Citigroup on JSW Steel

Citigroup rates JSW Steel with a `Buy’/`Medium Risk’ rating based on the positive Indian steel outlook, strong volume growth and less balance sheet stress. JSW Steel’s adjusted PAT for Q3FY10 was Rs 410 crore, higher than expectations, driven by a 100% y-o-y jump in volumes, a better mix and lower per tonne costs. Citigroup assumes a 23% price decline in average iron ore prices in FY10, but an average hike of 8% in FY11 and 2% in FY12. For coking coal, Citigroup assumes a 60% y-o-y price decline in FY10, but a 60% hike in FY11 and flat in FY12. The combination of higher prices and lower costs should help consolidated EBITDA margins to rise from 22% in FY09 to 24% in FY11 and 27% in FY12. Citigroup values the standalone business at 6.5x EV/EBITDA. We value the other businesses (mainly represented by US pipe and plate operations) at 3x EV/sales. We use 3x EV/sales as utilisation levels at its US business are quite low at 25-30% in FY11E. This gives a negative value resulting in a net target price of Rs 1,027/share. At our target price of Rs 1,027, the stock would trade at a consolidated March 2011E EV/EBITDA of 6.9x and P/E of 9.3x.