Goldman bullish on JSW Steel as valuation shines

[caption id="attachment_10950" align="alignright" width="380" caption="Broking firms Goldman Sachs and Bank of America Merrill Lynch recommend 'buy' for the stock due its attractive valuation. Reuters"][/caption]

JSW STEEL

Broking firm - Goldman Sachs

Rating - Buy

Current price - Rs 910

Target price - Rs 1,140

JSW Steel results have positively surprised Goldman Sachs. Key points of the report:

•Consolidated net income of Rs 7,900 crore, 36% above expectation EBIDTA (earning before interest depreciation tax depreciation and amortization) of Rs 16,600 crore, 20% above expectation.

• EBITDA/tonne of $210 against expectation of $200.

• Iron ore mining in Chile and coking coal mines in the US commenced in fourth quarter.

• Ispat Industries turned around in the first quarter post acquisition with capacity utilization of 88%, EBIDTA of Rs 410 crore and profit of Rs 70 crore.

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• New furnace at Vijaynagar to be commissioned by June 2011. The board approves a capacity expansion of 2 million tones in Vijaynagar. Net debt/equity of consolidated entity is at 0.84 times.

Recommendations

• EPS (earning per share) lowered by 14% for FY12 and 10% for FY 13 on lower utilization of its US facility

• 12-months price target revised to Rs 1,140

• Buy rating reiterated on attractive valuations.

• JSW is attractively positioned with sector's leading volume growth in FY12, improving upstream integration and leverage of steel pricing.

• Company trades at 1.1 times financial year 2012 (FY12) price to book value with a 12% ROE (return on equity) versus the sector average of 17%

Broking firm- Bank of America Merrill Lynch

Rating- Buy

Current price - Rs 910

Target Price - Rs 1,140

Key takeaways from the results

• Standalone profit grew 118% (quarter-on-quarter) to Rs 830 crore against the firms expectation of Rs 630 crore.

• Margins have peaked; expect headwinds from lower steel prices and higher coal costs. Cost savings may cushion impact partially.

• Remain positive for medium term as expected volume growth is 23% and EPS growth is 37% over the next two years

• The company's recent acquisition, Ispat is facing gas supply issues which may hurt output. However, gains from cost saving initiatives and synergies likely to come through over next few quarters. Expect EBIDTA per tonne of $68 for FY12

• JSW expects higher coal costs ($105/tonne quarter-on-quarter) from May as it had low-cost inventory.

• JSW expects steel sales of 9 million tones (including Ispat transfers) in FY12.

• Shipment from Chile mines have started.

Recommendations

• Though steel prices are expected to correct in near term, strong volume growth and deleveraging of balance sheet could drive EPS by 44% over next two years.

• There could be potential upside from proposed raw material projects.

• Reiterate 'Buy' with a price target of Rs 1,140