JSW Steel Share price: Sharekhan maintains Buy on JSW Steel with a price target of Rs 500

JSW Steel’s valuation of 6.5x its FY2023E EV/EBITDA seems reasonable, given our expectation of strong 15% PAT CAGR over FY2021E-FY2023E, improving RoE to 16.8% by FY20223E and likely balance sheet deleveraging. Also, sustained high profitability would result in early turnaround of loss-making overseas subsidiaries. Hence, Sharekhan maintains Buy rating on JSW Steel with a revised price target of Rs 500. JSW Steel Price today is Rs 444, up Rs 6 or 1.4%. 

Sharekhan expects domestic steel producers to witness sustained steel margin upcycle (expect EBITDA/tonne of Rs 13500-14000/tonne) over FY2022-FY2023, given:

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1)      strength in China HRC export price (up by 16% to $740/mt versus price in early February 2021), as China’s steel demand growth is expected to outpace production growth rate (given production cuts amid measures to curb pollution)
2)      tight demand-supply scenario in the domestic market, as exports become lucrative (export price are at premium of Rs. 6,000-7,000/tonne to domestic prices)

Moreover, domestic steel producers could further increase steel price by Rs 2000- 3000/tonne, which would improve profitability and lead to an upgrade in consensus earnings estimate for domestic steel players. Sharekhan believes JSW Steel is well placed to benefit from a favourable margin environment and is likely to report best earnings growth among domestic players with strong volume growth outlook (expect a 7% volume CAGR over FY2021E-FY2023E, which is conservative in their view).

Capacity expansion at Dolvi from 5mtpa to 10mtpa (expected to get completed by Q1FY2022) is coming at the right margin cycle and would drive volume growth for JSW Steel. Moreover, improved cash flow generation over the next two years would drive balance sheet deleveraging, and Sharekhan expects JSW Steel’s net debt/EBITDA to decline to 2.2x by FY2023 (versus 3.5x in 9M FY21).