JSW Steel Rating: Reduce- Great performance at the standalone level

JSW Steel posted a 62% y-o-y uptick in Q2FY21 Ebitda to Rs 19.9 bn, surpassing consensus forecast. Key highlights: (i) Standalone sales volume shot up 14% y-o-y to 4.12mt; (ii) overseas subsidiaries posted Ebitda loss (adj.) of Rs 2.1 bn; (iii) net debt dipped Rs 16 bn.

We expect the good performance to sustain. However, we are concerned about: (i) higher leverage post-acquisitions of Bhushan Power & Steel (BPS) and Asian Colour Coated Ispat (ACCI); and (ii) high valuation. Taking note of the Q2FY21 performance and earlier-than-expected uptick in spreads, we are raising FY21e/FY22e Ebitda by 19%/3%. Our TP thus stands revised to Rs 260 (earlier Rs 250) at an unchanged 6.5x FY22e Ebitda. Maintain Reduce.

Standalone performance delights; overseas subsidiaries disappoint: JSW Steel’s performance surpassed consensus. Key highlights: (i) Standalone sales volume shot up 14% y-o-y; (ii) standalone Ebitda/t surged 57% y-o-y to Rs 10,136; (iii) cost benefit of Rs 1,300/t q-o-q, mainly due to lower coking coal cost (down $25/t); (iv) net benefit of Rs 1.6 bn owing to a one-time dispute settlement (primarily in US operations) limited the loss at overseas subsidiaries to Rs 0.5 bn; (v) net debt reduced by Rs 16 bn owing to working capital unlocking and improved cash flow from operations.

Going ahead, we expect standalone Ebitda to sustain at Rs 11,500/t on average through H2FY21 due to: (i) negotiation of half yearly contracts at 10–12% higher prices; (ii) low coking coal prices; and (iii) improved domestic demand. That said, we expect an improvement at overseas subsidiaries only by Q1FY22e.

Dual concerns: Leverage and valuation—Despite a likely improvement in operating performance, we remain wary of: (i) potentially higher leverage; (ii) high domestic iron ore price owing to tight supply; and (iii) higher valuation than peers. That said, we believe mgmt will make all efforts to ensure debt resulting from the acquisitions is not consolidated.

Outlook: All in the price—Despite a healthy outlook, potential escalation in debt (net debt/Ebitda at 4.73x) post-BPS and -ACCI acquisitions is concerning. Besides, at 7.3x FY22e Ebitda, the current valuation is steep. Retain ‘REDUCE/SU’.