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Benefits of operating leverage keeps EBITDA intact

JSW Steel (JSTL)’s earnings were in-line with EBITDA of Rs 91.8bn (CentrumE: Rs91.4bn), flat QoQ. Standalone numbers (EBITDA of Rs69.1bn, up 2% QoQ; CentrumE: Rs71bn) were affected from lower steel prices and higher coal cost offset by higher volumes as Dolvi plant has been ramping up well. As a result, EBITDA/t fell by ~Rs3,476 to Rs13,517/t. We expect JSTL’s margins to be under pressure in 1HFY23 amid higher coking coal prices and softening steel prices especially after Government of India imposition of 15% export duty on steel products. JSTL will continue exports and take a hit on export duty as it will not be possible to sell the entire volume growth envisaged in FY23 (~3.5mt). We cut FY23/FY24 EBITDA by ~28%/~9% to factor in higher coal cost and 15% export duty levied by GoI on 21st May 2022. With fall in earnings, we cut our TP to Rs625 (earlier Rs763), valuing at 6.0x FY24E EV/EBITDA. Recommend ADD rating on the stock.

Higher volume offset lower steel prices and higher coal prices

JSTL’s standalone EBITDA increased 2% QoQ to ~Rs69.1bn but EBITDA/t was down Rs3,476 QoQ to Rs13,517/t. Higher volumes (up 27.8% QoQ to 5.11mt) offset higher coking coal (up ~USD52/t QoQ) and lower blended steel realisation (down ~3% QoQ). Q3FY22 was affected by start-up cost for new 5mtpa Dolvi expansion which subsided now. EBITDA of erstwhile Bhushan Power (became 83.28% subsidiary from October 2021) was flat QoQ at Rs15.5bn (EBITDA/t of Rs19,910 v/s Rs26,672 in Q3FY22) and constituted ~17% of consol EBITDA. Management guides coking coal cost to increase by ~USD125/t QoQ in Q1FY23 which will hit margins along with additional export duty.

Net debt down ~15% QoQ to ~Rs567bn

The working capital release amid inventory liquidation helped JSTL to reduce net debt by ~Rs100bn QoQ to Rs566.5bn. The capex spent was Rs142bn (cashflow impact of Rs100.9bn) in FY22. Despite FY23 capex of ~Rs190bn, we believe JSTL’s debt to reduce to Rs515bn (Net debt/EBITDA of 2x) in FY23 with further release of working capital.

Near term weakness prevails, recommend ADD with TP of Rs625

The imposition of 15% export duty on steel, continued high coking coal prices is expected to affect margins which is expected to fall further in Q1FY23 (EBITDA/t of ~Rs9,500 in Q1FY23E v/s ~Rs13,517 in Q4FY22). While steel prices are expected to fall soon, coking coal price too will fall with a lag. The ramp up of 5mtpa Dolvi unit will help in volume CAGR of 7% during FY22-24E. JSTL does not intend to reduce exports much and is going ahead with its expansion plans. The sharp fall in coking coal prices is essential for margins to recover in H2FY22. We value JSTL at 6.0x FY24E EV/EBITDA and arrive at a TP of Rs 625. We recommend ADD.

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