While Q4 volumes are expected to be higher, realisation is likely to go down; ‘Buy’ retained with revised TP of Rs 328.
Q3FY19 consolidated EBITDA at Rs 45 bn was up 17% y-o-y, but down 8% q-o-q. YoY growth was due to recovery in steel prices leading to 34% rise in domestic Ebitda/t though partly offset by lower export sales. Lower q-o-q Ebitda was due to weak volumes. Q3 sales at 3.7 mnt were down 7% q-o-q and y-o-y. As steel prices have slid steeply since November, buyers postponed purchase in anticipation of lower prices; hence, December sales of JSW were weak. However, quarterly production remained healthy at 3/1% growth y-o-y/q-o-q, leading to inventory build-up.
We believe Q4 volumes will be stronger. As domestic steel consumption was strong (8% growth), JSW significantly reduced exports to 10% of product mix from 30/17% y-o-y/q-o-q domestic sales enjoys a premium over exports.
Realisation remains a challenge:
Q3 standalone realisation at Rs 50,000/t was broadly flat q-o-q. Although domestic steel prices continued to slide in Q3, the realisation remained stable as (i) maximum fall was in December when JSW’s sales were down, (ii) lower export, and (iii) sticky realisation on long-term contracts with OEMs in automobile and consumer durables, where new pricing will be applicable from April. Company guided Q4 realisation to be lower by Rs 3,500/t. Globally steel prices increased by $40/t recently after production disruption on Vale’s dam collapse in Brazil, which led to increase in iron ore and pellet prices. From February, Indian companies increased steel prices by `300-700/t; however, with weakening HRC demand against backdrop of higher imports and increasing supply in rebar space (as big players ramp up capacity and push volumes in rebar on lower HRC demand), the sustainability of price hikes is a challenge.
We roll over TP to FY21 and value the company at 6x EV/Ebitda. We retain our FY19/20/21e EPS estimate of `33/30/ 28. Our revised TP stands at `328 (17% upside from CMP of `279). Retain Buy.
Cost continues to be a comfort area
Q3 cost/t was flattish q-o-q leading to flattish q-o-q Ebitda/t at Rs 12,100/t.
Q4 profitability is likely to decrease with lowering of realisation partly offset by declining iron ore prices. Being a converter, JSW is best positioned domestically on iron ore as (i) domestic iron ore prices are sliding with producers ramping up production to limits permitted in EC as in year 2020 the lease will get expired and (ii) internationally increase in iron ore prices is lending support to steel price.