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Muted steel prices a near-term headwind; higher capacity and robust domestic demand to drive long-term growth Capacity expansion on track; well placed to capitalize on opportunities

* The domestic steel demand is expected to be robust, driven by significant capex toward infrastructure development. The capacity expansion of JSW Steel (JSTL) is on track, positioning it well to capitalize on emerging opportunities. We expect +9% YoY (26mt) volume growth in FY25 and +8% YoY (28mt) in FY26E.

* The metal prices in both domestic and global markets have corrected significantly. Domestic HRC and CRC declined 4-5% QoQ in 2QFY25. Moreover, global steel prices are trending downward due to muted global demand and Chinese oversupply. Margins in the near-term could be under pressure due to lower realizations, which would more than offset the decline in input costs.

* Going ahead, we expect a double-digit revenue growth in FY26E owing to price recovery and capacity ramp-up, which would drive the EBITDA close to ~INR14,500/t.

* JSW Steel, a leading integrated steel producer with robust iron ore linkages, currently meets around 35% of its iron ore needs through captive mines, with plans to increase this in the future. In 1QFY25, the VAP share stood at 64% of the total volumes. Post the expansions, management foresees it to moderate but aims to maintain the VAP share >50% in the long term. At CMP, JSTL trades at 7x FY26E EV/EBITDA. We reiterate BUY on JSTL with a revised TP of INR1,100 (premised on 7.5x FY26E EV/EBITDA).

Strong volume growth; weakening metal prices could be near-term headwind

* In Aug’24, JSW reported consolidated crude steel production of 2.3mt, up by 1% YoY (+9% YoY to 2.2mt in Jul’24). We expect +9% YoY (26mt) volume growth in FY25 and 8% YoY in FY26 (28mt), driven by healthy domestic demand and ramping up of newly commissioned capacities.

* Currently, long steel demand is muted due to limited construction activity during the monsoon but is expected to improve from 3QFY25. Similarly, the domestic flat steel demand, which has been impacted due to low-cost imports, is expected to improve over the next few months.

* Metal prices trended downward recently, with China HRC FOB prices dropping from USD581/t in 1QFY24 to USD491/t in 2QFY25, resulting in a rise of cheap imports into India. Following the global trend, domestic HRC/CRC prices in India also fell by 4-5% QoQ in 2QFY25.

* Iron ore prices (NMDC) fell by INR500/t in Aug’24 and a similar fall was observed in Jun’24. This decline was largely attributed to weaker global ore prices and lower bids in OMC auctions despite the limited availability of high-grade ore during the monsoon. Meanwhile, coking coal premium HCC (CNF Paradip, India) experienced a 10% QoQ decline in 2QFY25 and is expected to remain stable due to subdued demand from global steel producers.

* Given the weakening metal prices outlook, we project an 8% YoY revenue growth for FY25, as muted NSR will partially offset the expected volume growth. We anticipate margins to remain under pressure and have modeled an EBITDA/t of INR 11,800 (flat YoY) for FY25E, driven by weak realizations.

* Looking ahead, we anticipate double-digit revenue growth for FY26E, driven by price recovery and capacity ramp-up. This is expected to drive the EBITDA to +INR 14,500/t.

JSTL on track to achieve its target of 50MTPA capacity by FY31

* JSW Vijayanagar Metallics Ltd is on track to build a 5MTPA integrated steel plant. The company successfully commissioned the Hot Strip Mill in Mar’24. The full commissioning of the facility is expected by 2QFY25, with optimal production anticipated by the end of 3QFY25. The company, through modification and debottlenecking, plans to add another 2MTPA, taking the total capacity to 19.5MTPA by Sep’27.

* The Phase-II expansion at BPSL, which aims to increase the capacity to 5MTPA from 3.5MTPA (including 0.5MTPA through debottlenecking by Sep’27) is progressing well, and its full ramp-up is anticipated by the end of 3QFY25.

* In Jammu & Kashmir, a new 0.12MTPA color coating line is nearing completion, with commissioning expected in 2QFY25.

* The company has outlined a capex plan of INR644b over the next three years, which includes INR370b for ongoing expansions and INR273b for new approvals.

* Key investments include INR191b for Dolvi Phase-III expansion of 5MTPA, INR47b for modernizing the Italy Rail Mill/Mining projects, and INR35b for operational sustainability.

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