JSW reported Ebitda and PAT beat in Q4 driven essentially by lower costs even as ASP/t increase was muted at ~2%. We expect Ebitda/t to improve further from Q4 levels of c.R5,400/t as the benefits of recent steel price hikes flow through. JSW has announced new capital spending programs totaling ~R3,800 crore. JSW has guided to sales volume growth of 24% y-o-y to 15MT and in our view is very much achievable given (i) industry demand growth and (ii) import substitution. We remain OW with a revised price target of R1,500 and increase our EPS estimates by 64-32% for FY17-18..
Strong Q4 driven by costs benefits, 1H to be near record: Reported Ebitda of R1,820 crore (+8% y-o-y) was even ahead of our street high estimates of R1,770 crore. Reported PAT stood at R170 crore. Standalone Ebitda/t stood at R5,409/t, the highest level in the last four quarters, driven by higher volumes (steel sales volumes at 3.28MT, the highest ever and up 7.2% y-o-y) and 22% q-o-q decline in implied operating cost/t, while implied ASP/t increased only 2% q-o-q (~R590/t). As per JSW, prices have increased by 25% from the lows seen in Jan 16 and the benefits should flow through to earnings in H1FY17.
Solid volume guidance, very much achievable in the new environment: Given the new capacity expansion to 18MT (all 3 Blast furnaces are now ramping up), JSW has guided to steel sales volumes of ~15MT, up 24% y-o-y. The 2.8MT of additional volumes should not be difficult to sell in the new Indian environment of improving demand and import substitution. Assuming 7%-8% demand growth on the ~~80MT consumption of FY16, it means ~6MT of additional demand. Over and above this there would be reduction of imports from the record ~11.2MT in FY16 (JSW expects ~5MT fall in imports). Thus there is enough domestic demand for JSW, Tata and SAIL.
New projects announced: New projects announced: Reported net debt stood at R38,500 crore and as per JSW could increase further as Indian accounting standards are adopted from April 2016. JSW has announced projects across coke oven plant (R2,000 crore), tin plate mill (R650 crore), Water Reservoir (R520 crore) and Pipe Conveyor (R650 crore). JSW expects capital spending at R7,000 crore over the next two years. On the company’s bid for Tata’s UK steel assets, JSW highlighted that it is at an exploratory stage.
Remain OW and increase EPS estimates: The key risks are (i) removal of duty protection in India and (ii) large acquisitions of loss making facilities. Our new June-17 PT (based on March -18 financials) of R1,500 implies 16% upside from current levels and is based on 6.2x FY18 EV/Ebitda.
Key takeaways from analysts’ meet
All plants restarted: All three plants have been restarted post shutdowns to commission the expansions – Salem and Vijaynagar started up in February, and have fully stabilised, while Dolvi started back up in March, and is currently running at a utilisation rate of c.70-75%.
Capex guidance for FY17/18 at R70 bn: With c.R4,900 crore spent in FY16, the company expects to spend c.R4,300 crore in FY17, and R2,700 crore in FY18.
Key projects include a pipe conveyor system for iron ore at Vijaynagar (cost at R650 crore)— this will take ~2 years to complete, and will reduce transport costs by c.R50/MT.
Sales/production to rise c.25% in FY17: Post commissioning of expansions, the company expects production to rise 25% to 15.75MMT, and sales to rise 24% to 15MMT. JSTL expects to take domestic market share up to 13% from 11.5%, while maintaining the proportion of exports at 11%.
Pricing impact to flow through in H1FY17: The company expects to see the benefits of higher prices (c.25% higher for products such as HRC from base levels of Jan 2016) in 1HFY17, and also expects to see the price differential at primary and secondary mills to normalise to c.R2,000-2,500/MT (vs. R3,000-5000/MT currently). In our view Ebitda/t should increase sharply in H1FY17 as the full benefits of the recent price hikes flow through to earnings. Iron ore update: The company expects to source 20MMT of iron ore (of the requirement of 22MMT) at Vijaynagar from within Karnataka, With additional auctions expected in July. Requirements at Dolvi and Salem will be met through a combination of domestic sources (Orissa mainly) and imports.
Increase earnings sharply, remain OW, expect protection to sustain in some form post MIP: We increase our Ebitda and EPS estimates sharply for FY17 and FY18 given the benefits of volume growth and higher pricing. We expect 1HFY17 to be near record profitability and expect some moderation in steel prices and profitability in 2HFY17. Overall we expect some sort of protection to continue in the Indian steel markets, given the surge in bad debts at the banks. In our view domestic steel industry needs a sustained period of protection (at least 2 years in our view) to come out of the current stress. While domestic demand is improving, imports need to remain at a low level for utilisations to increase at profitable levels. While the minimum import price (MIP) mechanism may not be renewed in August 2016, in our view some other instrument could likely take its place (anti dumping duty, a more broad based safeguard duty, import restrictions). This should allow Indian steel makers to report relatively robust earnings.
We increase our Ebitda estimates by 15% and 8% for FY17 and FY18 respectively and EPS estimates by 64% and 38% for the same period. While we expect net debt to remain at broadly similar levels in FY17, we would get more clarity when the company resets the balance sheet as per the new Accounting Standards. We now value JSW on FY18 Ebitda and at a revised multiple of 6.2x which is at a 10% discount to its 5 year average of 7x and arrive at a revised PT of R1,500. Our previous methodology was at 7x multiple on FY17. We now give a discount to average multiple, as we are assuming a sustained period of steel protection and hence higher then mid cycle profitability.
