JSW Steel has decided to put on hold its 3.2m tonnes steel plant, scheduled for commissioning in 4QFY10. We believe that the management has done this in response to the current weak demand for steel and the ongoing credit crunch.
The 2.8m tonnes plant, which has been ready for commissioning since September 2008 has also not yet been commissioned. We believe that the 2.8m tonnes plant will not be commissioned before April 2009 as demand for steel continues to remain weak.
The company has also put on hold the ongoing mine developments in Chile and Mozambique with a sharp correction in raw material prices.
We believe that annual contract prices for iron ore will correct by 20% and coking coal by 57% in FY10 (refer to Asia Steel note dated 6 November, 2008).
We estimate that with lower raw material costs, the cash cost of production for HRC will tend toward USD400/tonne. Steel prices will continue to remain under pressure as consumers will demand that steel producers pass should pass on the benefit of lower costs.
We lower our HRC price assumption for JSW to $732/tonne from $829/tonne for FY09 and to $500/tonne from $750/tonne for FY10. We also reduce our sales volume assumption for FY09 and FY10 by 29%.
We believe that the 2.8m tonnes will run at low capacity utilization in FY10 as demand will continue to remain weak. This lowers our FY09 estimates by 2.7% and that FY10 EPS by 51.0%.
We believe that JSW will incur losses in 4QFY09 as its annual coking coal contract continues until March 2009 and steel prices remain under pressure.
We continue to value JSW Steel at 4.0x our FY10 EPS estimate of Rs34.50. We are reducing our target price by 50.7% to Rs138 to account for a 51% decline in FY10 EPS estimate.
Our TP implies a P/BV of 0.4x for FY09, which in our opinion is trough valuation for JSW. We would turn positive on the stock when we see improvement in steel demand and higher off-take for the company.