JSW Steel Rating: reduce; Sales at record high, but margins slipped in Q4

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JSW Steel’s (JSTL’s) Q4FY22 Ebitda was up 8.8% y-o-y to Rs 91.8 bn, beating Street’s and our estimates. Key points: i) Domestic EBITDA/t slid 32% y-o-y to Rs 13,517. ii) Overseas subsidiaries (except Lucchini) performed relatively well. iii) Net debt (excluding Acceptances) decreased Rs 97 bn q-o-q to Rs 566 bn. iv) Working capital build-up owing to higher inventory.

Going ahead, while we expect JSTL to achieve its daunting volume guidance of 22.6mt, high capex intensity is a cause for concern in the current environment of declining steel prices. Maintain ‘Reduce’ with an unchanged TP of Rs 471 valuing the stock at 5.6x Q2FY24E Ebitda.

Beats estimates; challenging outlook: JSTL’s Q4FY22 Ebitda of Rs 91.8 bn is ahead of our and Street’s estimates. Key points: i) Blended realisation of standalone business was down Rs 3,400/t, mirroring domestic HRC price decline and lower export prices. ii) Coking coal cost was up $52/t, impacting profitability. iii) Highest-ever standalone sales volume of 5.11mt as Dolvi ramped up. iv) Exports reduced to a mere 21% of overall mix as domestic demand increased 7.4% q-o-q. v) US Plate/Pipe mill posted a strong performance. vi) Consolidated gross debt dipped Rs 37 bn as the company prepaid Rs 73.8 bn of debt. For Q1FY23E, management expects coking coal cost to rise by $125/t. In our view, this would lead to significant pressure on profitability, despite higher volume from standalone operations.

High capex intensity amid falling spreads a key issue: We are positive on JSTL coming close to its aggressive sales volume guidance of 24mt (India: 23.3mt). However, we believe standalone Ebitda/t might shrink to Rs 11,500–13,000/t, even considering moderating coking coal and iron ore prices through FY25E. This coupled with planned capex of Rs 200 bn in FY23E and Rs 191 bn in FY24E implies debt is likely to remain elevated. While management has indicated that capex might be pruned in case spreads erode materially, we see JSTL more precariously placed than its peers.

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Outlook: High capex intensity – While we are optimistic about JSTL ramping up volume, we are concerned about its high capex intensity in times of declining steel prices. This is exacerbated by the overhang created by the recent regulatory blow. We maintain ‘REDUCE/SU’ on JSTL with an unchanged TP of Rs 471/share.