Q3 Ebitda was below our estimate due to lower ASP (average selling price) and outage related costs. We cut our estimates and PT (price target) by 3%. JSW’s expansion will be completed and outage costs would fade in fourth quarter, but we expect steel prices to remain under pressure. JSW has gained from falling local iron ore prices as expected and we continue to prefer JSW over Indian peers, but post strong out performance (up 15% 3M) vs. Indian/global peers, we downgrade JSW to Hold as upside appears capped.
Q3 Ebitda miss; lowering FY16-17e Ebitda by 17%/6%: JSW reported standalone Ebitda of R8.8 bn (-44% q-o-q, Jeff Est. R11 bn). Consol. loss was R9.2 bn, well below consensus and our R2.7 bn loss est. due to impairment charges related to its overseas assets. Net gearing rose to 1.83x (2Q 1.72x). We have cut our estimates factoring lower volume guidance, lower fourth quarter steel prices and as we adjust cost estimates. PT reduces slightly to R1,045, as we lift our valuation multiple to 7x FY17e Ebitda (from 6.5x).
Volume in line; margins disappoint: Q3 volumes fell 16% q-o-q due to planned shutdown of its Dolvi unit for expansion. Ebitda/tonne dipped to R3443/ tonne (-1465/tonne q-o-q, Jef Est. R4251/t), despite lower raw material costs due to lower ASP (-6.6% q-o-q, 1% miss), inventory losses and outage related costs. Adjusting for one off costs (R3 bn), underlying Ebitda/tonne was R4620/t. Note, this reflects profitability of its lower cost Vijaynagar unit as Dolvi unit (higher cost, in our view), was shut in the third quarter.
FY16 volume guidance cut by 5%; expansions to be completed in Q4: JSW has cut its FY16 volume guidance to 12.3mt as expansions are delayed by 45 days. It is confident of commissioning its 3.9mt expansion (1.7mt Dolvi, 2.2mt Vijayanagar) in Q4. We have cut our FY16 volume estimate by 2.2% to 12.2mt and forecast volumes of 14.4mt in FY17.
Steel price outlook remains tough: Brief uptick in domestic steel prices in anticipation of minimum import price (MIP) has faded. Domestic HRC prices are down ~6% in Jan and are now ~7% below third quarter average. Prices are at around 5% discount to import parity, which should offer support, but we think meaningful relief is unlikely unless government imposes MIP.
JSW is up 15% in the last three months and is trading at 7.3x FY17e Ebitda. Our revised PT is based on SOTP (sum of the parts) valuation. We value (i) India and overseas units at 7x FY17e Ebitda and (ii) invested capital in yet to be commissioned projects at 0.9x. Key risks: lower steel prices, higher iron-ore prices and rise in BS stress.
Changes to our forecasts
We have cut our FY16-17e Ebitda forecasts by 17%/6%. Key changes to our estimates are summarised below.
Cut FY16 volume estimate by 5%: JSW expects to miss its FY16 volume guidance of 12.9mn tonnes by ~5% (implies 12.3mn tonnes) as commissioning of both Dolvi and Vijayanagar expansion has been delayed by 45-60 days. However, JSW remains confident of commissioning both the expansions in March quarter. We have cut our FY16 volume estimates by 5% to 12.2mn tonnes. In FY17, we are forecasting volumes of 14.4mn tonnes, which broadly implies 85% utilisation of the expanded capacity.
Lowering FY16 steel realisation forecasts: While steel prices had improved towards end Dec due to anticipation of government imposing minimum import price (MIP) soon, prices have corrected sharply over last few weeks as MIP is yet to be announced. Also end user demand has been sluggish. Domestic HRC prices are at around ~R24000-25,000/tonne (-6% in Jan) and ~7% below Q3 average. We have lowered our FY16 realisation forecast by 5% factoring in lower realisation in Q4. We have marginally tweaked our FY17 realisation forecasts by 1%. Our FY17 steel realisation forecasts assumes average HRC prices of R29,500/tonne, well above spot. We see downside to our estimates in case MIP is not imposed.
Minor tweaks in cost forecasts: We have also made minor adjustments to our costs and depreciation forecasts.