JSW Steel Share price: Sharekhan maintains Buy on JSW Steel with a price target of Rs 432

JSW Steel maintains Buy on JSW Steel with an unchanged price target of Rs 432. JSW Steel Q3 FY21 consolidated adjusted EBITDA at Rs 5946 crore (up 137.7% yoy; up 42% qoq) was 10% above Sharekhan’s estimate of Rs 5405 cr.

The beat in EBITDA was led by:

1) higher-than-expected EBITDA/tonne at Rs 15053/tonne (up 143% yoy, up 49.2% qoq versus expectation of Rs 13826/tonne) backed by the recent hike in domestic steel price (19.2% qoq jump in realisation) and benefit of operating leverage
2) marginal beat in consolidated sales volume at 3.95 million tonne (down 2% yoy; down 4.8% qoq) versus estimate of 3.9 million tonne.

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As a result, consolidated adjusted PAT increased by 11.3x yoy and 2x qoq to Rs 2681 cr, which was also above our estimate of Rs 2384 cr, led by superior operating performance. Management has reiterated its sales volume guidance of 15 mn tonne for FY2021E, which translates into a likely 12.6% yoy increase in sales volume to 4.1 mn tonne in Q4FY2021E. Domestic steel prices are expected to remain range bound in the near term and could probably moderate as long steel product price has declined recently due to increase in supplies.

Thus, Q4 FY21 growth would be largely driven by pick-up in volumes as margin seems to be near peak levels (but expected to remain healthy supported by expectation of double-digit growth in domestic steel demand in FY2022 and early price hike for auto space by JSW Steel). JSW Steel would also benefit from capacity expansion at Dolvi, which would drive volume growth over FY2022-FY2023.
Thus, Sharekhan expects JSW Steel’s earnings to grow by 20% CAGR over FY2021E-FY2023E along with a decent RoE of 15-15.6%. Hence, at the CMP, the stock is trading at 7x its FY2022E EV/EBITDA and 6.5x FY2023E EV/EBITDA.

Key positives:

Better than expected consolidated EBITDA margin at Rs 15053/tonne (up 143% yoy, up 49.2% qoq)
Sharp improvement in utilisation levels to 91% from 86% in Q2 FY21 with share of domestic sales at 88% (as compared to 72% in Q2 FY21)

Key negatives:

Continues to make EBITDA loss at overseas operations in the US and Italy in Q3 FY21