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JSW Steel's Q1FY19 results (Underperformer) - Profitability to taper off

Q1FY19 Result Highlights: Higher steel prices boost profitability

• JSW Steel (JSTL IN) reported marginally better-than-expected operating results with EBITDA of Rs51.1bn, though down 3% qoq but 6% higher than IDFCe. The beat is due to higher volume, realisation and higher incentive income related to VAT/SGST benefits accruing at Dolvi & Karnataka plants.
• Standalone EBITDA at Rs48.2bn, was down 4% qoq due to ~9% qoq lower volume on account of seasonality (3.83mt), higher raw material cost, partially offset by higher realisation (up ~6% qoq). As a result, adjusted EBITDA/t stood at Rs12,590, up 13% qoq i.e. Rs1,493/t.
• During Q1FY19, JSW’s other subsidiaries (Consol-Standalone-JSW Coated and US operation) reported EBITDA of Rs894m v/s Rs241m in Q4FY18.
• At Q1FY19-end, consolidated net debt excluding trade acceptances was up 2.8% qoq to Rs390.9bn, primarily due to rupee depreciation (MTM hit of Rs8.65bn)

Key Positives: Higher steel realisation improving spreads; EBITDA/t of Rs12,590

Valuation- Reiterate Underperformer with a TP of Rs312

We expect steel profitability to have peaked in Q1FY19 and should taper off in subsequent quarters amid lower steel prices. India became a net importer of steel in Q1FY19 with a part of steel diverting to India after USA imposed tariff restrictions. Despite that, we expect that the company will record EBITDA CAGR of 9% over FY18-20E on account of better spreads but lacks any meaningful volume growth (2% CAGR). The next phase of volume growth will accrue from FY21E, once it completes its brownfield expansion at Dolvi. The aggressive capex of ~Rs400bn during FY19-21E to expand Indian operation will increase debt further but will be comfortable at net debt/ebitda of 2.4x at FY20E end. The company’s target of expanding the steel capacity at its acquired companies in USA and Europe by ~8mtpa in the long term will keep a leveraged balance sheet. We donot see any major upside and as a result, we reiterate our Underperformer rating with an unchanged TP of Rs312, valuing it at 6.5x FY20E EV/EBITDA.