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Bigger picture gets better

We are upgrading JSW Steel (JSTL) to ‘BUY’ from ‘HOLD’ with an unchanged TP of INR820 as:: i) consolidation of Bhushan Power & Steel (BPSL) likely to be value-accretive; ii) volume from Dolvi expansion (5mtpa) is likely to be at a lower operating cost of 15–20%; and iii) it is the only company to have capacity ramp-up advantage through FY24E.

Going ahead, we see three key positives: i) sales volume rate at 5mt/quarter; ii) ramp-up of value-added capacity; and iii) turnaround of overseas subsidiaries. That said, lower scope of debt reduction due to capex commitment through FY24E remains the key risk. We maintain the TP of INR820 at an unchanged 5.5x EBITDA rolling over to FY23E, implying upside potential of 20%.

In-line performance as overseas subsidiaries turn around JSTL’s

Q2FY22 performance met estimates. Key points: i) Standalone EBITDA/t at INR22,944 (down 13% QoQ) owing to higher coking coal cost. ii) Blended standalone realisation was up INR2,000/t QoQ owing to prior priced exports and favourable contracts. iii) Overseas subsidiaries delivered EBITDA of INR4.9bn (Q1FY22: INR2.9bn). Going ahead, we expect: i) India sales volume to increase to ~5mt per quarter led by Dolvi ramp-up and consolidation of BPSL operations; ii) higher coking coal cost of USD95–100/t likely to impact margins; and iii) cost reduction initiatives across units and ramp-up of value-added capacity to likely lead to sustainable profitability improvement.

Looking beyond near-term impact of elevated coking coal cost

In our view, JSTL presents a compelling long-term opportunity as: i) consolidation of BPSL would be value-accretive (INR35/share); ii) it is the only company to ramp up capacity through FY24E; and iii) ongoing brownfield expansion at Vijaynagar (5mtpa) and scope to further expand BSPL capacity to 3.5mtpa present additional volume growth opportunities. However, we don’t expect material debt reduction at JSTL, unlike peers, as high capex is expected to continue through FY24E. That said, we expect the entire capex to be met through internal accruals, resulting in 32–35mtpa capacity by FY25E at nearly unchanged debt levels.

Outlook and valuation: Prospects getting better; upgrade to ‘BUY’

We view the additional value of INR35/share from BPSL consolidation and the volume uptick through FY24E mitigating the impact of higher coking coal prices in the near term. All in all, we are upgrading the stock to ‘BUY’ at an unchanged TP of INR820/share (5x FY23E EBITDA), implying upside potential of 20%..

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