JSW Steel’s (JSTL’s) Q1FY19 Ebitda surpassed consensus 8% driven by: (i) standalone Ebitda/t at Rs 12,590 compared to consensus’ Rs 11,900 estimate; and (ii) US operations clocking best performance since Q4FY12. Going ahead, we expect profitability to sustain, primarily driven by operating efficiencies from conveyor belt at Vijayanagar and iron ore sourcing from captive mines. Over the long term, we are upbeat on 8-10mtpa overseas crude steel capacity/backward integration coming at the right price and at right location. Our FY19/FY20e Ebitda is 12-13% ahead of consensus. Maintain Buy with TP of Rs 372.
Ebitda beat on domestic performance
Q1FY19 domestic Ebitda/t (highest in past 10 years) at Rs 48.2 bn was driven by:
(i) higher realisation (up 6% q-o-q);
(ii) ) higher volume (up 11% y-o-y); and (iii) better product mix with value-added auto shipments jumping 57%. US operations also sustained good performance due to:
(i) better capacity utilisation (plate mill 33%, highest in past 10 quarters); and
(ii) realisation improving to $1,142/s. tonne, up 25% y-o-y. Coated products division clocked a subdued performance with Ebitda dipping 40% y-o-y and q-o-q. We expect profitability to largely sustain due to: (i) favourable domestic environment; and (ii) operating efficiencies estimated at `1,000/t from a mix of downstream projects, captive iron ore and logistics.
Appetite for growth supported by balance sheet headroom
JSTL’s net debt/Ebitda and gearing at 2.26x and 1.38x, respectively, lend ample headroom to pursue overseas growth opportunities. Further, these backward integration/expansion projects come at a relatively lower cost and are expected to result in 8-10mtpa of steel making capacity in the US and Italy. In domestic operations as well, integration of Monnet Ispat will immediately add about 1.2-1.5mtpa capacity in a relatively short time.
Outlook: Primed for growth
We are upbeat on JSTL’s twin endeavours of: (i) improving domestic operations’ operating efficiency; and (ii) pursuing value-accretive opportunities overseas. With largely supportive domestic market equilibrium, we see JSTL sustaining its profitability. We maintain ‘BUY/SO’ with `372 TP, implying an exit multiple of 6.7x FY20e Ebitda.
Q1FY19 conference call: Key highlights
Management is positive on uptick in the global economy and better-than-expected H1CY18 demand uptick in India (9.2% y-o-y) and China (8% y-o-y). Management expects a positive surprise to WSA prediction of mere 1.8% y-o-y growth for CY18 due to continued better demand environment in China and India than initially expected. It cautioned on possible pressure on profitability owing to higher oil prices, surging inflation, tight liquidity and Fed rate hikes in coming quarters along with trade war pressure. Management is cautious on trade tensions and believes that a certain amount of material earlier exported to the US could knock on Indian shores. In Q1FY19, imports surged 15% y-o-y and India again became a net importer of steel.