Double-digit volume growth in FY17, low capex expansion, improving profitability on higher value-added mix and ability to tide through the iron ore crisis were the key takeaways of our recent meeting with the JSW Steel management.
An ongoing 1.5-mt expansion at Dolvi is at a capex cost of $350/tonne vs $1,200/tonne for a greenfield project. JSW is also expanding Vijaynagar capacity by 1 mt. We expect volume growth of 8% in FY16 and 15% in FY17, led by production ramp-up. Hence, we now value JSW Steel at 5.5x FY17E EV/Ebitda and discount it back by one year by 15%.
We upgrade the stock to ‘buy’ with a revised TP of R1,490 (R1,328 earlier), which implies an upside of 21% from a CMP of R1,235. Our EPS estimates are R108 for FY15, R132 for FY16 and R182 for FY17. The stock trades at 5.6x FY16E EV/Ebitda and 4.7x FY17E EV/Ebitda.
The company has been able to turnaround the Dolvi plant, led by (a) setting up a captive power plant, which reduced its reliance on grid power; (b) rail siding, which removed infrastructure constraints; (c) better gas availability; and (d) rationalisation of sales within Maharashtra (between Vijayanagar plant and Dolvi plant) as Dolvi unit is eligible for VAT benefit of 4%.
Currently, profitability at Dolvi plant is equal to or more than Vijayanagar unit (versus half at the time of acquisition). Phase 1 of its 2.3 mt CRM expansion is completed, while phase 2 is expected by FY15-end. This will improve profitability/tonne.
- Axis Capital