FREE

JSW Steel's Q4FY18 results (Underperformer) - Better spreads improves operating performance

Q4FY18 Result Highlights: Higher steel prices & incentives boost profits

• JSW Steel (JSTL IN)’s reported EBITDA of Rs52.9bn includes one off gain of Rs3.62bn related to VAT/SGST benefits accruing at Dolvi & Karnataka plants for earlier quarters. As a result, adjusted EBITDA stood at Rs49.3bn, up 28% qoq (3% above Idfce), driven by ~11% qoq higher blended realisation. Adjusted standalone EBITDA of Rs 46.8bn, up 31% qoq, due to higher realisation and 6% qoq volume growth. Derived EBITDA/t of Rs 11,092 was up 23% qoq.
• During Q4FY18, JSW’s other subsidiaries (Consol-Standalone-JSW Coated and US operation) reported EBITDA of Rs241m v/s Rs1.63bn in Q3FY18.
• At Q4FY18-end, consolidated net debt excluding trade acceptances was down 9.6% qoq to Rs380.2bn

Key Positives: Higher steel realisation improving spreads; EBITDA/t of Rs11,092

Impact on financials: Upgrade FY19E/FY20E EBITDA by 26%/16% to factor in higher steel prices

Valuation- Reiterate Underperformer with a revised TP of Rs312

We expect Q1FY19 average steel prices to be higher on a sequential basis which will more than offset higher coking coal cost, leading margins to improve. However, we expect steel prices to start tapering off from Q2FY19 due to increasing China production post winter shutdown. Despite that, we expect that the company will record EBITDA CAGR of 8% over FY18-20E on account of better spreads but lacks any meaningful volume growth (2-3%). The next phase of volume growth will accrue from FY21E, once it completes its brownfield expansion at Dolvi. The company has announced fresh capex of Rs176bn totalling Rs400bn capex to be spent during FY19-21, primarily for backward integration and enhancing downstream facilities. This will not allow any deleveraging of the balance sheet. With increase in earnings, we increase our TP to Rs312, valuing the company at 6.5x FY20E EV/EBITDA. We reiterate Underperformer.