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Monday, April 6, 2009

JSW Steel Ltd:-One of the hottest bet in the steel sector

Scripscan:JSW Steel Ltd
cmp:300
Traded in:Nse-bse

Story:The company has huge expansion plans for the future and looks fundamentally strong. Investors with a horizon of around four years are advised to buy this stock at the current level.

BUSINESS :JSW Steel is the thirdlargest domestic steel producer.The company has a steel production capacity of 4.8 million tonnes per annum (mtpa).One-third of its revenue comes from steel exports, while the domestic market accounts for the remaining. The company, which aims to grow its global footprint, acquired a steel pipe and plate mill in the US last year with 1.75-mt capacity. It has also set up a joint venture to manufacture 175,000 tonnes of steel per annum in Georgia.

GROWTH PLANS :The company has an ambitious plan to more than double its capacity to 11 mtpa by ’10 through the brownfield expansion of its Vijayanagar plant in Karnataka.It is also setting up a greenfield project to produce 6 mtpa of steel slabs in West Bengal. The 11-mtpa capacity will be achieved in two phases.The total capital investment required for this is around Rs 20,000 crore (to be financed through a debt-equity ratio of 65:35), out of which, around Rs 5,000 crore has already been spent in the current financial year. The remaining Rs 15,000 crore will be spent over the next three years.To make sure that there is uninterrupted and cheap supply of raw materials, JSW Steel has acquired iron ore and coking coal mines abroad. Currently, it has 25% self-sufficiency in iron ore, but does not have any captive coking coal mines. Going forward, the company intends to have 75% self-sufficiency in iron ore and 50% in coking coal.JSW Steel is also setting up a 20-mt capacity beneficiation plant, which will be commissioned in two phases.

FINANCIALS : Even though JSW Steel is not fully integrated, it has an attractive operating margin of 30% compared to integrated peers like Tata Steel and Steel Authority of India (SAIL), which have operating margins of 37% and 28%, respectively. JSW Steel’s return on capital employed (RoCE) is around 26%, which is on the lower side compared to its peers. Its gearing ratio of 0.28 is quite low and it also has a high interest coverage ratio of around 30. This puts it in a comfortable position to raise further debt for its future expansion plans.

VALUATIONS: The company’s topline will grow on account of higher volume and sales realisation. At the same time, its higher input costs will eat away a significant portion of the higher price. Hence, its operating margin is expected to remain almost constant. The earnings per share (EPS) for FY10 is estimated at Rs Rs 150, respectively. At the current price level of Rs 300, this translates into forward P/E multiples of just 2x. This is on the lowest side compared to the average industry P/E of 6-8. Hence,investors are advised to add the stock to their portfolio.

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