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JSW Steel's Q4FY19 results (Underperformer) - Lower profits amid leveraged BS

Q4FY19 Result Highlights: Lower realisations offset higher volumes

• JSW Steel (JSTL IN) reported in-line operating results with consol EBITDA of Rs44.4bn, down 1.4% qoq.
• Standalone EBITDA at Rs43.4bn, was down 2.2% qoq despite ~17% qoq higher volumes (4.29mt) due to lower blended realisation offset by lower costs. Blended steel realisation was down by ~9% qoq primarily due to lower steel prices in domestic market and higher proportion of export sales (22% vs 10% in Q3). Lower iron ore and fuel cost offset lower realisations to some extent. As a result, EBITDA/t stood at Rs10,119, down 16% qoq.
• During Q4FY19, JSW’s overseas subsidiaries (US operations, USA Ohio and Aferpi) reported EBITDA loss of Rs1,788m v/s EBITDA loss of Rs1,073m in Q3FY19.
• At FY19-end, consolidated net debt excluding trade acceptances stood at Rs459.7bn, flat qoq but up 21% yoy.

Key Positives: Higher volumes, Lower CoP

Key Negatives: Lower realisation, high debt, low FY21 volume growth guidance (1.5% yoy),

Valuation- Reiterate Underperformer with revised TP of Rs271

JSTL has to wait for a year before which volume growth will start kicking in.  Management guides 5mtpa steel expansion at Dolvi to be completed by March 2020. Meanwhile, the company’s aggressive capex  plans (~Rs340bn capex over FY20-1HFY22) will keep the balance sheet leveraged (FY20E net debt of ~Rs510bn from Rs461bn in FY19). As domestic iron ore prices are set to rise, the company needs steel prices to align with it in order to protect margins which is very important amid the leveraged balance sheet. 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. In the post result concall, we sense that management was not as keen as earlier to acquire Bhushan Power. If that happens, it will be positive for the stock. We have revised downwards our target price to Rs271 (earlier Rs277) valuing at 6.5x FY20E EV/EBITDA to factor in higher net debt in FY20E. Amid high valuation and PAT degrowth in FY20e (down 13% yoy), we reiterate Underperformer.