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Steely Future

India's 4th largest integrated steel manufacturer, JSW Steel is on the verge of major expansions to cater to the steel sector. The company is set to become one of the industry's major players

An integrated steel producer, JSW Steel is expected to benefit from the upturn in the sector and join the big league

JSW Steel is India's fourth largest integrated steel manufacturer. The JSW Group's flagship company, JSW Steel is also the only Indian company that uses the corex as well as the blast furnace technology to produce steel. The company's upstream steel making facility is located in Vijaynagar, Karnataka, while the downstream one is in Maharashtra. JSW Steel's product portfolio ranges from MS slabs and hot rolled coils to value added products like galvanized coils/sheets and cold rolled coils/sheets. At present, JSW Steel is on the threshold of a major expansion plan of adding 3 million tonne (MT) to its current capacity of 3.8 MT by 2008 and a further 10 MT by 2010.

Indian Steel Outlook
The Indian steel sector has shown one of the highest growth rates in Asia, after China, with domestic production and consumption growing at a CAGR of 12.6 per cent and 9.3 per cent, respectively during the 2001-06 periods. And with the GDP growth rate of more than 8 per cent during this period the positive correlation between economic growth and steel consumption leaves little doubt about the growth trajectory of this sector. Globally as well, India is expected to boost its position by becoming the second largest steel producer by 2015-16. The steel ministry has set up a target of 124 MT capacity by 2012 & 200 MT by 2020. These proposed expansion plans would make the country the second largest steel producer by 2015-16 after China by displacing Japan and the US among others. These capacity expansions would entail an investment of Rs 8,70,640 crore by 2020 assuming investments of Rs 4000 crore per MT.

M&A To Throw Surprises
Mergers and acquisitions have been the flavour of the recent years and JSW Steel has been a player in this sphere as well. The company's recent acquisitions of a plate & pipe mill in the US and Southern Iron and Steel Company (SISCOL) are expected to throw positive surprises on its earnings. This would also create value for the company and ease concerns of expensive acquisitions.

In line with its aggressive inorganic growth strategy, JSW Steel acquired a 90 per cent stake in the US arm of Jindal Saw (JSAW). This acquisition was done at a combined enterprise value of $940 million. Going forward, it is expected that the performance of this company should improve further as JSW Steel would be able to transfer surplus MS slabs from its expanded capacity by FY10. This acquisition provides immediate access to customers in the high-end market of the booming oil & gas sector in North America. At the same time, the company also gets an opportunity to capture value addition from slabs to high-end products.

JSW Steel has also merged its group company SISCOL with itself by issuing a share swap. The merger of SISCOL would further enhance JSW Steel's product basket with the introduction of long products. In addition, we expect further positive surprises on the operational cost front as SISCOL would have 100 per cent captive coke facility (0.4 MT) and has an iron ore mine with estimated reserves of 180 MT. The company would also be self sufficient in power with the commissioning of a power plant along with the current capex.

Construction Activity To Grow
The ongoing and proposed road construction of both residential & commercial projects, airport privatisation, port development, power and river linking projects are fundamental long-term growth drivers for the industry. We expect accelerated spending in these areas to mute the demand cyclicality of the steel business. As a thumb rule, quantity of steel used in high-rise residential buildings comes to around 5-6 kg per sq ft whereas commercial complexes use more steel than residential ones at around 6-7 kg per sq ft. The burgeoning investments envisaged in infrastructure during FY07-12E are set to drive a major demand led boom in the steel sector.

Associated Risks
Steel as a commodity is subject to price fluctuations. Currently, the steel industry is in a cost-push environment due to the rise in prices of iron ore, coal, coke and the rising freight rates on jump of crude oil price. In addition, the shift from a fixed sum per tonne of ore structure to advalorem rates of royalty would further inflate prices. JSW Steel also faces execution risks in terms of capacity expansion, cost overruns and securing raw material backward linkages. JSW Steel has not undertaken simultaneous capacity expansion of such a scale and magnitude and any cost overruns in any of these may dampen its profitability and returns from these projects.

Financials & Valuations
It is expected that JSW Steel will double its turnover in FY10E. Higher share of value added products to 50 per cent in FY10E from current 35 per cent levels would help the company mitigate marginal decline in realisations anticipated across major product categories. It is also expected that the company would sustain its margins above 30 per cent during FY08-FY10E despite an inflationary raw material price scenario and likely pressure on steel companies to affect a proportionate cost pass on globally. However, positive surprises on securing raw material linkages and higher price realisations may further boost margins during our investment horizon. The net profit is also expected to grow two fold while the EPS growth will be a bit muted due to equity dilution. The capacity expansion should also improve its quality of earnings