JSW Steel (JSWS) reported better than expected realisation and ebitda for Q1FY22. Realisation increased ~ Rs 11,765/te QoQ ( Similar to Q4 over Q3), much higher than expectations. Ebitda increased Rs 6500/te QoQ to Rs 26,291/te. Raw material costs + mining premium increased by Rs 3784/te QoQ. Increase in raw material costs also entailed increase in coking coal. While, one is tempted to extrapolate the superlative performance this result entails for an integrated player like Tata Steel, the difference in auto contracts (timing), export and other sales (like iron ore) can also determine price variation, and may not reflect in Tata. Increase in working capital led to QoQ increase in net debt (such unexpected net debt movements can be witnessed in other steel players as well). Investments into related parties (JSW Paints in particular) were a negative surprise. Maintain ‘hold’ with a revised target of Rs 682 (Rs 660 earlier).
Investments into ‘related party’ entities: JSWS will invest Rs 7billion in tranches into JSW paints over FY22-25E. First tranche will see Rs 3billion investment for 6.68% stake. This, as per management, is to ensure uninterrupted supply of industrial paint as JSWS’s requirement increases with near quadrupling of colour-coated capacity. PPA for wind and solar power has been entered into with JSW Energy wherein to maintain 26% stake in a new SPV, Rs 4.45billion will be invested. This will help reduce renewable purchase obligation for JSWS and will help avoid cross subsidy charges while procuring additional power from JSWS as Vijaynagar steel production ramps up to 18mtpa.
Projects update – 70% near-term growth to take India capacity to 30.5mtpa: 5mtpa Dolvi expansion to commence operations by Sep,’21. Project to increase steel-making capacity by 5mtpa at Vijayanagar from the existing 12mtpa is also underway. Total estimated capex is Rs 150billion. Expansion is expected to be completed by FY24.
Management expects to leverage existing facilities at Vijayanagar i.e surplus pellets, sinter, coke making facilities at existing operations to meet the key raw material requirements.
Maintain ‘hold’: The completion of the upstream and downstream capex can help improve the throughcycle ebitda and RoE profile. This should manifest in the next downturn. Also JSWS is fast featuring as a regional growth play on steel.