Subsidiaries performed better than expected; BS continued to deteriorate; valuations are stretched; ‘Reduce’ maintained.
JSTL’s Q1FY21 standalone Ebitda of Rs 14.3 bn dropped 63% y-o-y on the back of a 25% decline in shipments and 22% fall in realisations, missing HSBCe by 16%. Steel shipments of 2.8mt fell c25% y-o-y due to COVID-19 impact, but came in 6% ahead of HSBCe. Ebitda miss was entirely driven by lower than expected realisations (3% below HSBCe) as a higher share of exports (53% in Q1FY21 vs. 13% in Q4FY20) resulted in inferior product mix.
Standalone Ebitda/t fell 50% y-o-y to Rs 5,104 ($68), missing HSBCe by 20% due to lower realisations. However, miss to consolidated Ebitda was relatively small (4% below HSBCe) due to lower than expected losses from overseas subsidiaries (- Rs 0.9 bn vs. HSBCe – Rs 3 bn). Weak operating performance resulted in both JSTL standalone as well as consolidated PAT (- Rs 5.8 bn) moving into the red for the first time in 17 quarters and missing HSBCe of – Rs 4.6 bn.
Sales guidance maintained: JSW has maintained its FY21 sales guidance of 15mt (flat y-o-y). We, however, see downside risks as the guidance would imply 8% growth in the remaining 9 months. We expect shipments to contract by 6% in FY21e.
Few near-term positives emerge; but already priced in: (i) Combination of price hikes taken in July, potential price hikes in August, improved prices in export markets, and improving product mix (as export share reduces) is positive for realisations; (ii) $25-30/t benefit from lower coking coal prices should accrue in Q2; (iii) losses at overseas subsidiaries are likely to decline. The positives appear to have been priced in as we expect consolidated Ebitda/t for the remaining 9 months to improve by more than 50% to Rs 7,300/t compared to Rs 4,800/t in Q1FY21.
Stock trading at expensive valuations: The stock looks expensive at 7.4x FY22e EV/Ebitda and 20x PE. We believe the outlook is not encouraging for JSTL due to HSBC’s expectation of a sharp contraction in domestic demand, especially in autos, rising competitive intensity for flat products, and weak prices in US and Europe.
JSTL’s deteriorating balance sheet remains a concern (net debt increased by Rs 10 bn sequentially and net debt/Ebitda surged to 5.74x). Potential acquisition of Bhushan Power & Steel will likely remain an overhang. We maintain Reduce rating and TP of Rs 150. We value JSTL at 7.0x FY22e Ebitda. Higher than expected steel prices and demand are upside risks.