JSW STEEL : A Growth potential Stock !!!

Scrip Code: 500228 / JSWSTEEL

CMP:  Rs. 882.55; Buy at Rs. 865 - 875 levels ; Short term Target: Rs. 915, 6 month Target – Rs. 1150; STOP LOSS – Rs. 812.00; Market Cap: Rs. 19,674.47 cr; 52 Week High/Low: Rs. 1400.00 / Rs. 750.85 ; Total Shares: 22,31,17,200 shares; Promoters : 8,41,43,661 shares –37.71 %; Total Public holding : 13,89,73,539 shares –62. %; Book Value: Rs. 421.41; Face Value: Rs. 10; EPS: Rs. 90.12; Div: 95 % ; P/E: 9.78 times; Ind P/E: 10.67; EV/EBITDA: 6.46.

Total Debt: Rs. 14,160 Cr; Enterprise Value: Rs. 33,834.47 cr.

FAIR VALUE – Rs.1,516.00 .  

JSW Steel Limited (JSW) is an India-based company engaged in the business of production & distribution of iron and steel products. The company has two primary business segments, Steel and Power (used mainly for captive consumption). The Company's products include hot-rolled coils/steel plates/sheets, rolled products (long), cold-rolled coils/sheets, galvanized plain/corrugated/color coated coils/sheet, steel billet, and bars and rods. The Company has an installed crude steel making capacity of 7.8 metric tons per annum (MTPA) in India, consisting 23% of value-added flat products (capacity of 1.8 MTPA), spread across four locations, which are Vijayanagar Works in Karnataka, Salem Works in Tamil Nadu, and Vasind and Tarapur Works in Maharashtra. In January 2011, it bought assets of Bellary Steel.

Investment Rationale

Ispat will be a positive surprise in December 21st, 2010, JSW STEEL acquired 41.29 % of ISPAT IND for Rs. 2157 Cr; Ispat will be renamed as JSW Ispat Steel. JSW to get 108.66 crore equity shares of Ispat on a preferential basis at Rs. 19.85/sh totaling to Rs. 2,157 Cr. JSW has made an open offer for an additional 20% to the minority shareholders of Ispat at a marginal premium of Rs. 20.54, which would be an additional spending of around Rs. 1,200 Cr. This deal will not only make Jindal the largest private sector steelmaker by capacity in India, but it will also bring Ispat back to the profit path after its debt of Rs. 7,500 Cr is refinanced and Rs. 3,100 Cr injected into the company as capital expenditure. With the start of Chile shipments, Ispat industries have posted a net profit of Rs. 70 Cr for Q4FY11, with EBITDA/ tonne of Rs. 5700. This has been a positive surprise and could be achieved because of better realizations of Rs. 40,700/ tonne and one time tax benefit to the tune of Rs. 35 Cr. Japan’s 2nd largest steelmaker JFE has acquired 14.99% stake in JSW (on a fully diluted basis) at Rs. 5,410 cr @Rs1,500/share. The current stake of 16.17% will come down to 14.99% after the conversion of 1.75 Cr warrants by JSW’s promoters. This has helped JSW in bringing down its financial leverage to a manageable level & to meet its funding requirements for the many growth projects in the pipeline. It is believed that technological collaboration with JFE would help JSW to improve product mix & to achieve further operational efficiencies, leading to EBITDA/tonne expansion. JSW has received all permits for coking coal sales in US and expects 0.5mnt shipment in FY12. Company also plans to increase Vijayanagar capacity by 2.0mntpa through debottlenecking at an attractive capital cost of US$ 300/tonne. JSW Steel and Essar Steel have hiked prices of flat products by up to Rs. 600–1,000/tonne with effect from June 1, 2011, on account of higher raw-material costs. 1QFY2012 benchmark coking coal contracts have been settled at US$330/tonne due to floods in Australia, and 2QFY2012 contracts have been settled at higher levels of US$315/tonne. In case of iron ore, 1QFY2012 contracts were settled higher by 20%, while 2QFY2012 contracts are expected to remain flat vs. 1QFY2012. On the other hand, steel companies may not hike long product prices as the monsoon season is approaching, when construction activity slows down

Outlook & Valuation:

The company has a net debt of Rs. 14,160 Cr and a cash balance of Rs. 2300 Cr as on 31st March 2011. The consolidated D/E remains at 0.84. The company has repaid Rs. 450 Cr and drawn Rs. 760 Cr new debt during FY11. Raw material as percentage to sales has been lower during the quarter, as the company has been using its comparatively low priced coking coal inventory. The scenario however is not likely to remain same in the short to medium term, as the macro economic situation in the country has been getting more challenging with rise in inflation and interest rates.  This would put pressure on margins. Steps by Karnataka government and other concerned authorities to stop illegal mining in the state may also proved to be negative for the company, as that might restrict availability of low grade fines at a cheaper price. On the positive side, contribution form Chile iron ore mines are likely to visible during FY12. The sales volume of 0.8 mt and 1 mt for FY12 and FY13 respectively from Chile are considered. Company is expecting 0.5 mt coking coal from US during FY12. Despite some pain in the short to medium term it can be expected that the stock has a potential to outperform on a longer term basis backed by strong volume growth and higher integration. The company has indicated its seriousness in having stronger backward integration even by acquisition of mines if available at a right price. At the CMP of Rs. 882.55, the stock is trading at 7.18 x FY13E EPS and 5.1 x FY13E EV/EBITDA. Looking at the positives and concerns, the value of the company comes at Rs. 1,500/ share which I believe is a fair value of the stock.

KEY FINANCIALS	FY09	FY10	FY11E	FY12E
SALES (Rs. crs)	19,073.80	24,116.10	37,073.20	37,713.30
NET PROFIT (Rs. crs)	1,597.60	1,754.00	2,583.00	2,953.30
EPS (Rs.)	71.60	78.60	107.40	122.80
PE (x)	12.90	11.70	7.80	7.50
P/BV (x)	1.90	1.40	1.00	1.20
EV/EBITDA (x)	7.50	7.30	4.10	5.20
ROCE (%)	17.80	11.70	14.70	15.50
RONW (%)	7.20	6.90	8.60	8.20

I would buy JSW STEEL LTD with a price target of Rs. 915 for the short term and Rs. 1150 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 812.00 on purchases. JSW STEEL to hold its EGM on July 25, 2011 for the purpose of Rs.12.25 per share (122.5%) Dividend, the book closure for the same has been fixed from July 13, 2011 to July 15, 2011.

OnMobile Global : Highly under valued stock !!!

Scrip Code: 532944 / ONMOBILE

CMP:  Rs. 100.55; Buy at Rs.98 - 101 levels.
Short term Target: Rs. 115, LT – Rs. 150;

STOP LOSS : Rs. 92.00 ;

Market Cap: Rs. 1180.27 cr;

52 Week High/Low: Rs. 190.70 / Rs. 90.28;

Total Shares: 11,79,09,086 shares; Promoters : 5,70,68,638 shares –48.40 %; Total Public holding : 6,08,40,448 shares – 51.60 %; Book Value: Rs. 69.14; Face Value: Rs. 10; EPS: Rs. 7.77; Div: --- ;P/E: 12.88 times; Ind P/E: 20.33; EV/EBITDA: 12.06.

Total Debt: Rs. 181.87 cr; Enterprise Value: Rs. 1415.14 cr. 

OnMobile Global Limited was formerly known as OnMobile Asia Pacific Private limited and changed its name to OnMobile Global Limited in August 2007. OnMobile Global Limited was founded in 2000, headquartered in Bangalore, India. It provides telecommunications value added software products and services in India and internationally. It offers m-commerce, entertainment, media portals, interactive television programming, mobile marketing, user-generated content, social networking, mobile utility data, 3G, network products through mobile access channels, such as voice, SMS, WAP, USSD, video, on-device portal, and Web. The company’s product lines include speech products, speech ports, voice based search; network products comprises of ring back tones, missed call alert, and OnMobile developer network; pollenStudio 2.0; messaging and m-commerce products consisting of mobile adversting, cell broadcast. It also offers various applications, including music, entertainment, sports, live streaming, infotainment, and user generated content; data products comprising phone backup, network/social address book, mobile paparazzi, ODP applications. Company's subsidiaries include OnMobile Singapore Pte. Ltd., PT. OnMobile Indonesia, Vox mobili S.A., Vox mobili Inc., Phonetize Solutions Private Limited, Telisma SA, OnMobile Europe B.V., OnMobile USA, LLC, Servicios de Telefonia Onmobile, S.A. de C.V. and OnMobile Australia Pty. Ltd.

Investment Rationale

OnMobile witnessed strong traction in the international revenues, during 3QFY11, despite lower domestic revenues, as expected, further with the launch of 3G services by operators and access to 3G video technology of Dilithium it is believed that this will drive data revenues for OnMobile as 3G and Value Added Services (VAS) revenues are expected to be critical for growth of telecom in aspect of revenues. The company is expected to complete the deployment in the Latin American regions by March 2011, after which it is expected that the adoption rates will go up which in turn will help growth in international revenues. OGL dominates VAS market with 33% share & has firmly secured itself in the leadership position as the dominant VAS provider to majority of domestic telecom companies. OGL is expected to register revenues to a tune of 25% CAGR during FY10-12 and net profits to a tune of 67% CAGR during the same period. OGL will continue with its aggressive deployment of Telefonica projects in these regions. The company is now live in six countries of Latin America with the launch of services in Brazil, Argentina and Venezuela. The company has indicated that the deployments are on track. They expect all the deployment to complete by March 2011. OGL has won an embedded deal with one of the major handset OEMs for its video stacks in China. OGL’s dynamic churn management solution helped to add 2% to their top line revenue for a leading telecom operator in Asia, resulting in an astounding 88% increase in subscriber recharging.

Outlook & Valuation:

With the domestic revenues accounted for 33% of the addressable Value Added Services (VAS) market (ex-P2P SMS & non-aggregator share of revenues) worth Rs. 1000 cr – Rs. 1100 cr. Telefonica deal will ramp up revenues beyond FY11. In June 2009, OnMobile signed an agreement with Telefonica which is the world’s largest mobile operators, for an exclusive period of 5-7 years and non-exclusive market rights to deploy several of its VAS products. These include Ring Back Tones (RBTs), Music Radio, and Soccer Portal etc in 13 Telefonica operating Latin American countries. OnMobile is likely to complete roll out by Mar’-Apr 2011. As of Q2, company has gone live in 3 countries including Mexico, the first large-scale deployment. The real impact of the deal would be felt from FY12 as rapid revenue ramp up will occur from next fiscal. OnMobile is set to report increased traction in revenues driven by leadership in domestic business and upsides from Telefonica and Vodafone deals. It would incur a cap ex of Rs. 70 cr – Rs. 80 cr and to pay Rs. 170 cr in deferred liability to Telefonica in the current fiscal, comfortably supported by Rs. 150 cr in operating cash flows. Recovery in operating margins should be seen on stable content cost except for one-offs in Q4 FY10. As revenues kick in from international deals, benefits of operating leverage could help expanding operating profit margins by 2.80 % over FY10-12. Robust EPS CAGR makes a BUY on OnMobile Global with price target of Rs. 115 for the short term and Rs. 150 for the long term.

KEY FINANCIALS	FY09	FY10	FY11E	FY12E
SALES (Rs. crs)	406.4	454.4	571.8	695.6
NET PROFIT (Rs. crs)	85.2	42.8	84.14	95.4
EPS (Rs.)	14.7	7.3	14.3	16.3
PE (x)	19.0	38.1	26.9	17.1
P/BV (x)	2.3	2.2	2.7	1.8
EV/EBITDA (x)	10.4	17.5	13.0	10.0
ROCE (%)	13.0	6.0	10.8	11.1
RONW (%)	16.9	7.5	10.2	12.8

I would buy onMobile Global with a price target of Rs. 115 for the short term and Rs. 150 for the long term. As I always say do respect the markets and keep a strict stop loss of 8 % or Rs. 92.00 on your purchase.

Pipavav Shipyard Limited : A major Defence sector player !!!!

Scrip Code: 533107 / PIPAVAVYD

CMP:  Rs. 80.70; Buy at Rs. 78 - Rs. 80 levels.
Short term Target: Rs. 85, LT – Rs. 100 ; Market Cap: Rs. 5,372.99 cr ; 52 Week High/Low: Rs. 119.70 / Rs. 62.00

Total Shares: 66,57,98,388 shares; Promoters : 29,95,76,180 shares –45.00 %; Total Public holding : 36,62,22,208 shares – 55.00 %; Book Value: Rs. 24.81; Face Value: Rs. 10; EPS: Rs. 0.60; Div: --- ;P/E: 134.5 times; Ind P/E: 13.17; EV/EBITDA: 110.08.

Total Debt: Rs. 1,329.59 cr; Enterprise Value: Rs. 6,702.59 cr. 

Pipavav Shipyard Limited promoted by SKIL Infrastructure was formerly known as Pipavav Ship Dismantling and Engineering Limited and changed its name to Pipavav Shipyard Limited in April 2005. Pipavav Shipyard Limited was incorporated in 1997 and is based in Mumbai, India, company engages in the defense shipbuilding, and construction of offshore oil and gas assets, as well as provision of commercial shipbuilding and repairs, and heavy engineering services in India. Pipavav is the only private shipyard in India to have license to produce frontline warships from the Govt. of India giving it significant opportunities in the defence space. The company also offers very large crude carriers, suezmax tankers, aframax tankers, capesize bulk carriers, panamax bulk carriers and tankers, handymax and handysize bulk carriers and tankers, and product and chemical tankers; and specialized vessels, such as LNG carriers, LPG carriers, reefers, containerships, offshore support vessels, ferries, and dredgers. It also provides offshore platforms, which include rigs, jackets, and single buoy mooring systems; naval vessels; and ship repair services, such as refit/dry docking, a-float repair, and conversions. Pipavav Shipyard (PSL) is the largest shipyard in India and the 5th largest in the world in terms of its size (400000 dwt). Pipavav’s dry dock capacity is larger than top 5 yards in India put together.

Investment Rationale:

Pipavav recently signed a contract with the Ministry of Defence for construction of 5 naval gunboats worth Rs. 3000 cr. The company has also been active in signing MoU’s with international defence majors such as SAAB Dynamics, Northrop Grumman, and Babcock Group UK which will make the Company’s position as leader in the defence segment. The company is also planning to rename itself Pipavav Defence and Engineering Company Ltd. to highlight its objective to become a major defence player. Company has a strong and diversified order book of Rs. 6300 crore which is expected to result in CAGR of 48.8% over FY10-FY13.

The parent company of Pipavav Shipyard Ltd, SKIL Infrastructure promoted by Nikhil Gandhi, primarily is an infrastructure development company, with interests in shipyard, special economic zones, free zones, logistics, port, education and defence sectors, filed its drafted documents on 7th June 2011, to raise Rs. 1,125 Cr through IPO. SKIL Infra controls 43.14 % (a 28,72,26,686 shares) in Pipavav Shipyard and 21.02 % (a 40,00,000 shares) stake in Everon Education. Proceeds from the IPO will used to retire its debts of Rs. 800 Cr & will set aside Rs. 150 cr to acquire companies in education, infrastructure & defence sectors.  As of March 31, SKIL Infra had total debt of Rs. 1351 cr, excluding vehicle loans.

Investment concerns:

There was a delay of 15 months in the construction of the shipyard and the facility became fully operational only in December 2010 with the installation of Goliath cranes. The delay in construction of the shipyard has, in turn, led to significant delay in the delivery schedule of vessels. Although Pipavav has a strong and diversified order book valued at Rs. 6300 crore, the first deliveries of panamax and offshore vessels is likely only from Q2FY12 onwards i.e. delay of 18 and 3 months respectively. Pipavav is in a growth phase so a significant premium over global shipyards would not be justified until execution improves.

Outlook & Valuation:

Company posted 18 % YoY revenue growth in Q4FY11, after excluding subsidy of Rs. 75 cr and trade sales of Rs. 257 cr. The Company received a new order of Rs.3000 cr taking the total order book to Rs. 6300 cr. EBIDTA for the year turned green to Rs. 170 cr with margins at 20%. PAT at Rs. 44 cr. The order inflows and recent initiatives of the company give confidence that the company is on track to become a major defence player. At the CMP of Rs.80.70, Pipavav is trading at 19.6 x FY13E EPS and 2.55 x FY13E P/BV. In my view it can be a Bought with a price target of Rs. 100.50/share valuing the company at 11.3x FY13E EV/EBIDTA comparing it to defence player.

KEY FINANCIALS	FY10	FY11E	FY12E	FY13E
SALES (Rs. crs)	629.4	882.7	1,598.5	2,073.7
NET PROFIT (Rs. crs)	- 48.2	- 1.7	126.1	269.6
EPS (Rs.)	--	--	1.9	4.1
PE (x)	--	--	41.7	19.5
P/BV (x)	3.2	3.1	2.9	2.5
EV/EBITDA (x)	--	80.3	20.6	11.3
ROCE (%)	--	2.5	10.2	17.8
RONW (%)	--	--	6.9	12.8

I would buy PIPAVAV SHIPYARD LTD with the price target of Rs. 85 in short term. For long term I would be looking at a target price of Rs. 100. As I always say do respect the market and keep a strict stop loss of 8 % on your every purchase.