Reduce JSW Steel, target of Rs 197: IIFL

IIFL has recommended a reduce rating on JSW Steel with a target price of Rs 197 in its March 27, 2009 research report. “In our recent meeting with JSW Steel, management articulated its initiatives to tide over the current turbulence. Its strategy consists of: 1) reducing operating cost from USD 500/tonne in FY09 to USD 280/tonne in FY10; and 2) cutting its capex plan for FY10 to Rs 30 billion from Rs 55 billion earlier. At a price of USD 400/tonne for HR steel, the company estimates it will be able to meet its debt obligation as well as to meet its capex commitment.”

“JSW Steel’s estimate builds in 90% YoY growth in despatches, which in our view is an uphill task. Additionally, its assumption that HR steel prices will stay at the current USD 400/tonne leaves little margin of safety. A drop in steel prices below USD 400/tonne cannot be ruled out, as the expected fall in coking coal and iron ore price leads to a reduction in the industry’s production cost, while demand remains weak. A debt-to-equity ratio of 2.1x and EV/EBIDTA of 5.3x leaves little room for error. “REDUCE”, target price of Rs 197,” says IIFL’s research report.

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