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Robust domestic demand and increase in capacity to drive growth

Capacity expansion on track to become a steel mammoth

* JSTL is all set to capture the growing domestic steel demand amid rapid expansion in infrastructure and construction. We believe JSTL is adding capacity at a right time to capture the robust growth journey.

* JSTL, a leading integrated steel manufacturer with strong iron ore linkages, ensures adequate raw material supply. With 13 active iron ore mines, JSTL has an aggregate reserve of over 1.3bt. Around 45% of the iron ore requirement is met by captive mines and JSTL is enhancing its mining capabilities to strengthen its operations in Odisha.

* JSTL offers a wide gamut of flat and long steel products with strong focus on value added products (VAP). The share of VAP stands at around 55% of the total volumes.

* With the removal of export duty on iron ore, pellet, and steel in Nov ’22 and opening up of China and other European markets, prices of steel have started to increase since the start of Jan ’23. Global steel prices are also on the up move, on the back of improved macros, and hence, we believe global players such as JSTL with its diversified product offerings is well placed to capture the domestic as well as international markets.

* JSTL core operations (standalone business) are expected to post a crude steel production of 23.6mt and sales of 22.6mt in FY23. JSTL expects export volumes to rise to mid double digits in FY24.

* While JSTL is well placed, the stock trades at 5.8x FY24E EV/EBITDA and appears to be fully discounting the benefits. We reiterate our Neutral rating on the stock with a target price of INR710 (6x FY24E EV/EBITDA).

* Key downside risk - JSTL imports coking coal and any sharp increase in its prices could adversely impact margins.

JSTL on track to enhance India capacity to 37mtpa

* JSTL is undertaking capex programs which will enhance its Indian steel capacity from 27mt to 37mt by FY25E (global capacity to reach 38.5mt).

* JSTL is expected to add around 1.75mt capacity in FY23 via debottlenecking at its Vijayanagar plant (1mt) and capacity expansion at BPSL (0.75mt). Majority of expansion is expected to come on stream in FY24E, adding another 6.5mt to the total capacity.

* Post all the expansion, the Vijayanagar plant will be the largest single location plant in India and one of the largest in the world with a capacity of 19.5mt. The brownfield capex at Vijayanagar is a value accretive low cost capex of USD400-500/t.

* BPSL Phase I expansion is completed. Phase II expansion is planned to ramp up the capacity from 3.5mt to 5mt at a capex of INR45b and it is expected to be completed by FY24.

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