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 Q3 2010 was INR 410 crore higher than expectations, driven by 100% YoY jump in volumes a better mix and lower per tonne costs.
Citigroup assumes 23% price decline in average iron ore prices in 2010, but an average hike of 8% in 2011 and 2% in 2012. For coking coal, Citigroup assumes 60% YoY price decline in 2010, but a 60% hike in 2011 and flat in 2012. The combination of higher prices and lower costs should help consolidated EBITDA margins to rise from 22% in 2009 to 24% in 2011 and 27% in 2012.
Citigroup values the standalone business at 6.5x March 11 EV/EBITDA. We value the other businesses at 3x EV/sales. We use 3x EV/sales as utilization levels at its US business are quite low at 25% to 30 % in 2011E. This gives a negative value resulting in a net target price of INR 1,027 per share. At our target price of INR 1,027, the stock would trade at a consolidated March 2011E EV/EBITDA of 6.9x and P/E of 9.3x.
(Sourced from Economic Times)
