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Robust quarter; 4QFY21 to be even stronger

Reiterate Buy on strong earnings outlook

* JSTL reaped the benefits of higher pricing as consolidated EBITDA/PAT grew 40%/80% QoQ to INR59.1b/INR26.8b, beating our estimates by ~12%/19%. Standalone EBITDA/t was at a record high of INR14,444 (v/s our estimate of INR13,123).

* We expect 4QFY21E EBITDA margin to be even stronger ~INR18,000/t as spot steel price is ~INR9,000/t higher than its 3Q average. We raise our FY21E EBITDA by 8% to factor in strong pricing. Maintain Buy

Consolidated EBITDA up 170% YoY/40% QoQ on strong steel spreads

* Consolidated EBITDA rose 40% QoQ (170% YoY) to INR59.5b (v/s our estimate of INR53b) on higher spreads. Adjusted PAT was up 80% QoQ to INR26.8b. The beat was led by higher-than-expected realization in India.

* Standalone (S/A) EBITDA grew 35% QoQ (133% YoY) led by ~22% realization growth, which drove 42% rise in EBITDA/unit to INR14,444/t (v/s our estimate of INR13,123/t). Blended realization included ~INR1300/t contribution from higher iron ore sales. Volume declined 5% QoQ to 3.9mt due to lower exports (only 10% of sales v/s 28% in 2QFY21).

* EBITDA for subsidiaries rose to INR3.1b from INR0.8b in 2QFY21, led by 38% QoQ rise in JSW Steel Coated’s EBITDA to INR4b. While loss in JSTL’s three key overseas subsidiaries remained high at INR2.1b (v/s loss of INR2.1b in 2QFY21), we expect it to decline to INR1b in 4QFY21.

* Net debt declined INR11b QoQ to INR518b despite an INR15.5b infusion in Asian Color Coated. Net debt-to-EBITDA fell to 3.53x.

* 9MFY21 revenue/EBITDA/adjusted PAT stood at INR527b/INR115b/INR36b, -4%/+41%/+220% YoY.

Highlights from the management commentary

* The management expects Indian steel demand to grow 10-12% YoY in FY22 and prices to be at a discount to current import parity.

* It lowered its production guidance to 15.2mt from 16mt earlier, but expects to meet its sales guidance of 15mt in FY21 (10.8mt in 9MFY21).

* JSTL expects to complete the 5mtpa Dolvi capacity expansion by 4QFY21 end. However, complete integration of operations and stabilization would take place in 1QFY22.

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 16% CAGR in volume, led by Dolvi expansion. Any turnaround in its lossmaking overseas operations could provide a further upside.

* Despite high capex, we expect net debt to decline by ~10% over FY20-22E to INR578b. Deleveraging should accelerate post FY22 as capex ends and invested projects start generating cash flows. However, the BPSL acquisition may add INR30b in debt (assuming 30% equity in a 50:50 JV).

* We value JSTL at 6.5x FY22E EV/EBITDA to arrive at a TP of INR435. Buy.