NEW HIGHS: JSW Steel share price rises nearly 5% in today’s session; Kotak highlights key details

JSW Steel share price: Kotak Institutional Equities says that JSW Steel, the fastest compounding Indian metal stock, is in a sweet spot amid India’s growing steel deficit. It has brownfield, high IRR, growth opportunities; multiple cost savings and downstream projects should increase its sustainable EBITDA/ton by 50%. With sector-leading RoEs, a strong growth pipeline and peak debt behind, the compounding should accelerate. Kotak Institutional Equities says it has upgraded steel prices reflecting Chinese supply restrictions to Rs 600. It has also Upgraded JSW Steel to BUY.

Kotak says that China has announced a long-awaited decision to withdraw export rebates on major finished steel products and cut import duty on various semi-finished, crude and scrap steel. By discouraging exports, China is looking to support domestic demand while restricting supply to reduce emissions. China’s withdrawal from the steel export market should keep ex-China steel prices/margins elevated for longer. Domestic flat prices are currently at 15% discount to import parity and dealers expect a price hike of Rs 2000 – Rs 3000/ton hike for May 2021. Expect earning upgrades to continue for JSW Steel going forward.

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Kotak says that JSW Steel is in a sweet spot amid India’s deficit steel market. India has a lean steel capacity addition pipeline over the next 4-5 years. With demand outpacing supply, we expect steel producers to operate at rated capacity and imports to surge over FY2022-25E. JSW Steel has been the fastest growing Indian steel company in the past 20 years and well placed to benefit from timely capacity additions. Kotak estimates JSW Steel to increase its capacity from current 18 mtpa to 29 mtpa over FY2021-25E, organically. Further, the acquisition of Bhushan Power and Steel (BPSL) should eventually add another 3 mtpa in its portfolio. Brownfield expansion would have shorter gestation, lower capex and high IRR.

JSW Steel is one of the most cost-efficient steel producers globally and delivered an average EBITDA of Rs 8,500/ton in the past 15 years without any captive iron ore. Kotak estimates JSW Steel margin to increase by Rs 4,000/ton over the next 2-3 years led by:

(1)    higher backward integration – pellet and coke oven
(2)    doubling of value-added capacity from existing 5 mtpa to 10 mtpa
(3)    lower costs of the newer large blast furnace
(4)    other cost-saving projects like pipe conveyor, captive iron ore mines and operating leverage.

China’s renewed focus on reduction in carbon emission and subsequent restrictions should cap Chinese steel exports and subsequently keep global steel margins elevated. Kotak raised steel price assumption by 21%/5% and increased JSW Steel’s EBITDA by 30%/16% for FY2022/23E.