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JSW Steel: New heights!

Feb 22, 2007

Performance Summary
JSW Steel, the only flat steel producer in southern India, announced robust results for the quarter ended December 2006. The 51% YoY growth in topline of the company has been achieved on account of higher sales volumes and better sales realizations. Though the operating costs headed northwards (increased by 39% YoY), the EBITDA margin witnessed expansion of 590 basis points (5.9%), primarily due to better sales realisations. The same effect has been passed on at the net level. The operating margin expansion and higher other income have led to a whopping 160% YoY growth net profits.

Financial performance snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net sales 15,225 23,015 51.2% 46,191 60,913 31.9%
Expenditure 10,862 15,048 38.5% 32,871 40,857 24.3%
Operating profit (EBITDA) 4,363 7,967 82.6% 13,320 20,056 50.6%
EBITDA margin 28.7% 34.6%   28.8% 32.9%  
Other income 27 64 135.2% 89 164 83.7%
Interest 904 1,107 22.4% 2,814 2,979 -90.9%
Depreciation 1,021 1,295 26.8% 3,043 3,484 14.5%
Profit before tax/(loss) 2,465 5,630 128.4% 7,552 13,757 82.2%
Misc. Expenses 157 270 72.2% 462 820 77.4%
Tax 916 1,738 89.7% 2,631 4,149 57.7%
Profit after tax/(loss) 1,392 3,622 160.2% 4,459 8,788 97.1%
Net margin 9.1% 15.7%   9.7% 14.4%  
No of shares (m) 147 157   147 157  
Diluted EPS (Rs)*         82.1  
P/E (times)         5.6  
*trailing twelve month earnings

What is the company's business?
The Company has a fully integrated steel plant with units spread across Karnataka and Maharashtra. The only flat steel producer in the southern region with a capacity of 2.5 MTPA uses Corex technology to manufacture steel. The company’s product mix consists of upstream products (mild steel hot rolled coils, plates and sheets) and downstream (Cold rolled and galvanised sheets and coils) products. JSW Steel Limited's downstream exports constitute more than 33% of India's total exports of galvanised products. The exports contribute to 75% of production to over 45 countries. The company’s products primarily cater to the automobile sector, appliances, storage tanks, pipes, general engineering, etc.

What has driven performance in 3QFY07?
Not only realisations: The sales realisations were higher by 22% YoY for HR coils, the major component of the company’s product mix. While the production of HR coils went up by 21% YoY, sales volume registered a robust growth of 49% YoY on account of boom in the automobile industry. Thus, volumes, improved realisations and better product mix have resulted in impressive performance during the quarter.

Costs under control: While the raw material cost as a percentage of sales has reduced, on a cost per tonne basis it increased by 8% YoY (considering crude steel production). The company, however, managed to lower power, fuel and other expenses on cost per tonne basis. This reduction in cost may be attributed to scale (production of crude steel increased by 28% YoY), reduction in fuel consumption and increased availability of captive power. The rising raw material costs have exerted downward pressure on operating margins. Had the raw material costs not zoomed up by 21% YoY on cost per tonne basis, the operating margins would have witnessed further expansion.

Cost break up (% of sales) 3QFY06 3QFY07
Consumption of raw materials 47% 48%
Staff cost 2% 2%
Power and fuel 6% 4%
Other expenditure 16% 12%
Total expenses 71% 65%

Highest ever net profits: The company achieved highest ever net profits during 3QFY07, registering a growth of 160% YoY. As mentioned earlier, the growth has been mainly achieved on account of better sales realizations and volume growth. The increase in interest outgo and depreciation costs was not felt during the quarter on account of operating margin expansion and higher other income.

What to expect?
At Rs 456, the stock is trading at a price to earnings multiple of 5.6 times its trailing twelve month earnings. The company has outlined expansion plans to increase its market share and achieve economies of scale. It plans to increase its total capacity from current 2.5 MTPA to 6.8 MTPA in next 3 years. With this, its value added products capacity will go up to 1.8 MTPA from the current level of 1 MTPA. For the expansion purpose the company has outlined Rs 60 bn investment of which Rs 20 bn will be by way of equity arranged by associate companies with independent financing arrangement and the a debt of Rs 40 bn. Thus, the current expansion plans are set to increase the debt burden of the company.

In the past the JSW Steel’s performance has not been very impressive. Thanks to the corporate debt restructuring programme and upturn seen in steel price cycle, the company’s margins have expanded. Though the company is trying to lower its costs and the same is visible during the current quarter, the increased finance costs and depreciation costs may temper margins. Thus, to that extent caution needs to be exercised.

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