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Export duty impacts volumes, capacity exp. to drive earnings growth

JSW Steel reported 1Q consol. EBITDA of INR43.1bn, lower than JMfe of INR52.5bn. Standalone EBITDA came in line at INR33.5bn, implying an EBITDA/t of INR8.3k. EBITDA margin came in lower QoQ primarily due to a steep increase in coal and energy prices, unrealised loss on outstanding foreign currency loan and provision on closing inventory due to lower price at quarter end. BPSL performance dipped QoQ with revenues decreasing 23% and EBITDA declining 55% QoQ. JSW coated reported an EBITDA loss of INR1.5bn impacted due to net realisable value (NRV) provision and payment of export duty. Ohio operations reported an EBITDA of US$1mn vs US$10mn in 4Q. Net debt stood at INR672bn up ~INR105bn QoQ primarily due to working capital build up. Key takeaways from the call are a) coking coal cost decrease expected to be in the range of ~US$50-60/t in 2QFY23 b) iron ore cost reduction partially reflected in 1Q, full impact expected in 2Q b) discretionary capex of FY23 to be reduced by ~INR50bn. JSW preponed certain shutdowns scheduled during the year given the volatile market conditions, resulting in sequentially lower production. The company continues to aggressively add capacity across facilities – a) Vijaynagar expansion to be completed by FY24 b) downstream projects at Vasind and Tarapur to be completed by 2QFY23 c) expansion at BPSL to 3.5mtpa to be completed by 2QFY23 d) BPSL Phase-II expansion (from 3.5mtpa to 5mtpa) is expected to be completed by FY24. Strong growth pipeline and cost efficiency augurs well for the company. Maintain BUY with revised target price of INR610/sh (refer exhi.7).

* Standalone India ops. impacted by higher raw mat. inflation: Sales of Saleable Steel for the quarter was 4.03 million tonnes, lower by 21.1% QoQ, led by sharp drop in export volumes post imposition of export duty and deferral of procurement by user industries on expectation of further fall in steel prices. Realisations increased by ~6.7k/ton QoQ. Exports during the quarter decreased 46% QoQ. EBITDA/ton came in at INR8.3k, in line with JMfe. The EBITDA margin was lower QoQ primarily due to a steep increase in coal and energy prices, unrealised loss on outstanding foreign currency loan due to rupee depreciation and provision on closing inventory due to lower price at quarter end

* Subsidiaries largely underperform: JSW Coated reported an EBITDA loss of INR1.5bn in 1Q. Ohio operations reported an EBITDA of US$1mn vs US$10mn in 4Q. US plate and pipe mill, however, registered higher EBITDA of US$33.1mn in 1Q. BPSL performance dipped QoQ with revenues decreasing 23% and EBITDA declining 55% QoQ.

* Net Debt increases due to working capital build up: Company reported a net debt of INR672bn up 18.7% QoQ. The company incurred a capex of INR37bn during the quarter. The 5mtpa brownfield expansion at Vijaynagar is progressing well, with civil works underway at the site and long lead time items ordered. The company expects Vijaynagar expansion to be completed by FY24. Downstream projects at Vasind and Tarapur expected to be completed in Q2FY23. Expansion at BPSL to 3.5mtpa is expected to be completed by Q2FY23 while Phase-II expansion (from 3.5mtpa to 5mtpa) is expected to be completed by FY 2024.

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