2QFY2012 Result Update | Steel

October 22, 2011

JSW Steel
Performance Highlights

BUY
CMP Target Price
% chg (yoy) 33.5 30.6 (37)bp 43.7 1QFY2012 7,065 1,394 19.7 578 % chg (qoq) 7.9 (7.0) (273)bp 10.7

`580 `699
12 months

Y/E March (` cr) Net sales EBITDA EBITDA margin (%) Adjusted PAT

2FY2012 7,625 1,296 17.0 640

2QFY2011 5,713 992 17.4 445

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

Steel 12,951 1.4 1363/532 345070 10 16,786 5,050 JSTL.BO JSTL@IN

Source: Company, Angel Research

JSW Steels 2QFY2012 standalone net sales were in-line with our estimate, while adjusted net profit was higher than our estimate. We maintain our Buy recommendation on the stock. Better-than-expected performance: JSW Steel reported better-than-expected standalone numbers for 2QFY2012. Although JSW Steels crude steel production increased by 10.6% yoy to 1.7mn tonnes, production was lower by at least 0.5mn tonnes on account of shortage of iron ore. Despite lower production, standalone net sales grew by 33.5% yoy to `7,625cr, in-line with our estimate of `7,607cr. Net sales growth was driven by higher steel sales volumes (up 18.9% yoy to 1.9mn tonnes) as well as blended realizations (up 14.6% yoy to `42,831/tonne). However, EBITDA/tonne grew by only 9.9% yoy to `6,887 due higher raw-material costs. EBITDA increased by 30.6% yoy to `1,296cr. The company reported exceptional items related to forex loss of `513cr during the quarter. Adjusted net profit, excluding exceptional items, increased by 43.7% yoy to `640cr (higher than our estimate of `432cr). Outlook and valuation: We expect strong sales volume growth for JSW Steel in the coming three years on the back of higher utilization levels and aggressive brownfield expansion plans. We expect the company to reap the benefits of economies of scale on account of large-scale production, which should lower per unit cost of production. At the CMP, the stock is trading at 4.6x FY2012E and 3.4x FY2013E EV/EBITDA. We maintain our Buy recommendation on stock with a target price of `699, valuing it at 3.7x FY2013E EV/EBITDA. Key financials (Consolidated)
Y/E March (` cr) Net sales % chg Adj. net profit % chg Adj. EPS (`) OPM (%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 37.7 5.1 21.5 35.7

Abs. (%) Sensex JSW Steel

3m

1yr

3yr 57.1

(9.0) (17.2)

(32.2) (54.3) 116.5

FY2010 18,897 19.0 1,321 7.0 63.8 21.5 9.1 1.2 16.1 10.7 1.4 6.4

FY2011 23,900 26.5 1,754 7.3 78.6 20.4 7.4 0.8 14.3 10.9 1.0 5.0

FY2012E 32,667 36.7 1,643 5.0 68.3 17.0 8.5 0.8 10.0 10.1 0.8 4.6

FY2013E 41,440 26.9 2,818 6.8 117.1 19.6 5.0 0.7 15.3 14.6 0.7 3.4

Bhavesh Chauhan
Tel: 022- 39357800 Ext: 6821 bhaveshu.chauhan@angelbroking.com

Please refer to important disclosures at the end of this report

JSW Steel | 2QFY2012 Result Update

Exhibit 1: 2QFY2012 performance (Standalone)

Y/E March (` cr) Net sales Raw material % of net sales Power & fuel % of net sales Staff cost % of net sales Other expenditure % of net sales Total expenditure % of net sales Operating profit Other operating income EBIDTA EBITDA margin (%) Interest Depreciation Other income Exceptional items Profit before tax % of net sales Tax % of PBT Adjusted PAT
Source: Company, Angel Research

2QFY12 7,625 4,940 64.8 435 5.7 146 1.9 814 10.7 6,336 83.1 1,289 7 1,296 17.0 234 404 37 (513) 182 2.4 55 30.0 640

2QFY11 5,713 3,693 64.6 304 5.3 129 2.3 657 11.5 4,784 83.7 929 63 992 17.4 199 332 6 157 624 10.9 178 28.6 445

yoy% 33.5 33.8 43.1 13.3 23.9 32.4 38.7 (88.8) 30.6 17.6 21.5 477.4 (70.9) (69.4) 43.7

1QFY12 7,065 4,314 61.1 406 5.7 177 2.5 779 11.0 5,675 80.3 1,389 5 1,394 19.7 197 388 17 0 826 11.7 248 30.0 578

qoq% 7.9 14.5 7.3 (17.2) 4.5 11.6 (7.2) 47.0 (7.0) 19.2 4.1 118.2 (78.0) (78.0) 10.7

Exhibit 2: 2QFY2012 Actual vs. Angel estimates

(` cr) Net sales EBITDA EBITDA margins (%) PAT
Source: Company, Angel Research

Actual 7,625 1,296 17.0 640

Estimates 7,607 1,214 16.0 432

Variation (%) 0.2 6.8 104bp 48.2

October 22, 2011

JSW Steel | 2QFY2012 Result Update

Result highlights
JSW Steels crude steel production increased by 10.6% yoy to 1.7mn tonnes. However, production was lower by at least 0.5mn tonnes on account of shortage of iron ore. Despite lower production, standalone net sales grew by 33.5% yoy to `7,625cr, in-line with our estimate of `7,607cr. Net sales growth was driven by higher steel sales volumes (up 18.9% yoy to 1.9mn tonnes) as well as blended realizations (up 14.6% yoy to `42,831/tonne).

Exhibit 3: Higher sales volume...

2.0 1.6 120 90 60 30 0 (30)

Exhibit 4: coupled with higher realizations yoy...

50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 50

(mn tonnes)

1.2 0.8 0.4 0.0

(`/tonne)

25

(%)

(25)

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

Sales Volume (LHS)

yoy change (RHS)

Revenue/tonne (LHS)

yoy change (RHS)

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 5: ...aided net revenue growth of 33.5% yoy

9,000 7,500 6,000 60 50 40

(`cr)

2QFY12

3,000 1,500 0

20 10 0

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

Revenue (LHS)
Source: Company, Angel Research

yoy change (RHS)

Iron ore costs increased on account of shut down of captive mine, procurement through e-auctions and purchase from other states (which resulted in higher freight costs). Overall, the companys cost of production increased by 11.4% yoy to `33,666/tonne during the quarter. Hence, EBITDA/tonne grew by only 9.9% yoy to `6,887 due to rise in raw-material costs. EBITDA increased by 30.6% yoy to `1,296cr during the quarter.

October 22, 2011

2QFY12

(%)

4,500

30

(%)

JSW Steel | 2QFY2012 Result Update

Exhibit 6: EBITDA/tonne stood at US$148

250 200 160 140 120 100 80 60 40 20 0 (20) (40)

(US $/tonne)

150 100 50 0

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

EBITDA/tonne (LHS)
Source: Company, Angel Research

yoy change (RHS)

The company reported exceptional items related to forex loss of `513cr during the quarter. Consequently, net profit decreased by 71.5% yoy to `127cr. However, adjusted net profit, excluding exceptional items, increased by 43.7% yoy to `640cr (higher than our estimate of `432cr).

Exhibit 7: Adjusted net profit grew by 43.7% yoy

1,000 800 15 12 9 6 3 0

(` cr)

600 400 200 -

2QFY12

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

Adjusted net profit (LHS)

Source: Company, Angel Research

margin (RHS)

The company has now lowered its production and sales volumes estimates for FY2012 and FY2013 by 14.0% and 13.0% to 7.5mn tonnes and 7.8mn tonnes, respectively.

October 22, 2011

2QFY12

(%)

(%)

JSW Steel | 2QFY2012 Result Update

Investment rationale
Strong volume growth over FY2011-14: JSW Steel had expanded its capacity by
3.2mn tonnes during 1QFY2012, taking its total capacity to 11mn tonnes the benefits of which will be fully reflected in FY2013. Further, the company plans to expand its steel capacity in Vijaynagar plant from 10mn tonnes to 12mn tonnes by FY2014. Utilization levels to improve going forward: JSW Steels Vijaynagar plant operated at low utilization levels during 2QFY2012 on account of shortage/higher e-auction price of iron ore. However, we expect rationalization of e-auction prices going forward. Also, we expect improvement in iron ore supplies and, hence, higher utilization levels during FY2013. Savings due to low-grade ore usage: The commissioning of the beneficiation plant during FY2012 is expected to lower iron ore cost for the company. In case of rising iron ore prices, sourcing of low-grade iron ore fines is likely to reduce the impact of increasing iron ore costs.

Outlook and valuation

JSW Steels production continued to suffer in 2QFY2012; however, we expect utilization levels to improve as the company receives higher supplies from NMDC, which is ramping up its iron ore production in Karnataka. Further, lower coking coal prices (partially offset by INR depreciation) should benefit JSW Steels margins in 2HFY2012. With rise in production, we expect JSW Steels profitability to improve significantly during FY2013. We expect strong sales volume growth for JSW Steel in the coming three years on the back of higher utilization levels and aggressive brownfield expansion plans. We expect the company to reap the benefits of economies of scale on account of large-scale production, which should lower per unit cost of production. At the CMP, the stock is trading at 4.6x FY2012E and 3.4x FY2013E EV/EBITDA. We maintain our Buy recommendation on stock with a target price of `699, valuing it at 3.7x FY2013E EV/EBITDA.

October 22, 2011

JSW Steel | 2QFY2012 Result Update

Exhibit 8: Change in estimates

(` cr) Net sales EBITDA EBITDA margin (%) PBT PAT PAT margin (%) Earlier estimates FY12E FY13E Revised estimates FY12E FY13E Upgrade/(downgrade) (%) FY12E FY13E

30,254 42,558 32,667 41,440 5,210 16.0 2,250 1,534 5.6 7,641 18.0 4,037 2,764 6.5 5,543 17.0 2,410 1,643 5.0 8,132 19.6 4,118 2,818 6.8

8.0 6.4 97bp 7.1 7.1 (57)bp

(2.6) 6.4 167bp 2.0 2.0 31bp

Source: Company, Angel Research

Exhibit 9: EPS Angel forecast vs. consensus

Year (`) FY2012E FY2013E
Source: Bloomberg, Angel Research

Angel forecast

Bloomberg consensus

Variation (%)

68.3 117.1

62.3 95.7

9.6 22.4

October 22, 2011

JSW Steel | 2QFY2012 Result Update

Exhibit 10: P/E band

1,600 1,400 1,200 1,000

(`)

800 600 400 200 0 Apr-04 Feb-05 Dec-05 Oct-06 Aug-07 Jun-08 Apr-09 Feb-10 Dec-10 Oct-11 2x 7x 12x 17x

Source: Bloomberg, Angel Research

Exhibit 11: P/BV band

3,500 3,000 2,500

(`)

2,000 1,500 1,000 500 0 Apr-04 Feb-05 Dec-05 Oct-06 Aug-07 Jun-08 Apr-09 Feb-10 Dec-10 Oct-11 0.5x 1.5x 2.5x 3.5x

Source: Bloomberg, Angel Research

Exhibit 12: EV/EBITDA band

80,000 70,000 60,000 50,000

(` cr)

40,000 30,000 20,000 10,000 0 Apr-04 Feb-05 Dec-05 Oct-06 Aug-07 Jun-08 Apr-09 Feb-10 Dec-10 Oct-11 4x 6x 8x 10x 12x

Source: Bloomberg, Angel Research

October 22, 2011

JSW Steel | 2QFY2012 Result Update

Exhibit 13: Recommendation summary

Company SAIL Tata Steel JSW Steel CMP (`) Target price (`) Reco. Mcap (` cr) Upside (%) P/E (x) FY12E FY13E P/BV (x) FY12E FY13E EV/EBITDA (x) FY12E FY13E RoE (%) FY12E FY13E RoCE (%) FY12E FY13E

105 432 580

139 614 699

Buy Buy Buy

44,009 42,133 12,951

32 42 20

10.0 6.2 8.5

7.9 5.5 5.0

1.0 0.9 0.8

0.9 0.8 0.7

7.2 5.1 4.6

5.5 4.2 3.4

11.0 26.1 10.0

12.6 15.4 15.3

9.0 11.4 10.1

10.6 11.5 14.6

Source: Company, Angel Research

October 22, 2011

JSW Steel | 2QFY2012 Result Update

Profit & loss statement (Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net Sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT % chg Extraordinary Inc/(Expense) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) Extraordinary Expense/(Inc.) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E 13,554 17,064 20,151 25,868 1,209 111 44.9 6,244 2,342 392 3,478 28.4 28.2 742 2,736 23.8 22.2 573 261 10.8 2,424 26.6 2,424 766 31.6 1,658 (14) (4) 1,640 1,585 25.8 12.8 87.2 77.3 8.3 1,178 49 27.9 1,254 60 19.0 1,968 216 27.2 12,346 15,886 18,897 23,900 12,457 15,935 18,957 24,116 8,979 12,953 14,887 19,238 9,619 11,231 14,705 2,815 519 2,982 (14.3) 18.8 988 1,994 (27.1) 12.6 1,156 272 24.5 1,110 (54.2) (795) 315 73 23.0 243 12 21 275 804 (49.3) 5.1 41.2 38.2 (50.6) 3,176 480 4,071 36.5 21.5 1,299 2,772 39.0 14.7 1,108 128 7.2 1,792 61.4 408 2,200 647 29.4 1,553 11 33 1,598 1,321 64.2 7.0 68.8 63.8 67.1 3,895 637 4,879 19.8 20.4 1,560 3,319 19.7 13.9 945 68 2.8 2,442 36.2 2,442 782 32.0 1,659 71 24 1,754 1,754 32.8 7.3 78.6 78.6 23.3 35,084 2,417 32,667 103 32,770 35.9 27,002 20,436 5,717 849 5,543 13.6 17.0 1,976 3,566 7.5 10.9 1,257 100 4.2 2,410 (1.3) 2,410 771 32.0 1,639 4 1,643 1,643 (6.3) 5.0 73.6 68.3 (13.1) 44,507 3,067 41,440 105 41,546 26.8 33,076 24,746 7,252 1,077 8,132 46.7 19.6 2,507 5,625 57.7 13.6 1,608 100 2.4 4,118 70.9 4,118 1,318 32.0 2,800 23 (5) 2,818 2,818 71.5 6.8 126.3 117.1 71.5

October 22, 2011

JSW Steel | 2QFY2012 Result Update

Balance sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves & Surplus Shareholders Funds Share Warrants Minority Interest Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 18,105 3,074 15,031 5,771 783 470 4,121 471 910 2,739 4,706 (586) 21,469 22,389 4,080 18,309 9,585 783 397 5,093 509 1,243 3,341 8,263 (3,170) 25,904 26,792 5,339 21,453 6,956 899 628 5,470 303 1,604 3,563 8,073 (2,603) 27,334 187 7,702 7,889 192 12,136 1,252 21,469 187 7,617 7,804 273 16,550 1,277 25,904 187 9,070 9,257 219 16,173 1,685 27,334 223 15,777 16,000 529 236 16,474 2,049 35,289 32,684 6,873 25,811 6,508 1,093 2,914 9,565 2,048 2,157 5,360 10,601 (1,036) 35,289 241 17,179 17,420 529 231 17,474 2,049 37,704 41,751 8,850 32,902 1,440 1,093 2,914 10,428 2,199 1,960 6,270 11,073 (645) 37,704 241 19,757 19,997 529 236 18,574 2,049 41,386 47,751 11,357 36,394 1,340 1,093 2,914 11,383 1,174 2,486 7,723 11,739 (355) 41,386 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

October 22, 2011

10

JSW Steel | 2QFY2012 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (Inc.)/ Dec. in Investments (Inc.)/ Dec. in loans and adv. Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances 62 (9,789) 199 6,970 33 442 6,695 172 300 471 15 (5,841) 2,548 340 972 1,236 (12) 522 509 13 (2,932) 629 57 1,149 (576) (147) 450 303 53 (7,633) 5,936 401 240 1,001 5,096 293 1,755 2,048 (4,000) 17.5 1,000 241 777 151 2,048 2,199 23 (5,877) 1,100 241 859 (1,025) 2,199 1,174 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E 2,424 749 172 285 364 3,266 (9,611) (240) 315 988 2,678 874 262 4,592 (5,971) 115 2,200 1,299 (471) 793 459 3,361 (2,736) (209) 2,442 1,560 (1,314) 567 427 2,830 (7,674) (12) 2,410 1,976 (241) 771 3,374 (4,000) 4,118 2,507 (1,314) 1,318 3,993 (5,900) -

October 22, 2011

11

JSW Steel | 2QFY2012 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio (%) Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating RoE Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory (days) Receivables (days) Payables (days) WC cycle (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage 1.5 3.2 4.8 2.1 5.2 1.7 1.7 3.7 2.5 0.7 2.4 3.5 0.7 2.2 2.8 0.7 1.8 3.5 0.9 65 12 41 29 0.8 72 11 46 32 0.8 71 11 43 32 0.8 70 12 40 32 0.9 70 12 40 32 0.9 70 12 40 32 17.4 25.7 24.7 8.6 14.5 10.7 10.7 17.3 16.1 10.9 16.8 14.3 10.1 14.1 10.0 14.6 17.9 15.3 22.2 68.4 0.6 9.5 4.8 1.5 16.3 12.6 77.0 0.7 6.3 6.2 2.1 6.6 14.7 70.6 0.7 7.6 4.8 1.7 12.4 13.9 68.0 0.8 7.8 3.9 0.7 10.6 10.9 68.0 1.0 7.7 5.0 0.7 9.7 13.6 68.0 1.1 10.6 6.1 0.7 13.9 87.2 77.3 127.3 14.0 406.3 41.2 38.2 67.5 1.0 401.8 68.8 63.8 154.8 9.5 480.0 78.6 78.6 148.5 10.0 704.6 73.6 68.3 162.2 10.0 768.2 126.3 117.1 238.7 10.0 883.7 7.5 4.6 1.4 2.4 1.8 6.3 1.0 15.2 8.6 1.4 0.2 1.7 8.9 1.0 9.1 3.7 1.2 1.6 1.4 6.4 0.9 7.4 3.9 0.8 1.7 1.0 5.0 0.7 8.5 3.6 0.8 1.7 0.8 4.6 0.7 5.0 2.4 0.7 1.7 0.7 3.4 0.7 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

October 22, 2011

12

JSW Steel | 2QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

JSW Steel No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

October 22, 2011

13