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Focus on growth to keep capex elevated

Remains the best play on volumes in the sector

* JSTL’s 4QFY21 result was strong, with consolidated EBITDA/PAT growing by 42%/60% QoQ to INR84.4b/INR42.8b on higher steel prices. Standalone EBITDA/t was the highest ever at INR19,756.

* Given its strong growth focus, JSTL announced an expansion of 6mtpa (26%) at its Vijayanagar plant, which should be commissioned by FY24-end. The to be commissioned 5mpta expansion at Dolvi would expand JSTL’s capacity by ~60% over the next three years, thereby making it the best play on volumes in the Indian Steel sector.

* We raise our FY22E/FY23E EBITDA by 35%/28% to factor in strong pricing. Maintain Buy.

Consolidated EBITDA up 42% QoQ led by strong steel spreads​​​​​​​

* Led by strong spreads, JSTL reported a 42% QoQ growth in EBITDA to INR84.4b (highest ever) v/s our estimate of INR79.8b. Adjusted PAT was up 60% QoQ to INR42.8b (est. INR40b).

* Standalone EBITDA grew 42% QoQ to INR80.2b, led by ~22% growth in realization to INR60,094/t and 4% higher volumes at 4.06mt (est. 3.94mt), partly offset by higher iron ore prices, increase in power cost, and greater other expenses. EBITDA/t rose 37% QoQ to INR19,756/t (est. INR19,029/t).

* EBITDA for subsidiaries increased 34% QoQ to INR4.2b, led by 31% rise in JSW Coated’s EBITDA to INR5.2b. JSTL’s three key overseas subsidiaries reported a loss of INR2.4b in 4QFY21 v/s a loss of INR2.1b in 3Q.

* Reported net debt increased INR8.2b QoQ to INR526b. This was due to cash outgo of INR50.9b towards acquisition of Bhushan Power and Steel during 4QFY21. Reported net debt/EBITDA ratio stood at 2.61x v/s 4.5x in FY20.

* Consolidated revenue/EBITDA/PAT stood at INR796b/INR200b/INR78.9b in FY21, up 10%/79%/2.6x YoY. Consolidated OCF/FCF stood at INR188b/INR95.3b v/s INR128b/(INR0.3b) in FY20.

* Despite a strong OCF, debt reduced by just INR8.6b in FY21 due to higher capex spending (INR82.3b) and acquisitions (Asian Color Coated – INR15.5b and BPSL – INR50.9b).

* The company announced a dividend of INR6.5/share.

Highlights from the management commentary​​​​​​​

* JSTL announced a 5mtpa capacity expansion at Vijayanagar from the existing 12mtpa at a capex of INR150b (~USD400/t) by FY24-end. This includes capex for a blast furnace and a steel melting shop.

* The management guided at production and sales of 18.5mt/17.4mt in FY22, with new Dolvi capacity contributing 1.5mt/1.4mt.

* Capex spend guidance | FY22: INR182b, FY23: INR175b, and FY24: INR118b.

* Fully integrated operations at Dolvi is expected to commence in Sep’21.

Valuation and view – strong project pipeline to drive growth

* We like JSTL given its strong project pipeline and cost reduction initiatives, which should support margin. Over FY21-23E, we expect above industry 17% volume CAGR, driven by the Dolvi expansion.

* The announced 5mtpa expansion by FY24, at a competitive cost of ~USD400/t, should be RoCE attractive and improve growth outlook beyond FY24.

* Despite the high capex, we expect net debt to decline by ~17% over FY21-23E to INR514b.

* We value JSTL at 6x FY23E EV/EBITDA to arrive at our TP of INR816. Buy.

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