JSW Steel Rating: buy: Firm’s performance in Q2FY22 met estimates

By: |
October 26, 2021 2:00 AM

Macro picture’s got better for company with a host of positives; upgraded to ‘Buy’ with unchanged TP of `820

A JSW Steel Ltd. manufacturing facility stands on the banks of the Amba River in Dolvi, Maharashtra, India, on Friday, July 27, 2013. JSW Steel is scheduled to announce first-quarter earnings on July 31. Photographer: Adeel Halim/Bloomberg

We are upgrading JSW Steel (JSTL) to ‘Buy’ from ‘HOLD’ with an unchanged TP of `820 as: (i) consolidation of Bhushan Power & Steel (BPSL) is likely to be value-accretive; (ii) volume from Dolvi expansion (5mtpa) is likely to be at a lower operating cost of 15–20%; and (iii) it is the only company to have capacity ramp-up advantage through FY24e.

Going ahead, we see three key positives: (i) sales volume rate at 5mt/quarter; (ii) ramp-up of value-added capacity; and (iii) turnaround of overseas subsidiaries. That said, lower scope of debt reduction due to capex commitment through FY24e remains the key risk. We maintain the TP of Rs 820 at an unchanged 5.5x Ebitda rolling over to FY23e, implying upside potential of 20%.

In-line performance
JSTL’s Q2FY22 performance met estimates. Key points: (i) Standalone Ebitda/t at Rs 22,944 (down 13% q-o-q) owing to higher coking coal cost. (ii) Blended standalone realisation was up Rs 2,000/t q-o-q owing to prior priced exports and favourable contracts. (iii) Overseas subsidiaries delivered Ebitda of Rs 4.9 bn (Q1FY22: Rs 2.9 bn). Going ahead, we expect: (i) India sales volume to increase to ~5mt per quarter led by Dolvi ramp-up and consolidation of BPSL operations; (ii) higher coking coal cost of $95–100/t likely to impact margins; and (iii) cost reduction initiatives and ramp-up of value-added capacity to likely lead to sustainable profitability improvement.

Looking beyond near-term impact of elevated coking coal cost
In our view, JSTL presents a compelling long-term opportunity as: (i) consolidation of BPSL would be value-accretive (`35/share); (ii) it is the only company to ramp up capacity through FY24e; and (iii) ongoing brownfield expansion at Vijaynagar (5mtpa) and scope to further expand BSPL capacity to 3.5mtpa present additional volume growth opportunities. However, we don’t expect material debt reduction at JSTL, unlike peers, as high capex is expected to continue through FY24e.

Outlook: Prospects getting better – We view additional value of Rs 35/share from BPSL consolidation and the volume uptick through FY24e mitigating the impact of higher coking coal prices in the near term. We are upgrading to ‘Buy’.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Mcap of nine of top-10 most valued firms erode by over Rs 2.62 lakh crore, Bharti Airtel only gainer
2Targetted cryptocurrency attacks by cybercriminals to grow in 2022: Kaspersky
3FPIs net buyers in November; invest Rs 5,319 crore