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Peak margins expected in Q4FY21

JSW Steel (JSWS) reported higher than expected standalone EBITDA at ~ Rs 14,444/te, up ~ Rs 4,300/te QoQ. Higher auto sales (up 33% QoQ) and lower exports (down 60% QoQ) helped margins. The realisation increase is higher at Rs 8,600/te QoQ, given ~Rs5bn of iron ore sales, which given the duties and royalties fail to garner any EBITDA. JSWS has witnessed Rs 11bn of deleveraging in Q3FY21, despite Rs 15.5bn acquisition of Asian colour coated. Bhushan power acquisition, if completed may not allow deleveraging in Q4FY21. Iron ore integration has reached 49% post Odisha mines ramping up, as Dolvi looks to integrated commissioning in Q1FY22. JSWS trades at 1.5x FY23E P/B. Risk reward is not conducive. We maintain SELL at revised target price of Rs 292/share (from Rs 265/share earlier).

* Q4FY21 EBITDA/te expected at cyclical peak. With Q4FY21 margins expected at Rs 19100/te (Expected increase of Rs 5000/te QoQ), we are perhaps looking at peak margins for JSWS in this cycle. In a deep cyclical sector, one needs to anticipate the downward trajectory of EBITDA/te as and when such peak is visible. Deleveraging can happen, but experience suggests, with visibility of higher EBITDA/te, capex also gets rebased quickly.

* Overseas subsidiaries continue to incur EBITDA losses. (Adjusted) EBITDA losses for Q3FY21 stood at Rs830bn against Rs2.3bn (loss) QoQ. Adjusted for the provision in, overseas EBITDA loss was restricted to Rs520mn (reported). This has been a drag on consolidated (reported) EBITDA.

* Projects update – Integrated Dolvi operations expected to start from Q1FY21 now; delayed by a quarter. The expansion project at Dolvi from 5 to10mtpa is nearing completion, with majority of operations to be commissioned in Q4FY21. Full integrated operations and stabilization will take place in Q1FY22. In the CRM-1 complex in Vijaynagar, one out of two continuous Galvanising Lines (CGL) has been commissioned, and the second will be commissioned by Q1FY22. The 8mtpa pellet plant is under commissioning. In Vasind and Tarapur, all expansions except 0.45 mtpa CGL at Vasind are under commissioning, and will be fully commissioned by Mar, ’21. The 0.45mtpa CGL is to be commissioned in Q1FY22.

* Maintain SELL. ~15% price increase in Dec, ’20 underlines the cyclicality of the sector and at current prices; the entire set of steel producers is making EBITDA/te unseen in the past 20 years. Capex announcements are slowly resurfacing, and given the compressed cycle duration, it doesn’t look like sectoral leverage may permanently trend down. We retain our cautious stance on the sector, and maintain SELL rating on JSWS. We continue to value JSWS at 1.2x FY23E P/B. The bulge in FY21/22E earnings reflects the sharp rise in recent steel prices.

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