Consol. Ebitda for FY21/22e up 3/1%; TP raised to `174; valuations still reasonable.
We find risk reward attractive. We’re constructive on global steel spreads going into 2020. Valuation is still reasonable. Multiple events could take the stock to our bull case value.
Domestic steel spreads to improve— lower input costs, improving realisations: Our materials team for China has a stable outlook for steel demand and net exports in 2020 in view of recent infrastructure stimulus and property easing.
JSPL to grow faster than the market: We expect demand recovery to be gradual. JSPL’s capacity utilisation rate is still ~85% even after excluding the DRI facility in Angul. Our recent visit to the Angul facility suggests plans to start DRI plant in Jan 2020, which could start contributing to volumes.
Deleveraging: We expect net debt to come down by ~Rs 88 bn, to ~Rs 304 bn, by end-F21, with net debt to Ebitda improving from 4.8x in 2Q20 (on F1H20 annualised Ebitda) to 3.1x in F21e.
Reasonable valuation: The stock is up ~33% over the last three months (vs. Sensex +12%), yet 12-month forward EV/Ebitda of 4.8x is attractive vs. the average of 8.5x since April 2015 and peer range of 5.6x-6.2x (based on consensus).
Raising TP by 25%, to Rs 174: We include benefit from recent commissioning of the fourth coke oven battery. Our consolidated Ebitda rises 3% for F21e and 1% for F22e, lifting equity value by 9%. Lower risk-free rate and rolling forward drive remaining 16%. We believe favourable developments haven’t been priced in and could drive re-rating to our bull case value.