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MOSL: JSW STEEL (Buy)-Strong results-stepping up capex buoyed by demand; Raising estimates and TP

JSW Steel: Strong results; stepping up capex buoyed by demand; Raising estimates and TP; Maintain Buy

(JSTL IN, Mkt Cap USD12.0b, CMP INR377, TP INR394, 17% Upside, Buy)

 

JSW Steel (JSTL) delivered very strong performance driven by sharp expansion in spreads and improving domestic demand. Consolidated EBITDA increased 28% QoQ / 56% YoY to INR49.2b (14% ahead of est.). Adj. PAT increased 46% QoQ to INR26.7b (est. INR17b). PAT is adjusted for GST gains and deferred tax asset in US, together totaling INR10.9b.

• Standalone EBITDA per ton expanded by INR2,080 QoQ to INR11,081  on higher realization. Margins in color coated also improved QoQ. US plate and pipe mill utilization improved sharply QoQ/YoY to 30%.
• For FY18, consolidated EBITDA increased ~20% YoY to ~INR147b and PAT increased ~57% YoY to INR56b.

 

Timely investment for next phase of growth; Maintain Buy

• JSTL has sharply increased capex by INR176b to INR444b that will increase its steel capacity from 18mt to 24.7mt (earlier 23mt), increase its value-add product mix and further improve its raw material integration by FY20-21E. Domestic steel demand witnessed strong growth in FY18 after long-period of lull. Global demand outlook has also improved, while at the same time the supply side is more favorable. JSTL's timely expansion at low specific capex will drive gains from the ongoing recovery in the steel cycle in India.
• We have raised consol. EBITDA estimates by ~10% for to INR172b/173b FY19/20E and PAT by ~27% to INR73b/74b on higher steel spreads. JSTL deserves higher valuation multiple for its most efficient opex, capex, lower volatility in margins and aggressive growth. Its balance sheet is strong with net debt/EBITDA ratio of less than ~3x. We value it at 7x FY20E EV/EBITDA at INR394/sh (earlier INR334).  Maintain Buy.