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JSW Steel's Q3FY19 results (Underperformer) - High growth capex leading to a leveraged BS

Q3FY19 Result Highlights: Lower volumes led to decline in EBITDA

• JSW Steel (JSTL IN) reported in-line operating results with consol EBITDA of Rs45.0bn, down 8.3% qoq primarily due to lower steel sales volumes.
• Standalone EBITDA at Rs44.4bn, was down 8% qoq primarily due to lower sales volumes (down 7% qoq to 3.68mt) and lower other operating income (Rs4.46bn vs Rs5.76bn in Q2FY19). Volumes were lower due to weak demand owing to destocking at consumers’ end and liquidity issues. Higher proportion of domestic sales (90% v/s 82% in Q2) and part of contract sales helped JSW to realise marginally higher blended steel realisation (up 1% qoq to Rs46,323/t). EBITDA was affected adversely due to lower volume, higher iron ore cost and lower export benefits. EBITDA/t stood flat qoq at Rs12,060.
• During Q3FY19, JSW’s other subsidiaries (Consol-Standalone-JSW Coated and US operation) reported EBITDA of Rs127m v/s EBITDA loss of Rs225m in Q2FY19. Newly acquired Aferpi and Acero facilities contributed negative EBITDA of Rs1.36b during Q3FY19.
• At Q3FY19-end, consolidated net debt excluding trade acceptances was up 2.4% qoq to Rs460.3bn, due to higher working capital.

Key Positives: Stable steel realisation

Key Negatives: Lower volumes, increase in debt

Change in estimates: Lower FY19 PAT by 4.7% to factor in lower volumes and FY20 by 7.5% to factor in lower steel prices and higher interest cost; introduced FY21 estimates

Valuation- Reiterate Underperformer with a TP of Rs277

Though steel prices seems to have bottomed out in January 2019, we expect JSW’s EBITDA/t to compress by ~14% qoq in Q4FY19 due to lower steel prices, partially offset by lower iron ore cost and higher volume. JSW’s balance sheet remain leveraged (FY20E net debt of ~Rs486bn from Rs387bn in FY18) with the aggressive capex plans of ~Rs400bn during FY19-21E to expand Indian operation.  Moreover, JSW is the front runner in acquiring Bhushan Power at an estimated value of ~Rs197bn, thereby leveraging the balance sheet further. However, management indicated to structure the transaction in a manner that Bhushan Power would not be consolidated with JSW Steel. Though we have not factored the acquisition in our estimates, but if it happens, will knock off ~Rs34/sh from our TP. We reiterate our Underperformer rating with a reduced TP of Rs 277 (earlier Rs312), valuing it at 6.5x FY20E EV/EBITDA.