JSW Steel's standalone revenue at Rs58.1bn grew 26% YoY due to increased volume (up 12% YoY) and improved realisation (up 13% YoY) on better product mix and higher steel prices. However, adj. EBITDA at Rs10.1bn declined 2% YoY as operating cost/t rose 20% YoY on higher iron ore and coking coal cost. PAT at Rs3.8bn grew 18% YoY on lower interest and tax outgo.

Q3 performance: Sales at 1.59mnt reached all-time high; Productmix improved with semis' share at 5% vs. 19% in Q3FY10. JSW Shoppe accounted for 22% of total sales at 344kt. However, EBITDA declined to Rs6,328/t, 7-qtr low as higher RM cost squeezed margin.

Inorganic growth focus: During the quarter, JSW acquired 39.3% stake in Ispat Inds. for Rs21.6bn, thereby increasing capacity by 3.3mn tpa. Further, the company has recently acquired assets of Bellary Steel for Rs2.1bn, consisting of 700 acres land and CWIP pertaining to 0.5mn tpa steel project (pls ref pg4 for details).

Financial leverage: Post investment in Ispat Inds and Bellary Steel, JSW Steel has Rs140bn of net debt, with a net D/E of 0.85.

Project updates: 3.2mntpa brownfield expansion on schedule for completion by Mar’11; shipment of captive iron ore (Chile) and coking coal (US) expected from Q1FY12. Further, JSW has announced brownfield 2.3mn tpa cold-rolling mill at a capex of Rs40.3bn.

OUTLOOK

Contract prices for Q4FY11 has settled at higher level due to increased spot prices. Coking coal spot price continues to strengthen, as floods in Australia disrupt supply. Although steel prices have also increased on cost push factors, we believe that raw material prices would exert further pressure on steel processing margin in FY12. We have changed our estimates for JSW Steel to factor in revised assumptions for steel prices & raw material cost

VALUATIONS AND RECOMMENDATION

While volume growth drivers for JSW Steel are in place (Ispat Inds and 3.2mn tpa expansion in near term, West Bengal project for future), we expect rising input cost to keep margins of JSW’s nonintegrated ops under pressure in FY12. However, at 5x FY12E EV/EBITDA, the CMP factors in the concerns. We maintain ‘BUY’ with a revised target price of Rs1,045 (5.5x FY12E EV/EBITDA).