3QFY2012 Result Update | Steel

January 31, 2012

JSW Steel
Performance Highlights

NEUTRAL
CMP Target Price
% chg (yoy) 35.3 20.9 (191)bp 74.8 2QFY2012 7,625 1,296 17.0 640 % chg (qoq) 3.1 (3.4) (106)bp 4.4

`698 -

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

3FY2012 7,860 1,253 15.9 668

3QFY2011 5,808 1,036 17.8 382

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 15,584 1.47 1,015/464 456574 10 17,194 5,199 JSTL.BO JSTL@IN

Source: Company, Angel Research

JSW Steels 3QFY2012 standalone net sales were in-line with our estimate, while adjusted net profit was higher than our estimate. However, given the recent rise in the stock price, we recommend Neutral on the stock. Utilization levels rise on a qoq basis: JSW Steels net sales grew by 35.3% yoy to `7,860cr (in-line with our estimate of `7,645cr) on the back of a 20.0% increase in steel volumes and a 21.4% increase in realizations. Capacity utilization improved to 84% at Vijaynagar plant in 3QFY2012, compared to 30-60% during 2QFY2012. However, EBITDA margin slipped by 191bp yoy to 15.9% due to rising input costs. The company reported a tax reversal of `141cr in 3QFY2012 compared to tax payable of `147cr in 3QFY2011, which resulted in adjusted net profit growing by 74.8% yoy to `668cr. Iron ore availability remains a concern: The company reported that its usable iron ore inventory at Vijaynagar plant is expected to last for the next 3-4 months. However, it opined that continuing steel production would remain a challenge until the mining ban is lifted in Karnataka. Outlook and valuation: JSW Steels steel plant utilization improved qoq in 3QFY2012 on the back of increased availability of iron ore. However, we believe that sustaining steel production at current levels would remain a challenge until the mining ban is lifted in Karnataka. At the CMP, the stock is trading at 5.8x FY2012E and 5.0x FY2013E EV/EBITDA, which fairly discounts the anticipated volume growth of JSW Steel. Further, given the recent rise in the stock price, we recommend Neutral on the stock. 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 5.2 20.2 36.8

Abs. (%) Sensex JSW Steel

3m (2.9)

1yr (6.2)

3yr 68.7 231.0

7.0 (22.9)

FY2010 18,897 19.0 1,321 7.0 63.8 21.5 11.0 1.5 16.1 10.7 1.5 7.0

FY2011 23,900 26.5 1,754 7.3 78.6 20.4 8.9 1.0 14.3 10.9 1.1 5.6

FY2012E 34,778 45.5 1,074 3.1 44.7 15.4 15.6 0.9 6.7 9.0 0.9 5.8

FY2013E 40,889 17.6 1,741 4.3 72.4 16.7 9.7 0.9 10.1 10.8 0.8 5.0

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

Please refer to important disclosures at the end of this report

JSW Steel | 3QFY2012 Result Update

Exhibit 1: 3QFY2012 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

3QFY12 7,860 5,167 65.7 439 5.6 150 1.9 868 11.0 6,624 84.3 1,236 17 1,253 15.9 282 444 1 (500) 27 0.3 (141) (522.9) 668

3QFY11 5,808 3,598 62.0 301 5.2 128 2.2 650 11.2 4,807 82.8 1,000 36 1,036 17.8 132 346 8 566 9.7 147 26.1 382

yoy% 35.3 43.6 46.0 17.7 33.6 37.8 23.6 (53.3) 20.9 113.5 28.3 (90.4) (95.2) (195.8) 74.8

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

qoq% 3.1 4.6 0.9 2.7 6.6 4.5 (4.1) 138.5 (3.4) 20.2 10.0 (97.9) (85.1) (358.7) 4.4

Exhibit 2: 3QFY2012 Actual vs. Angel estimates

(` cr) Net sales EBITDA EBITDA margin (%) Adj. PAT
Source: Company, Angel Research

Actual 7,860 1,253 15.9 668

Estimates 7,645 1,230 15.6 482

Variation (%) 2.8 1.8 34bp 38.5

January 31, 2012

JSW Steel | 3QFY2012 Result Update

Result highlights
Net sales rise on higher volumes and realizations: JSW Steels net sales grew by 35.3% yoy to `7,860cr (in-line with our estimate of `7,645cr). Net sales growth was driven by increased steel volumes (+20.0% yoy to 1.9mn tonnes) and realization (+21.4% yoy to `43,401/tonne). Capacity utilization improved to 84% at Vijaynagar plant in 3QFY2012 compared to 30-60% during 2QFY2012.

Exhibit 3: Higher sales volume...

2.4 2.0
(mn tonnes)

Exhibit 4: ...coupled with higher realizations yoy

60

1.6 1.2 0.8 0.4 0.0

4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12

30

(30)

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

50

(`/tonne)

(%)

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

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 35.3% yoy

10,500 9,000 7,500
(`cr)

3QFY12

60 50 40
(%)

6,000 4,500 3,000 1,500 0

4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12

30 20 10 0

Revenue (LHS)
Source: Company, Angel Research

yoy change (RHS)

Costs rise in-line with realizations: 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 17.3% yoy to `34,716/tonne during the quarter. Hence, EBITDA/tonne grew by only 2.9% yoy to `6,565 and EBITDA margin slipped 191bp yoy to 15.9% during the quarter, although EBITDA increased by 20.9% yoy to `1,253cr.

January 31, 2012

(%)

25

JSW Steel | 3QFY2012 Result Update

Exhibit 6: EBITDA/tonne stood at US$130

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

(US $/tonne)

150 100 50 0

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

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

yoy change (RHS)

Forex loss leads to a decline in reported PAT: The company reported exceptional item related to forex loss of `500cr during the quarter. The company also reported a tax reversal of `141cr in 3QFY2012 compared to tax payable of `147cr in 3QFY2011, which resulted in adjusted net profit growing by 74.8% yoy to `668cr (higher than our estimate of `482cr). Reported PAT, however, declined by 56.0% yoy to `168cr.

Exhibit 7: Adjusted net profit grew by 74.8% yoy

1,000 800 15 12 9 6 3 0

(` cr)

600 400 200 -

3QFY12

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

Adjusted net profit (LHS)

Source: Company, Angel Research

margin (RHS)

Strategic initiatives to turnaround associate, JSW Ispat: JSW Steel is setting up a 1mn tonne coke oven battery, 4mn tonne pellet plant and cold rolling mill in an SPV called Amba River Coke (fully owned subsidiary of JSW Steel). These projects would be set up at JSW Ispats Dolvi plant for a capex of `2,140cr to improve JSW Ispats operational and financial performance.

January 31, 2012

3QFY12

(%)

(%)

JSW Steel | 3QFY2012 Result Update

Investment rationale
Strong volume growth over FY2011-15: JSW Steel had expanded its capacity by 3.2mn tonnes during 1QFY2012, taking its total capacity to 11mn tonnes the benefits of this will be fully reflected in FY2013. Further, the company plans to expand its steel capacity at Vijaynagar plant from 10mn tonnes to 12mn tonnes by FY2014.
Utilization levels remain at risk: JSW Steels Vijaynagar plants utilization levels improved to 84% during 3QFY2012 (30-60% in 2QFY2012) on account of higher availability of iron ore. Currently, the companys current iron ore inventory is expected to last 3-4 months. However, until the ban is lifted or some of the clean mines are allowed to operate in the region, it will be challenging for the company to sustain steel production utilization at 3QFY2012 levels.

Outlook and valuation

JSW Steels production improved qoq in 3QFY2012 on the back of increased availability of iron ore in Karnataka. However, we believe that sustaining steel production at current levels would remain a challenge until the mining ban is lifted in Karnataka. At the CMP, the stock is trading at 5.8x FY2012E and 5.0x FY2013E EV/EBITDA, which fairly discounts the anticipated volume growth of JSW Steel. Further, given the recent rise in the stock price, we have a Neutral rating on the stock.

Exhibit 8: EPS Angel forecast vs. consensus

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

Angel forecast

Bloomberg consensus

Variation (%)

44.7 72.4

51.0 85.3

(12.4) (15.2)

January 31, 2012

JSW Steel | 3QFY2012 Result Update

Exhibit 9: 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 10: 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

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

January 31, 2012

JSW Steel | 3QFY2012 Result Update

Exhibit 12: Recommendation summary

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

102

- Neutral 510 Buy - Neutral

42,006 54,746 14,113

13 -

11.0 7.6 15.6

8.3 6.6 9.7

1.0 1.0 0.9

0.9 0.9 0.9

8.6 6.2 5.8

6.1 5.2 5.0

9.7 24.0 6.7

11.7 13.8 10.1

7.2 10.5 9.0

9.4 11.0 10.8

Tata Steel 451 JSW Steel 698

Source: Company, Angel Research

January 31, 2012

JSW Steel | 3QFY2012 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 1,070 (32.5) 6.7 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 1,190 11.2 6.3 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 47.4 7.3 78.6 78.6 23.3 37,351 2,574 34,778 103 34,881 44.6 29,293 22,302 6,086 904 5,363 9.9 15.4 2,104 3,259 (1.8) 9.4 1,336 100 4.9 2,023 (17.2) 2,023 647 32.0 1,375 (310) 9 1,074 1,074 (38.7) 3.1 48.2 44.7 (43.2) 43,914 3,026 40,889 105 40,994 17.5 33,839 25,621 7,156 1,063 6,817 27.1 16.7 2,474 4,344 33.3 10.6 1,407 100 3.3 3,037 50.1 3,037 972 32.0 2,065 (325) 1 1,741 1,741 62.0 4.3 78.0 72.4 62.0

January 31, 2012

JSW Steel | 3QFY2012 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 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 43,851 8,977 34,874 1,440 1,093 2,914 10,134 1,269 2,087 6,778 11,324 (1,190) 39,131 49,851 11,451 38,400 1,340 1,093 2,914 11,705 1,401 2,453 7,851 11,822 (117) 43,631 187 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 35,289 241 16,611 16,851 529.4 227 19,474 2,049 39,131 241 18,111 18,352 529.4 226 22,474 2,049 43,631 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

January 31, 2012

JSW Steel | 3QFY2012 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Others Direct taxes paid Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (Inc.)/ Dec. in Investments (Inc.)/ Dec. in loans and adv. Share of profit/(loss) from Asso. 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 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E 2,424 749 172 285 364 3,266 (240) 62 199 6,970 33 442 6,695 172 300 471 315 988 2,678 874 262 4,592 115 15 2,548 340 972 1,236 (12) 522 509 2,200 1,299 793 459 3,361 (209) 13 629 57 1,149 (576) (147) 450 303 2,442 1,560 567 427 2,830 (7,674) (12) 53 (7,633) 5,936 401 240 1,001 5,096 293 1,755 2,048 2,023 2,104 (625) 647 2,854 (6,100) (310) (6,410) 17 3,000 241 2,777 (779) 2,048 1,269 3,037 2,474 (941) 972 3,597 (5,900) (325) (6,225) 3,000 241 2,759 132 1,269 1,401

(471) (1,314)

(9,611) (5,971) (2,736)

(9,789) (5,841) (2,932)

January 31, 2012

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JSW Steel | 3QFY2012 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 0.9 2.9 2.4 1.0 2.7 3.1 0.9 65 12 41 29 0.8 72 11 46 32 0.8 71 11 43 32 0.8 69 12 40 36 0.9 70 12 40 34 0.9 70 12 40 34 17.4 25.7 24.7 8.6 14.5 10.7 10.7 17.3 16.1 10.9 16.8 14.3 9.0 12.3 6.7 10.8 12.9 10.1 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 9.4 68.0 1.0 6.6 5.1 0.9 8.0 10.6 68.0 1.1 7.7 4.6 1.0 11.0 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 48.2 44.7 142.5 10.0 742.0 78.0 72.4 188.9 10.0 809.2 9.0 5.5 1.7 2.0 2.0 7.0 1.1 18.3 10.3 1.7 0.1 1.8 9.6 1.1 11.0 4.5 1.5 1.4 1.5 7.0 1.0 8.9 4.7 1.0 1.4 1.1 5.6 0.8 15.6 4.9 0.9 1.4 0.9 5.8 0.8 9.7 3.7 0.9 1.4 0.8 5.0 0.8 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

January 31, 2012

11

JSW Steel | 3QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
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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%)

January 31, 2012

12