BUY JSW Steel – Merger with SISCOL

JSW’s expansion plans ahead of schedule and strong demand leading to higher capacity utilization, expect the company’s steel output to register a CAGR of 28.3% over FY07-10 from 2.6mtpa to 5.6mtpa. JSW’s crude steel making capacity is expected to rise by 2.6x to 10mtpa by 2010 from current 3.8mtpa. The company is also increasing its upstream capacities, cushioning it from any downturn in the industry.

JSW merged its group company Southern Iron and Steel Company (SISCOL) effecting an equity dilution of 8.7%. With long product prices expected to rise faster than flat products, the merger of SISCOL would be value attractive. Expect SISCOL to add Rs2,437mn to the bottomline of JSW in FY09.

Expect the company to report a consolidated EPS CAGR of 31.4% over FY07-09 led by robust volume growth and imp roved realizations. At CMP Rs963, the stock trades at 10.1x and 7.1x on consolidated EPS of Rs94.8 in FY08 and Rs136.1 in FY09 respectively. Recommend a BUY with a target price Rs1,240 based on 6x FY09E consolidated EV/EBIDTA. Our target price implies a P/E multiple of 9.1x on FY09 consolidated EPS.