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Published on 7/09/2020 10:04:35 AM | Source: ICICI Securities Ltd

Hold JSW Steel Ltd For Target Rs.214 - ICICI Securities

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Weathered the storm

We downgrade JSW Steel (JSWS) to HOLD (from Add). The downgrade is an outcome of our framework-based assessment, which does not justify a P/BV of >1.2x given the through-cycle RoE potential. Q1FY21 standalone EBITDA was largely in line with our estimates; however, it is the decline in ‘other expenses’ that helped EBITDA/te match the expected print. With ~60% of volumes exported and the automotive segment accounting for 3% of volumes, margins faced multiple headwinds only to be partly supported by cost efforts (‘other expenses’ fell by ~Rs2,000/te). Consolidated EBITDA surprise was driven by improved performance of Indian subsidiaries (excluding JSWS Coated) while overseas subsidiaries continued to incur heavy EBITDA losses. Management maintains its FY21 sales guidance of 15mnte. Net debt rose by Rs10bn QoQ driven by increased mining capex and advances paid for mining.

 

* Net debt to EBITDA ratio reaches 5.7x in Q1FY21; may reach 8x if Bhushan Power acquisition is completed in FY21. Yet, with improving demand outlook and easily accessible export market, risk to earnings are limited. Net debt increased by Rs10bn QoQ driven by Rs12.9bn of upfront payment as advances, apart from spend of Rs8.17bn as capex + NPV + stamp duty. JSWS generated positive operating cashflow in Q1FY21.

* International subsidiaries continue to bear EBITDA losses. International subsidiaries continued to incur EBITDA losses (US$30mn in Q1FY21). They will require funding if profitability lingers at current levels. Additionally, the management has planned US$50mn capex for the overseas plants in FY21. We have seen increased advances (Rs12bn YoY in FY20) from standalone to Periama Holdings to support US operations (steel + coal mining). Management hinted at turnaround plans that could include closure of Ohio plant till revamp of EAF is complete.

* Dolvi plant commissioning on track. Complete commissioning of Dolvi plant expansion (5mtpa to 10mtpa) continues to be targeted for FY21-end. Strategic capex in JSWS Coated Steel to increase value added capacity by 2mtpa to accommodate increased Dolvi plant volumes is progressing well. Number of migrant workmen in Dolvi has increased steadily from the low of 3,000 in April to 4,900 currently. Downstream capex, along with capex for setting up slurry pipelines in Karnataka and Odisha, remain the key priority projects to complete

* Downgrade to HOLD. Panic surrounding Covid-19 pandemic presented an opportunity, which is largely captured post ~ 45% price rally that JSWS has witnessed since Mar, ’20 . Earnings upgrade will follow. Yet expectations are already mature. We see shadow expectations moving towards an FY22E standalone EBITDA of US$120/te. Bhushan Power acquisition is yet to be completed.

 

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