JSW Steel’s stock price has rallied 57% in the past one month. The run-up has been propelled by company’s strong production performance in Q4 FY09 and a 57% cut announced in coking coal contract prices globally.
However, at the current market price, we believe that JSW is significantly overvalued. Our belief is based on following rationale:
1) Company is set to miss its production target in FY10E
2) US operations would remain in doldrums in the medium-term and would require cash infusion to stay afloat
3) Lower-than-expected internal cash generation and debt repayment would constrain planned capex in FY10
4) Further dilution in balance sheet strength has now become a fair possibility.
At Rs331, the stock trades at FY10E P/E and EV/EBIDTA of 5.5x and 4.7x respectively, which is at premium to domestic peers.
Though we upgrade target price to Rs227, we retain SELL on the counter.