JSP reported higher-than-estimated Ebitda in Q1FY23 led by higher realisations from contracted volumes. However, with a sharp increase in working capital, strong earnings failed to reduce debt much. We estimate a sharp contraction in margins in the remaining 9MFY23E led by significant correction in prices. We have trimmed earnings for FY2024/25E and FV to Rs 360. Maintain Reduce.
Earnings outperformance on higher-than-expected prices: JSP’s consolidated adjusted Ebitda of Rs 29.9 bn (-34% y-o-y, -12% q-o-q) was 29% higher than our estimates on higher-than-expected realisations in the India operations. Steel sales volume increased to 1.7 mn tons (+8% y-o-y, -16% q-o-q) on a Covid-impacted base while q-o-q weakness was on account of imposition of export duties. Blended steel realisations at Rs 73,842/ton increased 11% q-o-q, much higher than our estimate. Costs increased to Rs 57,378/ton (+58% y-o-y, +11% q-o-q) on higher costs of coking coal and other input costs. Standalone steel Ebitda/ton came in at Rs 16,464/ton (-41% y-o-y, +11% q-o-q) after adjusting for one-offs. The company shared that the working capital has increased by ~Rs 30 bn, mainly due to build-up of high-cost inventory and this restricted deleveraging during the quarter.
Steel price correction likely to keep margins under pressure: Steel prices in India have corrected by ~20% in the past two months led by correction in regional prices. Current flat steel prices are at premium to import parity and we expect further correction in prices. On the other hand, costs are also deflating at a swift pace with 40-50% correction in coking coal and domestic iron ore prices in the past two months. We expect steel price weakness to outpace cost deflation and margins to contract. We are factoring Ebitda to moderate to Rs 10,567/ 9,470/ton in FY2023/24E versus Rs 16,464/ton in Q1FY23.
Inexpensive valuations but lacks triggers: We have increased our FY2023E Ebitda by 14% factoring in strong Q1FY23 print but cut FY2024/25E Ebitda by 2% on lower coking coal and steel price assumptions. Our FV reduces to Rs 360 (from Rs 400) mainly due to higher working capital at an unchanged 5X EV/Ebitda on March 2024E. Strong growth visibility from the ongoing expansion and increasing backward integration from captive coal blocks in FY2024-25E suggest favourable prospects in the long term. Maintain Reduce rating given near-term margin headwinds and unfavourable risk-reward at 5X EV/Ebitda FY2024E.