JSW Steel rating – Buy: A stellar performance in quarter

JSTL’s Q4 EBITDA rose 42% q-o-q (+184% y-o-y), 13% above JEFe, led by better-than-expected realisations. Ebitda/t expanded 37% q-o-q to Rs 19.8K. Asian steel prices remain strong despite some recent correction; Indian spot HRC price is 20% above Q4 average and still at a discount to imports. We expect JSTL’s margins to rise further in Jun-Q but factor in a normalisation in the remainder of FY22. We raise FY22-23e EPS by 44-68% and retain Buy with a revised PT of Rs 820.

Stellar Q4: JSTL’s Q4 Ebitda and net profit rose 42-57% q-o-q (both ~3x y-o-y), 12-13% above JEFe. Standalone sales volumes rose 4% q-o-q while realisations improved Rs 8.4K/t q-o-q (+18%) led by higher steel prices.

Raw material costs were up q-o-q due to higher iron ore prices; however, Ebitda/t still expanded 37% q-o-q to Rs 19.8K —a decade high. Combined performance of subsidiaries also improved q-o-q. Net debt went up a slight 2% q-o-q due to BPSL acquisition. In FY21, JSTL’s Ebitda grew 68% y-o-y while net profit was ~3x y-o-y.

Steel prices strong: China domestic steel prices are down ~15% from mid-May peak but are still up 27% CYTD at $887/t. The ongoing Covid wave is affecting Indian steel demand in near term but JSTL expects exports to make up for any shortfall.

Further margin expansion in Q1: JSTL’s iron ore cost should rise further in coming quarters on higher market prices and rising share of captive mines. However, Indian HRC (flat) steel price has risen 20% from Q4 average of Rs 55.5K/t to Rs 66.5K/t. Higher steel prices should more than offset the input cost pressures for JSTL driving further margin expansion in Q1FY22. We assume a meaningful moderation in steel prices and margins in balance FY22 though. We factor in HRC prices at Rs 57K/54K for FY22/FY23 — 14%/19% below spot. We estimate JSTL’s Ebitda/t at Rs 23.4K, Rs 18.1K and Rs 17.6K in Q1FY22, H2FY22 and FY23 respectively.

Next phase of growth capex: JSTL announced an aggressive capex plan with total spend of Rs 475 bn over the next three years. This includes 5mtpa expansion at Vijaynagar at cost of Rs 150 bn, implying an attractive ~$400/t of capacity. This, along with the already-announced 1mtpa expansion at Vijaynagar, will take JSTL total steel capacity to 33mtpa by FY25.

We believe the capex plans can be largely funded out of operating cash flows and these capacities will come at an opportune time when India would likely turn net importer of steel.

Upgrade estimates; retain Buy: The Board has approved fund-raising of up to Rs 190 bn. We upgrade FY22-23e Ebitda by 26-38% and EPS by 44-68%. We retain Buy with Rs 820 PT, based on 7.0x FY23e EV/Ebitda. We prefer TATA over JSTL.