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JSW Steel's Q1FY20 results (Underperformer) - Weakening steel prices to depress profitability

Q1FY20 Result Highlights: Lower volumes drag EBITDA

• JSW Steel (JSTL IN) reported in-line operating results with consol EBITDA of Rs37.3bn, down 16.3% qoq. However, profitability at standalone business (EBITDA/t of Rs9,936) was 5% higher than our estimates due to higher-than-expected steel prices.
• Standalone EBITDA at Rs37.3bn, was down ~14% qoq due to lower volumes (down 12.6%/2.1% qoq/yoy to 3.75mt). Blended steel realisation were higher by 1% qoq. This was primarily due to few of export sales at higher prices contracted in Q4FY19 and sale to auto & white goods for which prices are fixed mostly on a half yearly basis. Volumes were effected due to seasonality, weak demand pertaining to liquidity issues, thus accumulating inventory of ~300kt in Q1FY20. EBITDA/t stood at Rs9,936, down 2% qoq.
• During Q1FY20, JSW’s overseas subsidiaries (US operations, USA Ohio and Aferpi) reported EBITDA loss of Rs2,702m v/s EBITDA loss of Rs1,788m in Q4FY19.
• At Q1FY20 end, consolidated net debt excluding trade acceptances stood at Rs477.7bn, up ~4% qoq.

Key Positives: Higher realisation, sustaining EBITDA/t close to Rs10,000

Key Negatives: Lower volume, higher losses at overseas subsidiaries

Impact on financials: Reduce EBITDA by ~9%/~2% for FY20E/FY21E to factor in lower steel prices

Valuation- Reiterate Underperformer with revised TP of Rs230

We expect Q2FY20 EBITDA/t to fall by ~23% qoq to ~Rs7,650/t due to weak steel prices (down 6% qoq). However, we believe that profitability will improve from thereon with increase in steel prices. Domestic industry is requesting the government to impose safeguard duties so as to restrict imports at a lower price from FTA countries. Any positive development on this will be beneficial for JSTL. Moreover, we believe that the company may not acquire Bhushan Power, thereby not leveraging the balance sheet further. Management guides 5mtpa steel expansion at Dolvi to be completed by March 2020, thereby re-starting the volume growth journey from FY21 after a gap of two years. We roll over our TP to FY21 earnings. We factor in cut in earnings and revise downwards our target price to Rs230 (earlier Rs271) valuing at 6.0x FY21E EV/EBITDA. We reiterate Underperformer rating on the stock.