A gradual move from MIP to other duty measures will reduce the efficacy of trade protection
JSW Steel’s Ebitda of R32.7 bn (+92% y-o-y, +70% q-o-q) was higher than our estimate led by better-than-expected steel realisations and accounting gains from Ind-AS adoption (+R1 bn). Net debt increased by R69 billion q-o-q due to Ind-AS impact and higher working capital. The good run in Q1 was led by a combination of higher export and domestic steel prices (courtesy MIP)—prices in both geographies have cooled off since. Minimum import prices (MIP) is more a comprehensive measure to restrict imports and eventual transition to other duties will dilute trade protection. We maintain REDUCE rating with a revised target price of R1,130 (R1,045).
Higher-than-expected steel realisations (courtesy MIP, exports), Ind-AS changes aid Ebitda boost JSW Steel’s consolidated Ebitda increased 70% q-o-q to R32.7 bn (+92% y-o-y), 15 % higher than our estimate. The Ebitda boost was led by higher-than-expected increase in blended realisations (+13% q-o-q) and positive Ebitda impact of R1 bn from the adoption of IFRS-converged financials (Ind-AS). The change in accounting to Ind-AS led to certain long term arrangement for job work being treated as finance leases, resulting in ‘reduction in costs of goods, services procured’ though it also led to an increase in finance cost and depreciation charge.
Standalone Ebitda increased 60% q-o-q to R31 bn (+85% y-o-y), 14% higher than our estimate. MIP on steel led to 13% q-o-q (+R3,840/ton) increase in blended steel realisations against our estimate of R2,700/ton; realisations also gained from higher export realisations in April-May 2016 due to the sudden spike in China steel prices. Standalone Ebitda/ton increased 57% q-o-q to R9,280/ton (+72% y-o-y). Net income of R11 bn (R212m in Q1FY16) was 8% higher than our estimate despite Ebitda increase of 15% due to higher interest and depreciation charge.
Net debt increases by R69 bn to R454 bn due to Ind-AS impact, increase in working capital
JSTL’s net debt increased R69 bn q-o-q to R454 bn in June 2016 due to Ind-AS impact (+R25 bn) and increase in working capital, Fx impact (+R44 bn). The increase in working capital was due to a reduction in acceptances (-$450m) and higher inventories. The re-classification and inclusion of new borrowings (such as those of job work) due to Ind-AS led to an increase in borrowings by R27.4 bn in consolidated financials. The management expects net debt to decline to R425 bn by FY2017 end helped by the reversal of some of working capital increase.
MIP a more comprehensive measure, but expect gradual transition towards other duties
JSTL expects MIP on steel to be extended beyond August 2016. As per the management, MIP is a more comprehensive measure than anti-dumping duties which is country specific. Earlier, the steel ministry highlighted a gradual move from MIP to other duty measures— we believe this will result in reducing the efficacy of trade protection. We maintain our cautious stance but revise the TP to R1,130 (R1,045 earlier). The increase is led by 3% increase in our China steel price assumption—our EPS estimate for FY2017-19e increases by 0-5%.
We raise our China HRC price assumption by 3%—we expect demand to remain weak over next 1-2 years, but closures of inefficient and polluting capacities will gradually aid steel outlook. We incorporate our economist’s revised Fx rate of 68.5/$ for FY2017e and also change our FY2017-19e projections in line with Ind-AS. This results in 4-5% increase in our FY2017-19e consolidated Ebitda estimate (gains from steel prices and finance leases).
We estimate FY2017e Ebitda/ton at R8,230, FY2018e Ebitda/ton at R8,030 and FY2019e Ebitda/ton at R8,060/ton. These are based on the assumption that MIP will be rolled over beyond August 2016. We note that any other measure such as safeguard duty will not be as effective given WTO limitation such as (i) reducing rates of duty in successive periods, and (ii) time taken for investigation of each product individually can cause delays. We expect EPS of R138, R154.4 and R188.5 in FY2017e, FY2018e and FY2019e.
Our fair value of R1,130 includes (i) R930/share for core business earnings, assuming there is no MIP or safeguard duty in place. Hence, we value core earnings based on normal import duty rates, and (ii) cash accrual from safeguard duty of R200/ share assuming allowable period of safeguard duty of three years.