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JSW Steel's Q2FY20 results (Underperformer) - Profitability to improve in 2HFY20, but factored in

Q2FY20 Result Highlights: Lower prices & volumes drag EBITDA

• JSW Steel (JSTL IN) reported adj EBITDA of Rs22.6bn (IDFCe: Rs25.7bn). Reported number includes one off Rs4.66bn VAT benefits for earlier years as it received in-principle approval for its eligibility for incentives for investment in Dolvi plant (reported in other operating income). We have treated the same as an exceptional item.
• JSW’s standalone adj. EBITDA of Rs23.3bn, was down 37% qoq due to lower volumes (3.6mt, down 4% qoq) and lower steel realisations (Rs38,527/t, down ~Rs5000/t qoq) offset by lower raw material costs. Steel realisations were lower due to weak prices in domestic market, higher exports (31% of total volumes v/s 17% in Q1FY20) and adverse product mix (Value added and special products consisted 46% of total volumes vs 49% in Q1FY20). As a result, EBITDA/t stood at Rs6,472, down 37% qoq.
• During Q1FY20, JSW’s overseas subsidiaries (US operations, USA Ohio and Aferpi) reported EBITDA loss of Rs3,554m v/s EBITDA loss of Rs2,702m in Q1FY20.
• At Q2FY20 end, consolidated net debt excluding trade acceptances stood at Rs496.4bn, up ~4% qoq.

Key Negatives: Lower realisation and volumes, continuous losses at overseas subsidiaries

Impact on financials: Reduce EBITDA by ~19%/~15% for FY20E/FY21E to factor in lower steel prices & volumes

Valuation- Reiterate Underperformer with revised TP of Rs194

JSW’s cut in FY20 volume and capex guidance implies no major improvement in demand scenario in 2HFY20. We also expect a delay in commissioning of its 5mtpa Dolvi plant by 3-4 months (company guides by March 2020), thereby reducing volume growth to 9% yoy in FY21E on a low base. Even after factoring in improvement in profitability in 2HFY20 (EBITDA/t of Rs8,000 v/s Rs6472 in Q2) as benefits of lower RM cost starts kicking in and steel prices being bottomed out, we cut our FY20E/FY21E EBITDA by 19%/15%. Net debt remains high at Rs481bn in FY21E even after lowering our capex est to Rs110bn in FY20 (in-line with guidance) and retaining the same in FY21E (company guides ~Rs160bn). We have not factored in probable acquisition of Bhushan Power which, if happens, will be detrimental to the stock. With cut in earnings, we revise downwards our target price to Rs194 (earlier Rs230) valuing at 6.0x FY21E EV/EBITDA. We reiterate Underperformer rating on the stock.