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Unleashes Rs475bn capex program till FY24E

JSW Steel (JSWS) announced Rs 475bn of capex over FY22-24E. While the headline number may appear large, it involves completion of ongoing capex projects over FY22/23E and announcement of 5mtpa expansion in Vijaynagar (steelmaking) and mining infra capex of ~ Rs35bn. Negatives are i) taking away any meaningful scope over deleveraging over the medium term, despite management putting out a more conservative through cycle 2.6x ND/EBITDA target and ii) may inspire sector peers to aggressively follow. Positives are i) higher through cycle EBITDA/RoE given the progressive commissioning of cost savings/downstream projects and ii) with Bhushan power and Monnet, en-route to reach 35mtpa capacity by FY25E, becoming more and more regionally relevant. Q4FY21 standalone EBITDA numbers were largely in line at Rs19,756/te. We upgrade to HOLD from Reduce with a revised target of Rs660 (Rs565 earlier).

Unleashes Rs474bn of capex program from FY22-24E.

This includes accelerated completion of Rs 223.5bn of old capex program (with minor modifications) in two years. Also, Rs251.2bn of new capex programs have been announced. The new capex program consists of i) 5mtpa expansion at Vijaynagar for Rs 150bn expansion ii) Rs34.5bn of mining infrastructure capex towards more mechanization and reducing costs of mining and iii) Rs66bn of sustenance capex. The glide path of capex takes out any meaningful scope of deleveraging, even under elevated margin assumptions – a clear negative. Combined with Bhushan and Monnet, this also places JSWS on course towards 35mtpa of crude steel capacity by FY25E. Completed downstream expansion will also help downcycle EBITDA. There are sectoral implications as this kind of capex announcement may also draw peers to be a bit more aggressive on capex.

Overseas subsidiaries witness steady operational improvement.

(Adjusted) EBITDA for Q4FY21 stood at Rs1.6bn against Rs830mn (loss) QoQ. Including provisions, overseas EBITDA loss was Rs3.2bn (reported). Q4FY21 witnessed ~ Rs 4bn of EBITDA contribution from all subsidiaries.

Projects update – Integrated Dolvi operations expected to start from Sept, ’21 now; delayed by a quarter

The expansion project at Dolvi from 5 to10mtpa is nearing completion. Full integrated operations and stabilization will take place in Q3- Q4FY22 with the commissioning of BF/SMS. Coke oven, pellet plant and HSM have been commissioned in Q4FY21. 8mtpa pellet plant in Vijaynagar is commissioned; while 1.5mtpa coke oven will come up in phases by Q3FY22.

Upgrade to HOLD from Reduce

The completion of the upstream and downstream capex can help improve the throughcycle EBITDA and RoE profile of the company. This should manifest in the next downturn. Also JSWS is fast featuring as a regional growth play on steel.

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