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JSW Steel - Start of EBITDA contraction cycle - ICICI Securities

Posted On: 2021-10-24 15:35:57 (Time Zone: IST)


Majority of the discussion in the Q2FY22 results conference call of JSW Steel (JSWS) revolved around quarterly increase in coking coal price to come through and the levers management has to counter the same. Coking coal prices at US$400/te has started the EBITDA correction cycle after 5 quarters of upcycle (starting from Q1FY21). We expect the cycle to play out over the next 4-5 quarters. Q2FY22 print (standalone) was inline at EBITDA (EBITDA/te at Rs22944/te was down Rs3346/te QoQ), while higher other income led to beat in PAT. Overseas business as well as JSW Coated has witnessed significant traction in the quarter with ~Rs17.4bn of subsidiary EBITDA (vis--vis ~Rs7bn QoQ) driving consolidated EBITDA beat. Bhushan Power (BPSL) surprised our estimates with a Rs20bn Q2FY22 EBITDA (EBITDA/te at Rs26,605/te). We downgrade JSWS to REDUCE from HOLD with a revised target of Rs625/share (1.7x FY24E P/B).

  • India capacity moving towards 33mtpa. 5mtpa Dolvi expansion has commenced operations. Project to increase steel-making capacity by 5mtpa at Vijayanagar from the existing 12mtpa is also underway. Total estimated capex is Rs150bn. Expansion is expected to be completed by FY24. Management expects to leverage existing facilities at Vijayanagar i.e surplus pellets, sinter, coke making facilities at existing operations to meet the key raw material requirements. There are also plans for expansion at Vijayanagar of existing facilities to enhance capacity by further 2.5mtpa (1+1.5) in phases. Organic brownfield capacity expansion capex well below global benchmarks of replacement cost of ~US$1,000/te for BF-based capacity. Further management announced ~ Rs30bn capex for expanding BPSL capacity from 2.6mtpa to 5mtpa. With 15mtpa capacity coming on-stream in next three years, management appears confident of suitable placement of the same.
  • Subsidiary EBITDA witnessed a significant turnaround in Q2FY22, driving the consolidated beat. Meaningful beat was witnessed in JSW Coated with EBITDA/te reaching an all-time high of Rs14,743/te (up Rs986/te QoQ, we were expecting a moderation in profitability). US reported an EBITDA of US$13.16mn (EBITDA/te declined QoQ). Ohio operations has seen a meaningful turnaround with Q2FY22 EBITDA of US$48mn (up 2.5x QoQ). Management still underlines scope of further improvement in Ohio's profitability. Improvement is also witnessed in operating performance of Piombino (Italy) with EBITDA at 6.1mn against (4.6mn) QoQ. Global operations, combined reported an EBITDA of Rs5bn against Rs2.8bn QoQ.
  • Downgrade to REDUCE. We have consolidated BPSL financials into JSWS financials. The completion of the upstream and downstream capex can help improve the throughcycle EBITDA and RoE profile. This should manifest in the next downturn. This explains our high 1.7x P/B (FY24E) multiple. Our downgrade reflects our view on the steel cycle.

Shares of JSW Steel Limited was last trading in BSE at Rs. 667.90 as compared to the previous close of Rs. 673.45. The total number of shares traded during the day was 321457 in over 7622 trades.

The stock hit an intraday high of Rs. 690.45 and intraday low of 658.30. The net turnover during the day was Rs. 215286456.00.


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