Has JSW Steel run out of steam?

Despite having reported an almost fourfold surge in June quarter consolidated net profit to ₹2,339 crore,  JSW Steel stock price is quoting almost 10% lower from its recent highs of 343. Let analyse whats in store for the stock in the future.

Key Operation Highlights:

  • Crude steel production was up  ~5% yoy at 4.11 mn tonnes
  • Consolidated saleable steel sales stood at 3.76 mn tonnes, up by 11% YoY
  • Blended realisation grew to ~ Rs. 48,200/t, up by 11% YoY and 7% QoQ on the back of a better product mix, higher sales in domestic markets and favourable international steel price
  • Consolidated revenue grew by 25% yoy to Rs. 20,519 crores
  • Operating EBITDA at Rs 5,105 crores, up by 95% YoY
  • PAT grew fourfold to Rs. 2,339 crores
  • Standalone EBITDA/t stood at Rs. 12,590/t, up 100% YoY and 5% QoQ

Result highlights

Whats in store going forward:

  • Management has guided for FY19 sales volumes to scale to 16mt, a growth of 2.5% YoY.
  • Raw material costs largely remained in control due to flat coking coal prices in Q1FY19 and blending of high grade ore from Orissa and imports in place of relatively low grade Karnataka ore. Despite the change in sourcing strategy, there is no significant rise in iron cost and is expected to be continued going forth.
  • The company expects to commission its ~20mtpa conveyor belt by October, 2018. This will help in bringing down freight cost to Rs. 100/t from Rs. 450-500/t thus enabling improving Ebidta/t.
  • The company awaits final order from NCLT to complete acquisition of Monnet Ispat.
  • The Dolvi capacity expansion to 10 mtpa from 5 mtpa is on track to be commissioned by March 2020.
  • The Supreme Court has increased iron ore mining cap from 30mtpa to 35mtpa in Karnataka. Out of 5 mines won by JSW, the company has started 2 mines (capacity of 0.7mtpa). The company further expects the balance 3 mines to start operations by end of Q3FY19. The combined capacity of 5 mines is 4.3mtpa which will help in substituting imports and materials from Odisha. This will help JSW in saving logistics cost. The company will further bid for upcoming eight ‘Ç’ category mines in Q4FY19 with a combined capacity of ~10mtpa.
  • The company is also looking to invest ~US$500m in its US plate & pipe mill in phases in next two years. The company has a long term plan of ~8mtpa steel-making capacity overseas (~4mtpa in US and ~4mtpa in Europe)
  • The company completed the acquisition of US based steel company, Acero Junction plant during Q1FY19. This plant has 3mtpa facility with backward integration of 1.5mtpa.

Whats i store going forward: 

Domestic demand expected to remain strong

Domestic demand has improved in Q1FY19 (up ~9% yoy to 23.59mt) while net Indian steel imports (0.28mt) in Q1FY19 have gone up as a fall out of  dumping from the US Trade wars. As a result we believe that realisations have peaked out at least in the short run.

China policy key to price resurgence

In July’18, prices of steel commodities have moderated with long products losing more than 10% due to seasonally weak demand. With concerns over trade wars still hovering, uncertainty lies on the direction of prices. However what is encouraging is that prices in China have held out and with more capacity cuts planned and China expected to loosen its monetary policy pricing power might just return in the not too distant future. We have reason to believe that global growth will continue and capacity utilizations will continue to remain elevated and hence pricing rebound should happen sooner than later.

Profitability for JSW Steel has peaked; Dolvi expansion the next key trigger but only post FY20

JSW Steel Ltd. is already operating at ~90% of installed capacity and management has guided for a volume of 16 mn tonnes, up ~2.5% YoY during FY19. The company is taking measures to cut down cost through sourcing of ore from own mines and transporting through conveyors to reduce freight costs. However, we believe that in the short term profitability may have peaked (Q2 is anyways a soft quarter). We expect the next phase of growth in volumes post FY20 once Dolvi expansion is completed.

Expect balance sheet leverage to get further extended given the company’s aggressive expansion plans.

Valuation and View:

At the CMP of Rs. 312, JSW Steel Ltd. ( M cap Rs. 75,586 Cr.) is trading at 6.4x EV/EBITDA for FY20. We believe that the stock is fairly valued and has little upside room for expansion.

We believe that in the steel sector Sail (CMP 74,  MCap INR 29,750 Cr) offers much more upside with lowered risk given the surge in expected production post completion of a large capacity expasion. Check our recent initiating coverage report on Sail 

 

 

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