Stock queries

What lies ahead for JSW Steel shares? — Mukesh, Mumbai

JSW Steel reported an excellent set of numbers for the quarter ended December 2006. Crude steel output at 7.3 lakh tonnes was up 28% compared to the year ago quarter. Sales revenue at Rs 2,301.50 crore was higher by 51% compared to the Rs 1,522.45 crore last year. Profit after tax shot up 160% at Rs 362.15 crore against Rs 139.20 crore. EPS on a diluted basis for the quarter was at Rs 22.37 against Rs 8.36 last year.

If one were to look at the nine month numbers ending December 2006, net revenue is at Rs 6,091.27 crore against Rs 4,619.13 crore, up almost 32%. Net profit has doubled at Rs 878.75 crore against Rs 445.85 crore. The EPS on a fully diluted basis is at Rs 54 against Rs 27.02 last year. The company earned an EPS of Rs 55.57 for the year ended March 2006, which means that at the current share price of Rs 442.95, the share trades at a PE multiple of 7.97. If one were to simply annualise the nine months earnings of December 2006, the PE would improve to 6.15. It may be mentioned that the expansion of the companies’ capacity of steel to four million tonnes has been completed and benefits were visible in the last quarter. The March 2007 quarter would see the full benefits kicking in and the production and profits would improve substantially.

The recent share price high and low has been Rs 451.80 and Rs 310, respectively. The low was made just a month ago and the share has appreciated 50% in one month. The company will continue to do well and it makes sense in investing in the company with a medium-term perspective. However, having risen 50% in one month there would be some correction before a new sustained move is seen.

Investors would do well to enter the stock around the Rs 410-Rs 415 level for a price objective of Rs 515-525 in six months time.

Can I buy G E Shipping shares now? — Gokul Sharma, Ahmedabad

G E Shipping turned in an excellent set of numbers for the quarter ended December 2006 but the same were not apparent, as during the same time in 2005 the company had income from sale of ships amounting to Rs 124.04. If one were to exclude the same, the revenue this quarter is up marginally at 4.4% while the operating profits excluding sale of ships is up 11.6%. This is creditable when viewed in the context of the marginal improvement in realisation from crude tankers and a fall in realisation from product tankers. The improved performance came from the dry bulk where realisations were up 21%. New tonnage in dry bulk, which is a booming sector, will be added in the current quarter.

The company had earned an EPS of Rs 55.07 for the year ended March 2006 and Rs 42.19 for the nine months ended December 2006. The share closed trading at Rs 214.75 and the recent high and low have been Rs 228.85 and Rs 192, respectively.

These share prices are after the de-merger of the offshore division. The share trades at a PE multiple of 3.90 based on March 2006 earnings and slightly better at 3.82, if one were to annualise the nine months earnings.

I believe the true worth of this company is not captured in the valuations. The company has a market cap of Rs 3,270 crore and it has ships and assets under order to the tune of Rs 3,600 crore. This is 10% higher than the current market cap and these assets would be joining the company in a phased manner with a substantial portion joining the fleet in the second half of 2007-2008.

Investors with a 12-month time frame should invest in the stock for a decent 25 to 30% appreciation. 

Sebi disclaimer: The writer has investments in both the scrips mentioned above. He invites comments at kejriwalarun@ rediffmail.com