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Weak commodity prices keep outlook subdued

JSW Steel Limited (JSW) is an integrated steel producer with manufacturing facilities in India. The company produces steel products including hot rolled coils, cold rolled coils, wire rods, galvanized coils and sheets

In Q2FY23, revenue rose 28.5% YoY to Rs. 41,778cr, led by higher sales volumes owing to strong domestic steel demand.

However, EBITDA plunged 84.6% YoY to Rs. 1,752cr, while EBITDA margin contracted to 4.2% in Q2FY23 vs 35% in Q2FY22 because of a sharp fall in net sales realization as well as higher power and fuel costs. As a result, the company posted a net loss of Rs. 853cr in Q2FY23 vs. a net profit of Rs. 9,791cr in Q2FY22.

JSW Steel’s growth is expected to remain muted owing to weak global commodity prices coupled with inflationary pressure. Simultaneously, global steel production cuts following slowing steel demand is adding to the pain. Hence, we downgrade our rating on the stock to REDUCE with a revised target price of Rs. 570 based on 6x FY24E EV/EBITDA.

Revenue growth arrested by lower prices and fall in exports

The company’s revenue grew 28.5% YoY to Rs. 41,778cr in Q2FY23 vs Rs.32,503cr in Q2FY22. This growth was led by a 13% YoY increase in domestic consumption to 27.9MT. However, the growth was partially offset by weak prices and export duty imposed on finished steel products. Exports from India slumped 66.4% YoY (-35.6% QoQ) to 1.4MT

Margins impacted by low net sales realization

In Q2FY23, EBITDA plummeted 84.6% YoY to Rs. 1,752cr vs Rs. 11,363cr in Q2FY22. EBITDA margin fell to 4.2% from 35% in Q2FY22, owing to a steep fall in blended net sales realization (-14% YoY) despite modest correction in raw material and energy prices. Moreover, logistics constraint due to heavy rains and limited availability of iron ore impacted the earnings performance. Therefore, JSW Steel reported net loss of Rs. 853cr against a net profit of Rs. 9,791cr in Q2FY22 and Rs. 1,281cr in Q1FY23. This is the company’s weakest quarterly performances since Q1FY21.

Key concall highlights

JSW Steel’s net debt-to-equity ratio increased to 1.04x in Q2FY23 vs. 0.98x in Q1FY22. Net debt-to-EBITDA ratio also increased to 2.70x against 2.03x in Q1FY23, with net debt at Rs. 65,719cr

During the quarter, the company reported exceptional gain of Rs. 591cr, out of which, it received Rs.256cr as compensation against a subsidiary’s claim pertaining to expenditure incurred on a deallocated coal mine. It received the remaining Rs. 335cr from the sale of 70% stake in Santa Fe Mining in Chile by a wholly owned subsidiary

Valuation

The company’s growth is expected to be weak owing to sharp decline in commodity prices and higher inflationary pressure. Moreover, global steel production cuts due to subdue steel demand would continue to impact the company’s earnings performance. The management expects healthy steel demand growth in India in 2HFY23. However, we believe global economic headwinds would continue to dent the company’s profitability and the lag effect of low raw material prices will do little to support its future performance. We downgrade our rating to REDUCE on the stock with a revised target price of Rs. 570 based on 6x FY24E EV/EBITDA.

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