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Margin to soften in the near term, downgrade to Neutral

* Consolidated net sales grew 74% YoY and 23% QoQ to INR469b in 4QFY22. The 11% beat on our estimate was largely due to a 7% beat on ASP.

* EBITDA at INR92b (up 9% YoY and flat QoQ) for the quarter was in line with our estimate of INR88b. Consolidated EBITDA/t during the quarter was INR17,973/t (inline, down 14% YoY and 9% QoQ).

* Adjusted PAT stood at INR42b (down 3% each YoY and QoQ), 19% below our estimate due to a sharp jump in interest and depreciation after the commissioning of the 5mt expansion at Dolvi.

* Revenue/EBITDA/APAT stood at INR1464b/INR390b/INR216b in FY22, up 84%/95%/178% YoY.

* Overall, the numbers were in line at the consolidated level.

* JSTL announced the merger of erstwhile Monnet Ispat, acquired under NCLT in JV with Aion Capital earlier. This will add 0.9mt of steel capacity and lead to a 1.2% dilution in equity. It also declared a dividend of INR17.35/share. The 5mt expansion at Dolvi will contribute to incremental volumes, along with the integration with BPSL.

Tepid demand, imposition of export duty will lead to a correction in ASP

* Demand and consequently pricing is seasonally weak at present. The government’s policy on imposition of export duty on iron ore, pellets, and certain categories of steel will further depress domestic prices.

* Coking coal prices have largely remained stable, albeit at elevated levels. Unless there is a meaningful correction in coking coal prices, margin can remain subdued in the next six months. We believe coking coal prices will cool off in the next three-to-six months, and expect an improvement in margin in 2HFY23.

Valuation and view

* JSTL is likely to deliver ~29% volume growth on a standalone basis in FY23. Inclusion of BPSL and erstwhile Monnet Ispat (‘JISSPL’) will aid consolidated volume growth.

* However, we expect a sharp correction in EBITDA/t and absolute EBITDA due to: a) a subdued ASP, and b) elevated costs.

* The company has not indicated any slowdown in its capex program for FY23 and is working on its already committed capex of 5mt at Vijayanagar, 1.5mt at BPSL, and 0.3mt at JISSPL .The total outlay is INR200b for FY23.

* Steel prices have already corrected by INR3,500-5,000/t in the last oneweek across products, while iron ore prices have corrected in the INR750- 1,500/t range. Coking coal has reduced by 11% in the last one-week to USD494/t CFR India in anticipation of lower demand. The correction in coal prices will fructify in 2Q, while steel and iron ore will reflect in 1QFY23.

* We have cut our FY23 EBITDA estimate by 10% to reflect the near term headwinds in steel margin. Consequently, we downgrade the stock to Neutral from Buy with a revised TP of INR600, based on 6x FY23E EV/EBITDA.

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