23,122 24,470
Interest expenses 14,273 19,065 20,618 23,577
Other non operating income 3,213 2,536 2,662 2,796
PBT 19,934 27,282 25,608 33,767
Provision for tax 5,002 8,331 7,618 10,556
Minority interest and ext. items

PAT (adjusted) 11,151 16,123 15,556 20,868
YoY growth (%) (36.4) 44.6 (3.5) 34.1
PAT margin 3.3 4.4 4.1 5.0

Balance Sheet

Equity Share Capital 2,231 2,417 2,417 2,417
Pref Shares 2,790 2,790 2,790 2,790
Reserves & surplus 162,081 173,656 185,052 200,157
Shareholders' fund 167,713 179,473 190,870 205,974
Total Debt 198,128 214,091 244,091 274,091
Deferred Tax Liability 30,412 30,412 30,412 30,412
Total Capital Employed 398,430 426,153 467,550 512,654
Gross Block 414,455 469,455 514,455 549,455
Less: Acc. Depreciation 88,451 109,665 132,787 157,257
Net Block 326,004 359,790 381,668 392,198
Capital WIP 28,018 28,018 33,018 38,018
Net Fixed Assets 354,022 387,808 414,687 430,217
Goodwill 12,440 10,932 10,932 10,932
Investments 20,896 20,896 20,896 20,896
Cash 32,916 48,423 64,572 98,027
Trade Receivables 15,394 14,954 15,474 17,306
Loans & Advances 47,900 29,110 30,122 33,690
Inventories 57,983 65,501 67,910 74,981
Total Current Asset 154,192 157,988 178,077 224,004
Current Liab. & Prov. 143,120 151,471 157,042 173,395
Net Current Asset 11,072 6,517 21,035 50,610
Total Assets 398,430 426,153 467,550 512,654

Cash Flow Statement

PBT 19,934 27,282 25,608 33,767
Interest 14,273 19,065 20,618 23,577
Depreciation 19,332 21,214 23,122 24,470
Change in working capital (4,265) 20,063 1,630 3,881
Tax 5,002 8,331 7,618 10,556
Cash flow from operations 41,872 76,465 60,926 72,796
Change in fixed assets 55,810 55,000 50,000 40,000
Change in investments (6,735) (1,508) - -
Cash flow from investments (49,075) (53,492) (50,000) (40,000)
Change in equity capital - 186 - -
Change in debt 28,995 15,963 30,000 30,000
Dividends paid 1,958 4,549 4,159 5,763
Interest paid 14,273 19,065 20,618 23,577
Cash flow from financing 12,722 (7,465) 5,222 659
Net cash flow 5,519 15,508 16,148 33,455
Opening cash balance 27,397 32,916 48,423 64,572
Closing cash balance 32,916 48,423 64,572 98,027

Financial Ratios

Y/E 31 Mar FY12 FY13E FY14E FY15E
Per share Ratios (Rs)

Basic EPS 50.0 66.7 64.4 86.3
Fully diluted EPS 50.0 66.7 64.4 86.3
Book value 751.7 742.5 789.7 852.2
Cash earnings per share 136.6 154.5 160.0 187.6
Dividend per share 7.5 16.1 14.7 20.4
Key Ratios

ROE 6.6 9.0 8.2 10.1
ROCE 9.8 10.3 9.3 10.6
ROIC 12.7 12.7 12.3 13.8
Gearing Ratio (x)

Debt-equity 1.2 1.2 1.3 1.3
Interest coverage ratio 2.7 2.3 2.1 2.3
Turnover Ratios

Asset turnover ratio (x) 0.9 0.9 0.8 0.8
Debtors (days) 16.5 15.0 15.0 15.0
Inventory (days) 74.9 80.0 80.0 80.0
Creditor (days) 184.8 185.0 185.0 185.0
Valuation (x)

P/E (Fully Diluted) 14.0 10.5 10.9 8.1
P/BV 0.9 0.9 0.9 0.8
EV/EBITDA 5.5 5.1 5.2 4.4
EV/Sales 0.9 0.9 0.9 0.8
M-cap/Sales 0.5 0.5 0.4 0.4

18




Notes

19




Notes

20




Upside >20% Buy
Upside between 0% and 20% Overweight
Downside up to 20% Underweight
Downside >20% Sell

Institutional Sales +91 22 6639 9153 / 58
Sales Trading +91 22 6639 9154
Research +91 22 6639 9136
HNI Desk +91 22 6639 9124

Disclaimer:
This report has been prepared by VIOLET ARCH Securities Pvt Ltd. VIOLET ARCH is regulated by the Securities and Exchange Board of India.
This report does not constitute a prospectus, offering circular or offering memorandum and is not an offer or invitation to buy or sell any securities, nor shall part, or all, of this presentation form the basis of, or be relied
on in connection with, any contract or investment decision in relation to any securities. The information, figures, graphs, charts, analysis and conclusions contained in this report are for information purposes only.
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content contained herein is suitable or appropriate to a recipients individual circumstances or otherwise constitutes a personal recommendation.
All investments accept risks and investors should exercise prudence in making their investment decisions. The report should not be regarded by the recipients as a substitute for the exercise of their own judgement. Any
opinions expressed in this report are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of VIOLET ARCH as a result of using different assumptions
and criteria. VIOLET ARCH is under no obligation to update or keep current the information contained herein.
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