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JSW Steel (JSTL)’s reported better-than-expected EBITDA of Rs 84.5bn (CentrumE: Rs73bn), up 20% QoQ. Standalone numbers (EBITDA of Rs69bn, up 42% QoQ; CentrumE: Rs59.3bn) outperformed due to higher sales volume, lower than expected coking coal cost as well as royalty cost. Lower coking coal cost primarily aided sharp fall in CoP which more than offset decline in steel realisation leading to higher EBITDA/t by Rs2,890/t QoQ of Rs12,750; (CentrumE: EBITDA/t of Rs11,205). The performance of overseas subsidiaries stood lower amid demand slowdown. While domestic subsidiaries posted volumes growth bust miss on margins. We factor in margin compression in H2FY24 due to higher coking coal price and hence lower FY24 EPS by 25%. Further, we roll over our valuation to mid-FY26, resulting in 7% increase in our TP to Rs869/sh, valuing at 6xFY25/FY26 average EV/EBITDA (Earlier: Rs814/sh) and upgrade our rating to ADD (Earlier: Reduce).

Lower coking coal price, and Higher volume aided EBITDA; adj EBITDA/t up to Rs 12,750

JSTL’s standalone adjusted EBITDA increased by 29.3% QoQ to ~Rs69bn and EBITDA/t increased by Rs2,890 QoQ to Rs12,750/t lead primarily by higher volumes (up 10% QoQ to 5.4mt) and lower coking coal (down ~USD54/t QoQ) partially offset by lower blended realisation (down Rs4,439/t; 2.41% QoQ). Exports remained lower due to muted demand during the quarter. Bhushan Power Q2FY24 EBITDA was up 5.9% QoQ at Rs7.4bn. Another subsidiary, JSW Steel coated products EBITDA rose by 6% QoQ. Management guided coking coal cost to decrease by USD25-30/t QoQ in Q3FY24 and largely offset by increase in steel prices in September and Oct 2023, leading to rangebound margin outlook for near term.

Net debt up ~3.6% QoQ to ~Rs692bn, on account of merger with JISPL

The Net debt increases primarily due to additions in borrowings arising from merger of JISPL. As on Q2FY24 end stood at Rs692bn up Rs24bn QoQ. The capex spent stood at Rs37bn in Q2FY24. Management maintains FY24 capex guidance of Rs188bn. JSTL expects to add ~8.5mtpa in next 1.5 years to ~37mtpa. Further, targets to reach ~50mtpa by FY31. Net Debt/EBITDA dropped to 2.52x as against 3.14x in Q1FY24. Project updates: 1) The 5mtpa expansion project at vijayanagar is expected to completely by end of FY24 2) The Phase II expansion at BPSL from 3.5mtpa to 5mtpa is expected to complete by end of FY24 and 3) Colour coated steel line of 0.12mtpa in Jammu & Kashmir is expected to completed in Q4FY24.

Q3FY24 margins likely to remain steady; Recommend ADD with TP of Rs869

The steel demand in domestic markets continue to remain robust. The international steel prices have bottomed out and likely to rise to offset sharp rise in coking coal prices in H2FY24. We expect JSW Steel sales volume to grow by 11% CAGR over FY23-26 years to 27.2mt in standalone business in FY26. With moderation in raw material cost, we expect EBITDA to grow by 36% CAGR by FY26E and margins to remain healthy (EBITDA/t of ~Rs14300/t in FY25/FY26. The expansion visibility remains strong and planned out target to reach 50mt by FY31. We recommend ADD with a TP of Rs 869.

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