For Q1FY2010, JSW Steel posted a marginal 6% y-o-y growth in its standalone topline to Rs3,894 crore (Rs3,671cr) mainly on account of the decline in average steel realisations led by the fall in steel prices during the quarter.
Average sales realisations fell by 34.4% y-o-y and 4.3% q-o-q to Rs29,499 during the quarter. However, strong volume growth of 62% y-o-y to 1.32mn tonnes (0.82mn tonnes) restricted the fall in topline.
Capacity expansions of 2.8 million tonnes helped the company deliver such a huge volume growth. Also, recovery in steel demand in India boosted the company’s sales volumes.
Management has maintained its earlier guidance of 78% volume growth to 6.1 million tonnes in FY2010E.
We have marginally increased our volume estimate for FY2010E from 5.14mn tonnes to 5.30 million tonnes, due to the better-than-expected Sales volume registered in Q1FY2010.
Following the recovery in steel demand in India, robust guidance given by management and the company’s aggressive marketing strategies, we have upgraded our FY2010E and FY2011E volume estimate by 3.4% and 2.8% to 5.3mn tonnes and 6.3 million tonnes, respectively.
We are also upgrading our Profit estimates by 42.8% and 33.7% for FY2010E and FY2011E, largely on account of:
1) Increase in sales volume estimates;
2) Higher Other Income due to income of Rs240 crore from gain on forex and FCCB buyback in FY2010E, almost 25% of our earlier Profit estimate;
3) Lower-than-expected other expenses; we have pruned out other expense estimate by 6% for FY2010E; and
4) Upward revision of price estimate by 6% for FY2011E, due to improved pricing scenario.
At Rs606, JSW Steel is trading at an EV/EBIDTA of 6.1x FY2011E EBIDTA and P/E of 7.5x FY2011E consolidated Earnings.
Assigning a mid-cycle EV/EBIDTA of 6x, we have arrived at a fair value of Rs582. Hence, we upgrade the stock from Reduce to NEUTRAL.