JSW Steel’s Rs26,800 crore capacity expansion plan over the next four years (2018-21), though seen as growth investments by analysts, is likely to stall the company’s deleveraging programme for the next three to four years. JSW Steel plans to spend Rs15,000 crore as debt and Rs12,000 crore as internal accruals to double the plant capacity at Dolvi to 10 million tonne from 5 million tonne by March 2020; upgrade blast furnace (BF-3) to 4.5 million tonne and closure of BF-2 at Vijaynagar in next 20 months, expand the cold roll mill at Vijayanagar to 1.8 million tonne from 0.85 million tonne, modernise the Vasind-Tarapur plant, apart from mining and sustenance capex. The capacity expansion is planned keeping in mind the country’s steel requirement in the coming years which is likely to overtake the expected supplies.
Analysts believe JSW Steel has the financials to take growth investments as they are also supported by favourable supply dynamics and a track record of timely execution. However, they may find it difficult to reduce their debt in the next three-four years despite increased cash flows.
“This does change financial estimates of JSW Steel — We now expect no deleveraging over the next three years and a spurt in earnings thereafter,” Abhishek Poddar, research analyst at Kotak Institutional Equities said. The brokerage has also cut the EBITDA estimates for FY 18-19 by 3%.
“We estimate a consolidated EBITDA of Rs13,500 crore, Rs14,000 crore and Rs14,500 crore for FY18, FY9 and FY20,” Poddar said.
The net debt at Rs41,500 crore in FY 2017, is seen rising to Rs41,800 crore in FY 2018 and to Rs41,400 crore in FY 2019. In FY17 the company reduced its debt by Rs2,800 crore from Rs45,400 crore.
Others believe though deleveraging may not be possible in the next few years when the expansion is underway, but it will once the expansion is through by 2021.
Edelweiss Securities in a report said though, the brownfield expansion will boost capacity and improve cash flow, the company may not be able to deleverage in the next few years. However, the brokerage upgraded JSW Steel’s ratings to “Accumulate” from “Sell” on improved earnings and higher efficiency besides its expectations that cash flows will improve post completion of the entire capex plan by FY20.
According to an estimate by Motilal Oswal Securities, JSW Steel’s free cash flow is expected to improve to Rs5,336 crore in FY18 from Rs3,111 crore in FY17.
The brokerage believes JSW Steel’s expansion in western India provides proximity to strong-growth markets and downstream facilities, lowers competition and provides state tax benefits.
“With EBITDA of Rs13,600-Rs14,400 crore over FY18-19E and net debt/EBITDA of around 4x, JSW Steel can comfortably fund capex,” Motilal Oswal Securities report said.