Analyst Corner: Maintain ‘Buy’ on JSW Steel with TP of Rs 484

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New Delhi | Published: September 22, 2018 12:17:54 AM

Steel capacity expansion in FY18-21F likely to be limited, which will likely saturate capacity in next three-four years, in our view. Already in FY19 we are seeing steel demand growing faster than GDP.

Analyst Corner: Maintain ‘Buy’ on JSW Steel with TP of Rs 484

Play on cost competitiveness and capital allocation efficiency; we initiate coverage at Buy with TP of Rs 484, implying 18% potential upside Indian steel on cusp of strong demand growth, but capacity expansion is slow.

We expect Indian steel demand to grow at 5-7% over the next decade driven by large-scale infra spending and consumption growth.

Steel capacity expansion in FY18-21F likely to be limited, which will likely saturate capacity in next three-four years, in our view. Already in FY19 we are seeing steel demand growing faster than GDP.

JSW Steel (JSTL) is favoured, in our view, due to its history of timely capex and lowest capacity-expansion costs.

JSW Steel is incurring `440 billion capex programme on expanding capacity from 18MT (currently) to 24.7MT by FY21F and adding value-added products (improving product This will drive EBITDA margins and profitability growth while maintaining balance sheet strength, in our view.

Balance sheet remains strong despite capex-intense phase, as cost-saving measures and increased share of value-added products has led to strong operating cash flows.

Even FY18 OCF of `124 billion largely covers FY19F capex of `100 billion and estimated interest expenses; hence, we believe debt metrics are likely to improve despite heavy capex. JSTL could incur capex on acquisitions (inorganic) for 4.5-8.0MT while maintaining net debt metrics.

With lots of stressed assets up for sale in India, we see great value-addition potential (historically JSTL has turned around acquired assets, transforming them into low-cost steel converters).

Valuation: Trading at 6.7x FY20F EV/EBITDA; initiate at Buy; `484 TP.

We value JSTL at 2.53x one-year forward P/B (regression justified) and add `7.9/share value accretion from Monnet Ispat to arrive at a TP of `484, implying 18% upside, and hence we initiate with Buy.

Key risks are sharp compression in steel spreads and risks to supply of iron ore and coking coal.

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