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JSW Steel's Q3FY18 results (Underperformer) - Robust operating performance; expensive valuation

Q3FY18 Result Highlights: Higher steel prices boost profits

• JSW Steel (JSTL IN) reported much-better-than expected operating profits (15% above Idfce), driven by higher-than-expected realisation. It reported standalone EBITDA of Rs 35.7bn, up 22% qoq, due to higher realisation and some profits from trading (earlier it used to be ~Rs1bn/qtr). Derived EBITDA/t of Rs 9,000 was up 21% qoq due to higher realisation (up ~5% qoq), marginally offset by higher RM cost. During Q2FY18, the part of the sales were booked at the low prices which hit average blended steel realisation. On low base, we observe an increase of ~Rs2,000/t in blended realisation qoq in Q3FY18.
• During Q3FY18, JSW’s other subsidiaries (Consol-Standalone-JSW Coated and US operation) reported EBITDA of Rs1.63bn v/s EBITDA loss of Rs384m in Q2FY18. This was essentially due to booking of profits by selling HRC inventories lying with its subsidiaries. As a result, JSW reported consolidated EBITDA of Rs38.5bn, up 27% qoq.
• At Q3FY18-end, consolidated net debt excluding trade acceptances was down 1.6% qoq to Rs420.7bn

Key Positives: Higher steel realisation improving spreads

Impact on financials: Upgrade FY18E/FY19E EBITDA by 9%/8% to factor in Q3FY18 results and higher spreads; introduced FY20E

Valuation- Reiterate Underperformer with a TP of Rs247

We expect steel spread to improve in Q4FY18 which bodes well for JSW. The full effect of higher coking coal price will be reflected in Q1FY19E, affecting margins. We estimate that the company will record EBITDA CAGR of 7% over FY17-20E on account of better spreads but lacks any meaningful volume growth. The next phase of volume growth will accrue from FY21E, once it completes its brownfield expansion at Dolvi. We have not factored in any probable acquisition of distress steel assets in India. We believe the acquisition of any distress assets will not come at a cheap valuation. We rollover our valuation to FY20E. We value the company at 6.5x FY20E EV/EBITDA and arrive at a TP of Rs247. At CMP, the company is trading at 7.0x FY20E EV/EBITDA. We reiterate Underperformer.