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Remains the best volume play in the sector

Raise FY22E/FY23E EBITDA by 21%/23% on better price outlook

We are raising our FY22-23E EPS for JSW Steel (JSTL) by 42-48% to factor in improved Steel price outlook and accretion from the acquired assets of Bhushan Power and Steel (BPSL). We reiterate a Buy on JSTL as the best play on volume growth in the Indian Steel sector. Over FY21-23E, we estimate 16% volume CAGR (excluding BPSL), which should drive 22%/37% EBITDA/EPS CAGR. We also estimate net debt to fall by 26% over FY21-23E to INR483b (1.7x FY23E EBITDA) despite an ongoing capex program to expand its upstream and downstream Steel capacities.

Dolvi expansion to drive strong volume growth

* We expect the 5mtpa Dolvi expansion, which is expected to be completed in 1QFY22, to add 2.1/4mt to JSTL’s volumes in FY22E/FY23E, factoring in 50%/80% capacity utilization. This should help JSTL achieve above industry volume growth of 22%/11% in FY22E/FY23E, implying 16% CAGR.

* Given a strong Steel cycle, we expect realization to remain high in the medium term, which, coupled with a 16% volume CAGR, should boost EBITDA by 22% CAGR over FY22-23E. Every INR1,000/t increase in Steel prices improves JSTL’s FY22E EBITDA by 5%.

* Completion of downstream capacities at Vijaynagar, Vasind, and Tarapur would improve JSTL’s product mix and realization.

BPSL acquisition to be EPS accretive

* BPSL’s acquisition has been completed at an opportune time as the Steel cycle is looking strong, which should help earn a post-tax RoCE of ~13% on the investment. Based on the acquisition cost of INR193.5b, we estimate a reasonable 6.4x implied FY22E EV/EBITDA.

* The acquisition has been done through Piombino Steel (PSL), which raised INR86.1b from the JSW group (INR50.9b from JSTL and INR35.2b from JSW Shipping & Logistics Pvt) through a combination of equity and convertible debt. The balance INR100.8b was raised through short-term debt repayable in Mar’22.

* Post implementation of the resolution plan to acquire BPSL, JSWSL converted its debt into equity, thereby raising its stake in PSL to 51%. As a result, JSTL’s stake in PSL has been reduced to 49%. JSTL holds optionally convertible debentures in PSL which can later be converted to equity to make PSL (and BPSL) a subsidiary of JSTL. For the time being, BPSL will thus be classified as an associate and its share of profit/(loss) will be added to the consolidated PAT of JSTL.

* We expect the ~3mtpa (operating ~2.7mtpa) BPSL asset to generate an EBITDA of INR30.3b/INR32.1b in FY22E/FY23E, based on an EBITDA/t of ~INR12,100 – ~INR3,000/t lower than JSTL’s own operations due to a weaker volume mix.

* After providing for interest cost, depreciation, and nil tax (due to accumulated tax losses), we expect BPSL to report a FY22E/FY23E PAT of INR14.0b/INR15.8b. Of this, JSTL’s share (based on 49% stake) would be INR6.9b/INR7.8b in FY22E/FY23E. We estimate this to result in an increase of ~3% in consolidated EPS of JSTL.

* We expect JSTL to convert the debt given to PSL into equity over the next 2-3 years, thereby raising its stake above 50% and later merge BPSL with itself. Besides increasing its volume market share, merger of BPSL with JSTL would result in tax synergies as BPSL has large accumulated tax losses.

Cash flows to take care of capex and debt reduction

* Expected robust EBITDA in FY22E/FY23E would take care of JSTL’s high planned capex and aid deleveraging. Of the INR487b mega capex that JSTL unveiled in FY17, INR166b is expected to be spent over FY22-23E on various remaining projects.

* Despite higher capex, we expect JSTL to generate FCF of INR266b in FY22-23E, which should aid debt reduction by INR173b, or 26%, to INR483b by FY23E.

Valuation is reasonable

* JSTL trades at FY22E EV/EBITDA of 6x, which is a 20% discount to its past fiveyear average of 7.4x. On a FY22E P/BV basis, it trades at 2.1x, which is a 20% premium to its past five-year average of 1.75x. This we believe is justified given its improving RoE profile – 30% in FY22E as against its last five-year average of 18%.

* We value JSTL at 6.5x FY22E EV/EBITDA and its investment in BPSL at 1x P/B to arrive at our TP of INR610. Reiterate Buy.

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