Buy JSW Steel Ltd for the Target Rs.1,200 by Motilal Oswal Financial Services Ltd
In-line operating performance; outlook bright
* JSTL reported consolidated revenue of INR432b (flat YoY and -4% QoQ), in line with our estimate of INR429b, as healthy NSR was offset by weak QoQ volume growth.
* Steel sales volumes stood at 6.69mt (+9% YoY and -11% QoQ), impacted by planned shutdowns at Dolvi and BPSL, while ASP stood at INR64,500/t (-8% YoY and +8% QoQ), led by price recovery.
* EBITDA stood in line with our estimate at INR75.8b (+38% YoY and +19% QoQ). EBITDA/t improved to INR11,324/t in 1QFY26, up 26% YoY and 33% QoQ (vs our est. of INR10,440/t). The improvement in EBITDA was driven by better NSR and lower coking coal costs.
* APAT stood at INR21.8b (+159% YoY and +43% QoQ; vs. our estimate of INR20b), aided by better operating profitability during the quarter.
* Consolidated crude steel production stood at 7.26mt (+14% YoY and -5% QoQ), impacted by planned maintenance shutdowns.
* Capacity utilization at Indian operations stood at 87% in 1QFY26 vs. 93% in 4QFY25. Institutional and retail sales volumes were higher 12% YoY.
* Domestic sales stood at 5.96mt, marking a 12% YoY increase, while exports fell 20% YoY and accounted for 7% of sales from Indian operations during 1QFY26.
Highlights from the management commentary
* In 1QFY26, blended steel prices increased ~INR3,300/t QoQ, in line with prior guidance. However, steel prices softened in Jun’25 (HRC prices down ~INR1,000/t) and continued to show softness in Jul’25, led by global uncertainties, cheaper imports into India, and seasonal monsoon affecting infrastructure and construction demand.
* Blended coking coal costs were ~USD160/t in 1QFY26 and are likely to stabilize in the coming quarters. Management foresees a marginal coking cost reduction of USD5/t in 2QFY26.
* Volumes are expected to improve QoQ in 2QFY26 as planned shutdowns conclude and operations at Dolvi and BPSL stabilize.
* Management expects cost efficiencies to improve going forward, led by: 1) subdued coking coal cost; 2) improved operational efficiencies at JVML (potential cost savings of up to INR1,500/t QoQ); and 3) reduced iron ore costs due to increased captive sourcing and beneficiation.
* The BPSL phase II (from 3.5mtpa to 5mtpa) expansion was completed and ramped up to 4.5mtpa in 3QFY25. The 0.5mtpa brownfield expansion at BPSL remains under review pending Supreme Court decisions, with a potential slight delay but no impact on the broader 2030 capacity target.
Valuation and view
* JSTL reported a decent performance in 1QFY26, supported by price recovery and deflated costs, offsetting the muted volume growth. We believe JSTL is wellplaced with new capacities coming on-stream, strong 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 estimate double-digit revenue growth in FY26/FY27, driven by the ramp-up of new capacity and price recovery. Further, as input costs are expected to remain soft, we believe EBITDA margin will rebound to 18-19% in FY26/FY27 (~INR12,000/t in FY26E and ~INR13,500/t in FY27E) on account of domestic steel price recovery led by safeguard duty.
* Strong margins will enable JSTL to generate a CFO of INR620b, which can be utilized to fund the expansion plans of INR350b (INR150-200b each) over FY26- 27E and any potential deleveraging efforts. JSTL’s net debt/EBITDA declined to 3.2x as of 1QFY26, which we expect to decline further in FY27, supported by robust operating performance.
At CMP, JSTL trades at 7.6x FY27E EV/EBITDA, and we largely maintain our FY26/FY27 EBITDA estimates. We reiterate our BUY rating on the stock with a TP of INR1,200 (premised on 8.5x EV/EBITDA on FY27 estimate).
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