JSW Steel share price: Jefferies says BUY, pegs price target at Rs 820

JSW Steel share price: Jefferies says that JSW Steel’s 4Q EBITDA rose 42% QoQ (+184% YoY), 13% above Jefferies, led by better-than expected realizations. EBITDA/t expanded 37% QoQ to Rs19.8K. Asian steel prices remain strong despite some recent correction; Indian spot HRC price is 20% above 4Q average and still at a discount to imports. Jefferies expects JSW Steel's margins to rise further in Jun-Q but factor in normalization in the remainder of FY22. Jefferies raise FY22-23E EPS by 44-68% and retain Buy with a revised Rs 820 price target.

JSW Steel's 4Q EBITDA and net profit rose 42-57% QoQ (both 3x YoY), 12-13% above Jefferies estimates. Standalone sales volumes rose 4% QoQ while realizations improved Rs8.4K/t QoQ (+18%) led by higher steel prices. Raw material costs were up QoQ due to higher iron ore prices; however, EBITDA/t still expanded 37% QoQ to Rs19.8K — a decade high. Combined performance of subsidiaries also improved QoQ. Net debt went up a slight 2% QoQ due to BPSL acquisition. In FY21, JSW Steel's EBITDA grew 68% YoY while net profit was 3x YoY,says Jefferies.

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China domestic steel prices are down 15% from mid-May peak but are still up 27% CYTD at $887/t. The decarbonization efforts are weighing down on steel supply in China and Japan at a time when demand outlook has improved led by synchronized recovery in global manufacturing and potential infra stimulus across regions. The ongoing Covid wave is affecting Indian steel demand in the near term but JSW Steel expects exports to make up for any shortfall, explained Jefferies.

JSW Steel's iron ore cost should rise further in coming quarters on higher market prices and rising share of captive mines. However, Indian HRC (flat) steel price has risen 20% from 4Q average of Rs55.5K/t to Rs66.5K/t (still 3-8% discount to landed imports assuming the recent fall in China domestic prices flows through). Higher steel prices should more than offset the input cost pressures for JSTL driving further margin expansion in 1QFY22. Jefferies assume a meaningful moderation in steel prices and margins in balance FY22 though. Jefferies factor in Indian HRC prices at Rs 57K / Rs 54K for FY22/FY23 — 14%/19% below spot. Jefferies estimate JSW Steel's EBITDA/t at Rs 23.4K, Rs 18.1K and Rs 17.6K in 1QFY22, 2HFY22 and FY23 respectively.

JSW Steel announced an aggressive capex plan with total spend of Rs 475 bn over the next three years. This includes 5mtpa expansion at Vijaynagar at cost of Rs 150 bn, which implies an attractive US$400/t of capacity. This, along with the already-announced 1mtpa expansion at Vijaynagar, will take JSW Steel total steel capacity (including BPSL) to 33mtpa by FY25. Jefferies believe the capex plans can be largely funded out of operating cash flows and these capacities will come at an opportune time when India would likely turn net importer of steel (Structural Shifts).

The Board has approved fund-raising of up to Rs 190 bn

1) Rs70bn as non-convertible debenture with warrants and/or Rs 70 bn as equity share or convertible securities to QIB
2) Rs 50 bn rights issue

Jefferies upgraded FY22-23E EBITDA by 26-38% and EPS by 44-68%. Jefferies retain Buy with Rs 820 price target, based on 7.0x FY23E EV/EBITDA. Jefferies prefer Tata Steelover JSW Steel.