MOSL: JSW STEEL (Buy)-Export orders, long-term contracts protect margins-Strong project pipeline to drive growth
JSW STEEL: Export orders, long-term contracts protect margins; Strong project pipeline to drive growth; Maintain Buy
(JSTL IN, Mkt Cap USD8.8b, CMP INR250, TP INR298, 19% Upside, Buy)
JSW Steel's (JSTL) consol. EBITDA was down 16% QoQ to INR37.2b (our est. INR35.7b) on lower volumes, while consol. PAT was down 33% QoQ to INR10.3b (est. INR9b).
- Standalone (S/A) volumes declined 2% YoY (-13% QoQ) to 3.75mt due to weak demand. But, crude steel production rose 3% YoY (2% QoQ) to 4.2mt.
- Realization surprised positively, increasing ~INR741/t QoQ to INR46,664/t (v/s expectation of decline), as it benefited from carry-forward of higher priced export orders from 4QFY19 and favorable hedges.
- EBITDA/t declined INR183/t QoQ to INR9,936/t, impacted by negative operating leverage as volumes were lower QoQ.
- EBITDA of subsidiaries was down from ~INR1b in 4QFY19 to a loss of ~INR100m on higher losses in overseas subsidiaries.
Strong project pipeline to drive growth; Maintain Buy
- JSTL was able to partially offset the impact of a weak domestic steel market due to some favorably priced contracts. However, margins are likely to be under pressure in the near-term due to (a) domestic steel prices correcting by ~INR2-3,000/t from 1Q average, and (b) weak near-term demand outlook.
- While the near-term outlook is weak, we continue to like JSTL given its strong pipeline of projects and cost reduction initiatives. Also, its recently acquired overseas operations are expected to turnaround soon. On the domestic front, (a) improving product mix, and (2) higher captive iron ore production should put a check on costs/aid margins. Besides, JSTL's ongoing 5mtpa Dolvi expansion remains on track and provides growth visibility. We value JSTL at 7x FY20E EV/EBITDA at INR298/share. Maintain Buy.
JSW Steel Limited is a holding company. The Company is engaged in the business of production and distribution of iron and steel products. Its segments include Steel; Power (used mainly for captive consumption), and Others, which includes cement, mining and construction activities. Its product portfolio in flat and long steel products includes hot rolled (HR) coils, sheets and plates; cold rolled coils and sheets; galvanized products; galvalume products; non-grain oriented electrical steel (CRNGO); pre-painted galvanized products (color coated sheets/coils); pre-painted galvalume products; wire rods; special steel bars/wires; rounds and blooms, and angles. Its color coated products include JSW Pragati, JSW Colouron and JSW Colouron+. Its galvanized products include JSW Vishwas and GALVOS. It has plants in over six locations in India, including Vijayanagar in Karnataka, Salem in Tamil Nadu, and Tarapur, Vasind, Kalmeshwar and Dolvi in Maharashtra.
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