28 July 2012
1QFY13 Results Update | Sector: Metals
JSW Steel
BSE SENSEX
16,839
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
S&P CNX
5,100
JSTL IN
223.1
885/464
-3/0/-17
143.7
2.6
Consolidated
CMP: INR644
TP: INR542
Sell
JSW Steel 1QFY13 adjusted standalone (s/a) PAT increased 16% YoY to INR6.6b (above est.) due to higher
realization and lower tax rate. Reported s/a PAT of INR2.69b was affected by forex loss of INR5.9b. Consolidated
adjusted PAT declined 19% YoY to INR3.9b. Reported consolidated PAT was INR497m, which also included
INR1.5b share in loss of JSW Ispat. Subsidiaries together contributed profit of INR1.4b to EBITDA and loss of
INR6.4b to PBT.
Net Sales grew 28% YoY to INR90.4b driven by 4% higher realization and 23% higher volumes. Sales volume
declined 9% QoQ to 2.19mt. EBITDA/t increased 8% QoQ to USD154/t. Blended realization increased 4% QoQ
to INR42,853 due to better sales mix.
Sourcing iron ore is still a challenge in view of delay in reopening Karnataka mines. 3.2mtpa of pending
delivery of purchased iron ore in E-auction, NMDC, outstanding inventories at mines may be able to support
production until March 2013.
Steel demand remains weak. Although INR depreciation against USD is helping realization, yet imports continue
to rise. We believe changing demand and supply equation of iron ore and heavy investment in pelletization
capacities across India will narrow the spread between prices of steel and iron ore fines.
We have regrouped acceptances in net debt across all companies under our coverage to create comparable
valuations. As such, this is another source of short term funding. Thus, the net debt as on March 31, 2012 is
INR266b. Stock is trading at FY14E EV/EBTIDA of 6.9x. Maintain
Sell.
Sanjay Jain
(SanjayJain@MotilalOswal.com); +9122 39825412/
Pavas Pethia
(Pavas.Pethia@MotilalOswal.com); +9122 39825413
Investors are advised to refer through disclosures made at the end of the Research Report.

JSW Steel
Standalone PAT increased 16% YoY; Realization helped by product mix
JSW Steel 1QFY13 adjusted standalone (s/a) PAT increased 16% YoY to INR6.6b
(above est.) due to higher realization and lower tax rate. Reported s/a PAT of
INR2.69b was affected by forex loss of INR5.9b.
Consolidated adjusted PAT declined 19% YoY to INR3.9b. Reported consolidated
PAT was INR497m, which included INR1.5b share in loss of JSW Ispat and INR5.9b
of forex loss. Subsidiaries together contributed profit of INR1.4b to EBITDA and
loss of INR6.4b to PBT.
Net Sales grew 28% YoY to INR90.4b driven by 4% higher realization and 23% higher
volumes. Realization increased 4% QoQ to INR42,853 as well aided by product mix.
Sales volumes were up 23% YoY (declined 9% QoQ) to 2.19mt. EBITDA/t increased
8% QoQ (down 16% YoY) to USD154/t as revenue benefited from currency
depreciation.
Cost of iron ore has increased INR350/t YoY but the consumption ratio has
increased to 2.1x leading to higher increase in cost on per ton of steel basis. Poor
quality of iron ore has increased the coke consumption rate by 50kg/thm. However,
these cost hikes were not seen in per ton of raw material costs w.r.t. 4QFY12.
JSW redeemed FCCB totaling USD391.85m (including redemption premium)
through funds from ECB of USD225m and USD166.85m of internal accruals.
American assets still underperforming
Together all subsidiaries contributed (net) INR1.4b to consolidated EBITDA and
loss of INR6.2b to consolidated PBT.
US plate and pipe utilization remains low at 39% and 16% respectively and
contributed USD6.5b of EBITDA.
Chile iron ore mine delivered 34kt iron ore and EBITDA of USD8.5m.
US coal mines could deliver only 9kt. Permits for other mines are still under
progress
JSW Ispat produced 690kt of HRC and delivered 740kt of products. The attributable
loss was INR1.5b.
FY12
1Q
2Q
3Q
4Q
FY13
1Q
FY12
US Pipe & Plate mill (USD m)
Y/E March
Operational performance
Plate mill
Production (tons)
Sales (tons)
Pipe mill
Production (tons)
Sales (tons)
Capacity utilization (%)
Plates
Pipes
Financials (US operations)
Revenues
EBITDA (incl. oth inc)
PBT
PAT
56,815
46,875
8,986
9,716
23.2
6.4
62
3
-9
100,811
68,818
16,855
16,369
37.0
12.0
101
6
-8
65,959
66,309
17,785
17,444
27.0
12.7
94
4
-10
108,183
65,795
22,541
24,482
44.3
16.1
105
43
28
98,000
69,000
22,000
22,000
39.0
16.0
331,768
247,797
66,167
68,011
32.9
11.8
362
56
6
1
Source: Company/MOSL
2
28 July 2012

JSW Steel
Normal production till March, 2013
Management believes that they can continue to operate normally till March, 2013
without additional supply from reopening of Category A&B mines.
Out of the 15.6mt (Total auctioned iron ore 25.7mt) procured by JSW through e-
auction, 80% of Iron ore has already been received till June, 2012. Therefore 3.2mt
of additional supply is expected now. Additional ~2.5mt of iron ore stock is yet to
be auctioned of which JSW expect to get ~1.5mt iron ore.
NMDC is current producing at monthly run rate of 0.7-0.8mt will result in additional
supply ~ 4mt for JSW (assuming 60% share) till March,2012.
Together it had 8.7 mt of iron ore is available excluding any incremental volumes
from reopening of mines. Taking current consumption ration of ~2.1x per ton of
steel this will support ~4.2mt of production.
Valuation and view
Steel demand remains weak and there is pressure on pricing. Although INR
depreciation against USD is helping realization, yet imports continue to rise. Steel
imports have already seen significant jump of 42% YoY to 2mt in 1QFY13 due to
supplies from FTA countries (Japan and South Korea) and Russia and Ukraine. We
believe Indian steel producers will have to resort to more aggressive pricing to
prevent imports as domestic market is more lucrative as compared to exports.
The loop holes in recently hiked import duty from 5% to 7.5% on flat products
have now been plugged by customs.
JSW Steel has to additionally live with deteriorating quality of iron ore from e-
auction in Karnataka, which has increased the coke rate, reduced the campaign
life of equipment and resulted in lower effective capacity due to higher slag rate.
JSW Steel is hopeful that few mines will start operation in August once Supreme
Court grants permission in next hearing on 3rd August. 7 Category A and 3 Category
B mines have received R&R approval. In our view, the actual production will take
longer. Coking coal cost may be lower as international prices are weakening.
We believe steel prices will be under pressure due to global demand slow down.
Due to changing demand and supply equation of iron ore and heavy investment in
pelletization capacities across India, we believe the spread between prices of
steel and iron ore fines will narrow over 2-3 years as was seen between lump ore
and steel in last 2-3 years. As a result, margins of non-integrated steel producers
like JSW Steel will come under pressure.
We have regrouped acceptances in net debt across all companies under our
coverage to create comparable valuations. As such, this is another source of short
term funding. Thus, the net debt as on March 31, 2012 is INR266b. The actual value
of net debt is higher by INR13.2 after considering forex loss on un-hedged forex
liabilities of USD3b. Only INR5.9b has been accounted in the P&L, while the rest
goes to fixed assets and some to interest account as per recent modifications in
accounting standards. Since our economics team believes that INR will appreciate
to 52 against USD by end of FY13, we are treating the forex loss temporary in
calculations of debt for FY13.
Stock is trading at rich FY14E EV/EBTIDA of 6.9x. Despite operational difficulties,
the CapEx program remains strong with a target of INR63b in FY13. We are
concerned about significant leverage and uncertainty regarding sourcing of iron
3
28 July 2012

JSW Steel
ore. A potential merger with JSW Ispat will further strain the balance sheet
although there will be tax synergies on account of accumulated losses at the
balance sheet of later. We maintain Sell with a target price of INR542 based on
SOTP. The core EBITDA is valued at FY14 EV/EBITDA of 5x in the SOTP. We continue
to have great trust in execution skills of JSW Steel and give full value to CWIP in
our SOTP.
Target price calculations
Year
EBITDA
Target EBITDA multiple
Target EV
less: Net Debt (Rs m)
add: value of JSW Ispat
add: CWIP
Residual equity value
No. of shares
Target price
2012
61,019
6.5
396,623
265,860
21,570
35,703
188,036
223
843
2013E
65,408
5.5
359,745
282,214
21,570
55,703
154,804
223
694
2014E
64,245
5.0
321,225
297,535
21,570
75,703
120,963
223
542
Source: Company/MOSL
Capex programs remain strong
Project
20mtpa Beneficiation Plant –II
5mtpa HSM-II
CRM–I
CRM–II
3rd Stove BF
4th Stove BF
Coke oven (Dolvi)
Expected Commissioning Date
September 2012
2HFY13
2HFY14
FY15
2QFY13
3QFY13
FY14 End
Source: Company/MOSL
28 July 2012
4

JSW Steel
JSW Steel: an investment profile
Company description
JSW Steel (JSTL) has demonstrated excellent project
execution skills over the past decade, growing its
capacity 6x to 10mtpa through brownfield expansions at
Vijaynagar. With the acquisition of Ispat Industries and
Salem Steel, it controls 14mtpa capacity. Its main
production facilities are located in proximity to rich iron
ore reserves at Karnataka. It has investments in iron ore
mining in Karnataka and Chile. Its other overseas
investments include plate and pipe mill operations and
coal mines in the US.
Recent developments
7 Category A and 3 Category B mines have received
concordance for Rehabilitation and Reclamation
Program from CEC and are awaiting Supreme Court
permission.
Valuation and view
The stock is trading at FY14E EV/EBTIDA of 6.9x.
Maintain
Sell.
Sector view
Steel prices have declined across major geographies
in 1QFY13 with major drop in the month of June,
2012. The decline is most severe in China where
prices are at their two year low levels. However
Indian prices so far have avoided similar correction
due to support from rupee depreciation.
We expect steel prices to correct, going forward, on
account of slowdown in domestic demand and some
reversal in the INR depreciation against the USD.
According to World Steel Association Global crude
steel production declined 2.5% MoM (flat YoY) to
127.9mt in June driven by decline of 2% in China, 3%
in CIS, 4% in Europe and 6% in North America.
Key investment arguments
JSTL has the lowest conversion cost due to
operational efficiencies. Its strategic location near
iron ore rich Bellary-Hospet belt helps it to keep iron
ore purchase costs low; however, the ban on iron
ore mining at Bellary and subsequent unavailability
of adequate quantity at lower costs has derailed
volume growth.
Due to heavy investment in pelletization capacities
across India, we believe the spread between prices
of steel and iron ore fines will narrow over 2-3 years.
Key investment risks
Weaker than 52 INR/USD rate will result in higher
realization and earnings.
EPS: MOSL forecast v/s consensus (INR)
JSW Steel
SAIL
9.2
10.7
0.8
0.8
1.1
1.3
6.9
8.5
Tata Steel
13.3
7.9
1.4
1.3
0.7
0.7
6.9
6.4
FY13
FY14
12.7
13.0
0.8
0.8
1.2
1.1
6.5
6.9
MOSL
Forecast
50.7
49.4
Consensus
Forecast
77.1
97.0
Variation
(%)
-34.2
-49.1
Comparative valuations
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY13E
FY14E
FY13E
FY14E
FY13E
FY14E
FY13E
FY14E
Target price and recommendation
Current
Target *
Price (INR)
Price (INR)
644
542
Based on EV/EBITDA of 5xFY14
Upside
(%)
-15.8
Reco.
Sell
Stock performance (1 year)
Shareholding pattern (%)
Promoter
Domestic Inst
Foreign
Others
28 July 2012
Jun-12
38.6
4.7
41.3
15.3
Mar-12
38.5
4.7
41.7
15.2
Jun-11
38.3
4.8
45.4
11.5
5

JSW Steel
Financials and Valuation
28 July 2012
6

JSW Steel
N O T E S
28 July 2012
7

JSW Steel
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JSW Steel
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28 July 2012
8