We maintain our ?neutral? rating on JSW Steel with a target price of R780 (R789 earlier). We value JSW Steel at 5.5x FY15f EV/Ebitda at R708 per share and add R72 per share on account of deferred tax assets in the books of JSW Ispat Steel. The stock currently trades at 5.1x FY15f EV/Ebitda.
At the same time, we expect steel prices to remain under pressure in the near term. Although we expect JSW Steel to maintain its Ebitda margin owing to benefits of lower raw material prices, we believe the stock is already pricing in these positives.
JSW Steel has performed well in a challenging environment and needs further improvement in iron ore availability to ramp up production from the current levels.
We expect the company to see stable operating margins going forward, despite a weaker steel price environment, as it would gain the most from lower raw material prices. With iron ore mining starting in Karnataka over the next 2-3 months, we expect JSW to ramp up production from H2FY14f, leading to an Ebitda CAGR of 7.1% and net profit CAGR of 37% over FY13-16f.
However, we believe high leverage remains a key concern and estimate it will increase further with the planned merger of JSW Ispat. JSW stock has performed well in a weak environment, outperforming peers by 15-20% over the past six months. The stock offers limited potential upside at current levels. Nonetheless, allotment of captive iron ore mines in Karnataka could be a positive trigger.