Buy JSW Steel Ltd For Target Rs.1,100 by Motilal Oswal Financial Services Ltd
Revenue in line; lower-than-expected costs drive earnings beat
* JSTL reported consolidated revenue of INR414b (-1% YoY and +4% QoQ) in 3QFY25, largely in line with our estimate of INR421b. ASP declined 12% YoY and 5% QoQ to INR61,666/t, which was offset by strong volume growth of 12% YoY and 10% QoQ to 6.71mt.
* EBITDA came in at INR56b (-22% YoY and +3% QoQ), beating our estimate of INR51b, aided by lower-than-expected costs. EBITDA on QoQ basis was impacted by weak realization, which was largely offset by better volumes and lower cost of coking coal. EBITDA/t stood at INR8,314/t (-31% YoY and -6% QoQ) vs. our est. of INR7,583/t.
* APAT stood at INR7.8b (-66% YoY and +21% QoQ) against our estimate of INR8.2b. For the quarter, JSTL incurred an exceptional expense of INR1b related to forfeiture of performance guarantee due to the surrender of Banai and Bhalumuda coal blocks.
* Consolidated crude steel production was at 7.03mt (+2% YoY and +4% QoQ), led by a ramp-up of new capacities at BPSL and Vijayanagar. The capacity utilization of India operation was at 91% in 3QFY25.
* During 9MFY25, volumes grew by 5% YoY, while ASP declined by 8% YoY, resulting in a 4% drop in revenue, 25% decline in EBITDA and 71% slump in adj. PAT. ? The net debt-to-EBITDA ratio stood at 3.57 x as of 3QFY25 vs. 3.41x as of 2Q-end.
Highlights from the management commentary
* Coking coal costs declined by USD34/t QoQ (guided USD20-25/t) in 3QFY25 and may further decline by USD10-15/t sequentially in 4QFY25, as per management.
* Iron ore prices will also decline in 4QFY25 as NMDC has announced price cuts (INR350/t in Jan’25). Management has also hinted that iron ore prices may moderate in the long run and that the current high pricing is attributed to strong demand and slow supply-side expansions.
* Management expects to achieve ~98% of the earlier guided sales volume of 27mt since there was a delay in starting the JVNL blast furnace.
* It expects consolidated capex of ~INR160b in FY25 and has incurred INR110b as of 9MFY25 (INR30.87b in 3QFY25).
* Management expects a pick-up in government capex, which will revive domestic demand in 4QFY25. This should support volume growth for JSTL.
Valuation and view
* JSTL’s 3QFY25 performance was muted due to weak realization, which was partly offset by the deflated costs. We believe JSTL is well placed with new capacities coming on-stream, an expected pickup in domestic demand, and a rising share of value-added proportion in the sales mix. Its focus on increasing the captive share of iron ore and improving coal linkages will support earnings.
* Going forward, we expect strong revenue/EBITDA/APAT performance, driven by healthy volume, improving realization and muted costs. This will generate CFO of +INR600b over FY26-27E, which will help JSTL fund its proposed capex of INR650b over FY25-27E.
* At CMP, JSTL trades at 6.4x FY27E EV/EBITDA. We reduce our near-term estimates to factor in a weak short-term demand environment and we largely maintain our FY27 estimates. We reiterate our BUY rating on the stock with a TP of INR1,100 (premised on 7.5x EV/EBITDA on FY27 estimate).
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