Buy JSW Steel Ltd for the Target Rs.1,520 by Motilal Oswal Financial Services Ltd
Capacity expansion to drive volume
* JSW Steel (JSTL), with an existing capacity of 32MTPA (excluding JVs), is targeting to reach a capacity of 50MTPA by FY31. Following the BPSL transaction, its balance sheet is much more comfortable, providing greater flexibility to execute its planned expansions.
* The expansion of the Dolvi facility from 10MTPA to 15MTPA (capex ~INR210b; completion by Sep’27) is expected to strengthen the company’s positioning in Western India and in export markets. Additionally, the 1MTPA EAF at Kadapa (INR38b; commissioning by FY29) will enhance the long-product portfolio and provide decarbonization optionality.
* The company is undertaking a 5MTPA greenfield expansion at Utkal, comprising two 8MTPA pellet plants, 5MTPA blast furnace, 6MTPA SMS, and 6MTPA HSM-2 (scheduled to be commissioned by FY30).
* The company has planned ~INR1.3t of investments over 4–5 years, covering Odisha Phase-I, Dolvi Phase-III, downstream VAP, mining, and renewable energy (RE). Funding will be supported by internal accruals, INR320b proceeds from BPSL, and disciplined leverage management.
Backward integration at play; likely to drive cost savings
* JSTL is accelerating its backward integration initiatives to support its capacity expansion target of 50MTPA by FY31. Iron ore captive sourcing is expected to increase from the current levels of 40% to the long-term target of ~50% on higher capacity. Incremental iron ore volumes are expected from three Karnataka mines (~4mt from 1QFY27) and Goa mines (~3.7mt across FY26-27), while two 8MTPA pellet plants in Odisha (by FY28) will further enhance integration.
* On coking coal, the company has secured domestic blocks in Jharkhand (2.2MTPA), which is expected to ramp up in 2-3 years. Internationally, the company has increased its stake to 30% in Illawarra Metallurgical Coal (~1.2MTPA offtake of PLV coal) and is pursuing the Minas de Revuboè project (Mozambique) to secure high-grade supplies, improving sourcing diversification.
* Logistics integration will be strengthened via a 302km (30MTPA) slurry pipeline by FY27, linking the Nuagaon mines to the Jagatsinghpur plant. Additionally, the company aims to develop the 30MTPA Jatadhar Port by FY27 to increase port throughput, along with expanding dedicated rail capacity.
* Renewable integration is scaling up, with ~1GW of installed capacity and Board approval for 2.5GW of RE capacity along with 320MWh of battery storage, supporting decarbonization and long-term energy cost optimization.
Valuation and outlook
* JSTL is well-placed with new capacities coming on stream, strong domestic demand, and a rising share of value-added proportion in the sales mix. The recent sale of BPSL stake positions the company well to execute its various projects. 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 over FY27-FY28, driven by the ramp-up of new capacity and price recovery led by the safeguard duty. Despite input cost volatility, we believe EBITDA/t will rebound to ~INR14,000/t by FY28E on account of domestic steel price recovery, led by the safeguard duty.
* As BPSL was transferred to JFE JV via a slump sale, our FY27/28 earnings estimates exclude BPSL. At CMP, JSTL trades at 7.5x FY28E EV/EBITDA, and we reiterate our BUY rating on the stock with a TP of INR1,520, valued on SoTP.
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