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In-line performance; margin to improve in Q4

JSW Steel (JSTL)’s reported in-line consolidated EBITDA of Rs 45.5bn (CentrumE: Rs45.9bn), up 160% QoQ. It recorded standalone EBITDA at Rs40.3bn up 131% QoQ and EBITDA/t at Rs8,141/t up 134% QoQ. Adjusted to one-off expense like rupee depreciation and inventory losses, EBITDA stood at Rs48.9bn and EBITDA/t of Rs9,891, up Rs6,414/t QoQ; (CentrumE: EBITDA of Rs40.8bn and EBITDA/t of Rs8,231). The sequential growth is primarily on account of benefit from lower coking cost of USD100/t (higher than guidance of USD80/t). The international subsidiaries reported positive EBITDA of RS1.1bn and domestic subsidiaries contributed Rs4.5bn to consolidated EBITDA. We expect profitability to improve in Q4 due to rising steel prices. Similarly, with international and domestic steel prices are on rise, we believe Q4 margins to further improve sequentially to Rs12,000/t. But despite margin recovery in sight, due steep valuation we downgrade JSTL to Sell rating with target price of Rs688 (earlier: Rs667), valuing at 6.0x FY24E/FY25E average EV/EBITDA. Lower coking coal price aided margin recovery; adj EBITDA/t increase to Rs 9,891

JSTL’s standalone adjusted EBITDA increased 181% QoQ to ~Rs48.9bn and EBITDA/t was up Rs6,414 QoQ to Rs9,801/t. The increase is primarily on account of decline in coking coal prices by USD100/t QoQ offset by RS3200/t QoQ decline in steel realisation. Volumes was flattish QoQ at 4.95mt (vs 5.01mt in Q2FY23). The rupee depreciation and inventory loss due to high cost inventory of Rs8.7bn was one-off adjustment during the quarter. EBITDA of Bhushan Power turned positive to Rs3.4bn vs loss of Rs1.8bn in Q2FY23. The pellet plant was down for maintenance and hence had to buy from outside at higher price. Apart, higher cost steel inventory impacted BPSL profitability by Rs1.5bn. Another subsidiary, JSW Steel coated products slipped into losses (EBITDA loss of Rs0.1bn v/s EBITDA loss of Rs0.79bn in Q2FY23) due to inventory write down and hit of export duty. Management guides coking coal cost to remain flattish QoQ in Q3FY23. Further, volumes likely to remain healthy due to Dolvi Phase 2 ramp up and strong domestic demand and rise in steel prices expected to lead higher margins in Q4FY23.

Net debt up ~6% QoQ to ~Rs695bn, thanks to forex impact

The increase net debt levels by 6% QoQ to Rs695bn is on account of adverse forex impact of Rs7.7bn and capex of Rs41.2bn incurred during the quarter. The average cost of debt stood at 6.89%. The net debt/EBITDA increased to 3.51x (up from 2.7x in Q2FY23). The cap is at 3.75x.Management announced 9 projects got clearance under PLI schemes. Out of which, 6 projects are under implementation. Overall capex is Rs167bn out of which Rs53bn is already capex was announced and ongoing.

Margins improvement in sight for Q4, recommend SELL with TP of Rs688

Management, believes with export duty roll back and China demand to pick up faster in H2CY23, overall demand outlook is positive for CY23. Further, supply is likely to catch up slow keeping market more tightly. Exports likely to resume with 10-25% of total sales. For Q4FY23, blended steel realisations are expected to be higher than Q3FY23 level while iron ore and coking coal costs are expected to remain range bound sequentially in Q4FY23. As a result, EBITDA/t is expected to further improve to ~Rs12000/t. But despite margin recovery in sight, due steep valuation we downgrade JSTL to sell rating with target price of Rs688, valuing at 6.0x FY24E/FY25E average EV/EBITDA.

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