JSW Steel (JSTL) reported consolidated 2QFY14 Ebitda of Rs 2,350 crore (c20% above street; 3% above HSBCe), led by strong volumes. However, an R850-crore forex loss (HSBCe of R480 crore) resulted in a net loss of Rs 115 crore (consensus NPAT of Rs v170 crore; HSBCe NPAT Rs 280 crore). The company announced that, by October, it had completely hedged its forex exposure on both coking coal acceptances and proportionate unearned export revenue, and hence large forex losses will not likely recur.
JSW Steel had so far treated forex loss as exceptional (below Ebitda line) following volatility in the rupee. The loss that flowed through the Income Statement predominantly related to payables for JSW Steel’s coking coal imports. Rupee depreciation leads to forex loss on raw material imports, but improves realisations (both exports and domestic). Whereas higher revenues were reported as usual item, higher raw material costs were treated as exceptional.
Net gearing is high. Cut rating to underweight. Consolidated net gearing (ex-acceptances) at c1.6x is high, given (a) our negative view on the global steel cycle and (b) that JSW Steel will have to, at some point, decide to write off its loss making US steel facilities.
Following the results, we have raised our JSW Steel FY14/15 Ebitda estimates by 4%/2% and adjusted for lower tax expense, lower capex and higher working capital, which cumulatively reduces our FY15 net-debt estimate by c8%.
We maintain our JSW Steel valuation methodology at FY15e EV/Ebitda of 5.5x which results in a higher price target of R745 (vs R595 earlier) and see a c13% downside to the current market price of R863.