MOSL: JSW STEEL (Buy)- Margin expansion better than expected; A strong pipeline of projects to drive growth
JSW Steel: Margin expansion better than expected; A strong pipeline of projects to drive growth; Reiterating Buy
(JSTL IN, Mkt Cap USD11.1b, CMP INR317, TP INR385, 22% Upside, Buy)
JSW Steel (JSTL) reported better-than-expected 1QFY19 results. Insulating the impact of regrouping and one-offs related to GST in 4QFY18, spreads (between steel prices and RM cost) increased ~INR2,488/t QoQ, which was offset by INR400/t increase in power & fuel cost and other operating cost. On a net basis, EBITDA per ton increased by INR1,510 QoQ to INR12,590/t (USD194) for the standalone business.
- EBITDA grew 4% QoQ/86% YoY to INR51b (21% beat), even as volumes declined 9% QoQ to 3.8mt in a seasonally weak quarter. Adj. PAT of INR23.6b (-11% QoQ/257% YoY) was 33% ahead of our estimate.
- JSTL has acquired a few assets in the US (1.5mtpa HRC capacity at Acero at EV of USD182m) and Italy (1.3mtpa rolling mill at Aferpi for EUR55m) at low cost. It has charted a plan to invest USD1b in the US to scale up the EAF route crude steel capacity of Acero and its old plate & pipe mill to 4mtpa in order to leverage from trade restrictions and oversupply of scrap locally. Although JSTL is yet to demonstrate its execution skills in that country, it is a good bet given that initial investment is low and capex is staggered. There is a high probability of a positive surprise. Monnet Ispat, too, will eventually be merged. It is an attractive addition of 1.5mtpa capacity at the valuations mentioned in media. Organic growth of 6.7mtpa at Dolvi and Vijaynagar will give a boost to volumes in FY21. We see a very strong growth outlook for the company.
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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