JSW Steel’s ebitda of Rs 31.6 bn was in line with our estimate. JSTL will invest in another phase of capacity expansion of +5 mtpa at Dolvi and a few other downstream units at an investment of Rs 192 bn. We like all aspects of this investment from low capex spends, its strong execution track record and limited steel supply growth in India which will lag behind demand in a few years. But, in the interim for the company, it does change the financial equation—expect no deleveraging over the next few years and spurt in earnings thereafter, possibly in FY2021. We maintain Add with target price of Rs 225.
In-line quarter; volumes increase 20% y-o-y while Ebitda/ton declines 2% q-o-q to Rs 7,590 JSW Steel’s consolidated Ebitda increased 10% q-o-q to Rs 31.6 bn and was in line with our estimate. Standalone Ebitda increased 7% q-o-q to Rs 30 bn led by 9% q-o-q increase in deliveries to 3.96mt while Ebitda/ton declined by 2% q-o-q to Rs 7,590. Blended steel realisations increased by Rs 2,840/ton q-o-q though increase in raw material costs more than offset steel price increase; both coking coal and iron-ore costs increased during the quarter. Higher operating income of Rs 2.5 bn also aided Ebitda by +Rs 270/ton q-o-q. The Ebitda of subsidiaries increased to Rs 1.6 bn led by higher earnings at JSW Coated and earnings Ebitda of $1.3 million from US operations against a loss of $4.4m in Q3FY17. Net income of Rs 10 bn was 10% ahead of our estimate due to lower depreciation charge and effective tax rate.
Takes up next phase of capacity expansion with 5 mtpa at Dolvi and a few downstream capacities JSW Steel announced another phase of capacity expansion/upgrade projects entailing an investment of Rs 192 bn over the next three years. The projects include (i) Rs 150 bn at Dolvi plant to increase capacity to 10 mtpa from 5 mtpa by March 2020, (ii) up-grade of a Blast furnace -3 at Vijaynagar to 4.5 mtpa from 3 mtpa for Rs 10 bn, and (iii) Rs 32 bn investment in downstream capacities which include CRM mills, galvanising lines, continuous pickling line, HR skin pass mill and a colour coating line.
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A good project given limited supply growth in India Steel capacity growth in India is constrained due to weak financial health of steel companies and JSW Steel only has financials that allows for growth investments; India’s steel supplies will likely lag behind demand in a few years given limited new investments. As such, we like the investment of JSW Steel. However, this does change financial estimates of JSW Steel—we now expect no deleveraging over the next three years and a spurt in earnings thereafter. We tweak our estimates and maintain Add with target price of Rs 225.
Changes in our estimate
We cut our FY2018-19e volume estimates for India by 3-4% on management guidance of 15.5 million tons in volumes in FY2018e. This results in 3% cut in our Ebitda for FY2018-19e. Our EPS estimate is cut by 1-2% as we tweak depreciation and interest rates. We estimate EPS of Rs 19.3, Rs 21.6 and Rs 24.3 for FY2018e, FY2019e and FY2020e. Our fair value has remained unchanged at
Rs 225 as we roll over to March 2019e. The increase in net debt on account of higher capex is adjusted to value of capital work in progress for Dolvi operations. We value CWIP at 50% of capital invested as on March 2019e.
—Kotak Institutional Equities