We perceive incremental value in JSW Steel (JSTL), despite the relative outperformance vis-a-vis peers, as: (i) recent overseas acquisitions are estimated to be Ebitda accretive from H2FY19; (ii) operating efficiencies in domestic operations will aid profitability; and (iii) volume boost post FY21 from upstream expansion at Dolvi and Vijayanagar. However, a key risk is the possibility of balance sheet stress if the company goes solo in its bid for Essar Steel. Taking cognisance of earnings from overseas acquisitions, we raise our FY19/FY20e Ebitda by 4/13%. Hence, we revise our target price to Rs 433 (earlier `372), implying unchanged exit multiple of 6.8x FY20e.
Upbeat on value enablers over next three years
We estimate JSTL to post 25% Ebitda CAGR through to FY20 driven by:
(i) commencement of operations at the 1.5mtpa longs products mill at Aferpi and 3.0mtpa steel mill at Apero; and
(ii) operating efficiencies from captive iron ore mines, coke oven at Dolvi and conveyor belt at Vijayanagar. Beyond FY20, completion of capacity expansion at Dolvi and Vijayanagar is likely to be a major growth enabler.
FY19/FY20e Ebitda ahead of consensus
Taking cognisance of incremental earnings from the acquisitions of Aferpi (Italy) and Acero Junction (US), we have raised our FY19/FY20e Ebitda by 4/13%. As a result, we are 11/24% ahead of consensus. We expect consensus estimates to also be revised upwards once earnings from these two acquisitions are built in.
Outlook: Growth levers intact
We are optimistic on JSTL’s prospects as organic and inorganic growth avenues appear value accretive. In the medium term, we expect growth post completion of projects at Dolvi and Vijayanagar. However, a key risk is the possibility of JSTL going solo in Essar Steel acquisition, which could lead to additional stress on the balance sheet. On the valuation front, the stock is trading at a premium to 10-years’ average of 5.0x. However, considering the impending earnings growth opportunities, our exit multiple is 6.75x, leading to revised TP of `433. We maintain ‘BUY/SO’.