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JSW Steel’s (JSTL) Q4FY23 EBITDA surpassed consensus estimates. Key points: 1) consolidated EBITDA surged 75% QoQ to Rs.79.4bn (down 14% YoY) owing to positive price-cost effect, mainly at standalone operations; 2) both shipments and EBITDA/te at the standalone level were ahead of estimates; 3) performance of all the subsidiaries improved; 4) gross debt was down by just Rs6.1bn QoQ to Rs800.6bn. Going ahead, management expects combined sales volumes at 25mnte for FY24 (FY23: 22.8mnte) and coking benefits to flow in from Q2FY24.

In our view, the risk-reward in JSTL stock is balanced at this stage. On one hand, volume growth in FY24E/FY25E is likely stay ahead of peers and, on the other, debt remains high and is unlikely to come off in light of the company’s capital commitments. That said, the stock price has corrected and is trading near its 10- year historical mean EV/EBITDA. We introduce FY25E numbers at this stage and roll over to FY25E valuations. Our revised target price is Rs675 (earlier: Rs550) on an unchanged multiple of 6.2x FY25E EBITDA. Upgrade to HOLD (from Sell).

* Impressive performance: JSTL’s Q4FY23 consolidated EBITDA of Rs79.4bn (up 75% QoQ, down 14% YoY) was 17% ahead of street estimates. Key points: 1) standalone EBITDA/te at Rs10,998 was 35% QoQ higher owing to higher blended realisation (up Rs3,000/te QoQ) and lower coking coal cost (down US$6/te QoQ); 2) JSW Steel Coated Products’ EBITDA rebounded to Rs4.3bn (post losses in three successive quarters); 3) Piombino (Italy) delivered EBITDA of EUR13.4mn (up nearly 2x QoQ) on steady rail orders from Italian Railways; 4) BPSL’s EBITDA/te also surged 2.7x QoQ to Rs13,366; 5) FY23 standalone shipments at 19.8mnte were 3% lower than guidance; 6) capex in FY23 was at Rs142.1bn vs guidance of Rs150bn; 7) Board recommended a dividend of Rs3.4/share. Going ahead, management expects growth to be largely volume-driven with Dolvi-II and BPSL ramp-up in FY24 (adding ~2mntpa to sales volumes), followed by contribution from the 5mtpa brownfield capacity at Vijayanagar and expansion of BPSL capacity to 5mtpa (FY23: 3.5mpta). Besides, lower price of coking coal (down US$100/te in past three months) is likely to flow into the P&L from Q2FY24, resulting in higher margins.

* High gross debt and capex commitments make the stock more vulnerable to the steel cycle: Despite JSTL’s excellent performance, we are a tad disappointed at the insignificant reduction in gross debt QoQ. Furthermore, the company has capex plans of Rs188bn and Rs185bn for FY24 and FY25 respectively. During the earnings concall, management stated that gross debt is unlikely to come off and, in fact, is likely to rise by Rs30bn, once the consolidation of JSW Ispat Special Steel Products is complete. ‘Net debt/EBITDA’ at 3.2x is also much higher compared to peers. That said, we believe JSTL has the highest volume growth capability among peers over next two years and this balances the risk-reward at this stage.

* Outlook & valuations – Fairly valued: Despite significant volume growth potential, we see the CMP already pricing-in many of the positives. That said, we expect the planned capex to be funded through internal accruals, hence a further increase in debt is unlikely. At CMP, the stock is trading close to its past 10-year historical average of 6.4x. We roll over our valuation to FY25E and value the stock at an unchanged multiple of 6.2x FY25E EBITDA. Our revised target price works out to Rs675 (earlier: Rs550). Upgrade JSTL to HOLD (from Sell).

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