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MOSL: JSW STEEL (Buy)-Shifts to higher-margin path and sees demand pickup

jsw sTEEL: Shifts to higher-margin path and sees demand pickup

(JSTL IN, Mkt Cap USD11.0b, CMP INR290, TP INR339, 17% Upside, Buy)

 

JSW Steel (JSTL) reported a significant improvement in margins led by expansion of spreads (difference between price and RM cost), and sees demand picking up in India. 3QFY18 consolidated EBITDA increased 27% QoQ to INR38.5b on expected expansion of margins. JSTL provided INR2.6b toward surrendering of an unviable mine in Chile and reversed deferred tax by INR5.7b on tax rate reduction in the US. Adj. PAT of INR18.3b (est. of INR16b) increased 118% QoQ to INR18.3b.

• Standalone sales increased 1% QoQ to 3.97mt. Share of exports increased 6pp QoQ to 30%. EBITDA/t increased by INR1,533 to INR9,000, primarily led by an increase in average realization.
• JSW Coated’s margins have been facing headwinds from pressure exerted by imports. Capacity utilization and EBITDA at the US mills are gradually improving. Salav’s operating performance too is stable.
• Net debt (incl. acceptances) declined INR11.6b QoQ to INR514b. Capex is likely to be at INR60b in FY18, 25% lower than the earlier guidance.
• The margin outlook for 4QFY18 is stable at current levels, as there is sufficient steel price increase to offset cost pressure from iron ore and coking coal.
• JSTL is likely to benefit from captive iron ore mines (one lease already signed), enhancement of mining limit by 5mt and conveyor in Karnataka during FY19E.