JSW Steel - 3QFY23 Result Update

 JSW Steel Result Update

JSW Steel’s (JSTL) 3QFY23 EBITDA and Margins were lower than our estimate, due to higher-than-anticipated input cost pressure. Moreover, realisations also plunged by 13% YoY and 4% QoQ to Rs62,495/tonne, broadly in line with our estimate of Rs62,172/tonne. Sales volume stood at 4.95mn tonnes (up 24% YoY/down 1% QoQ), 2.3% higher than our estimate of 4.84mn tonnes. Consolidated revenue grew by 3% YoY (down 6% QoQ) to Rs391bn, broadly in line with our estimate of Rs390bn. EBITDA fell by 50% YoY (up 160% QoQ) to Rs45.5bn, as against our estimate of Rs52.6bn due to higher input cost (lower than expected decline). EBITDA margin stood at 11.6%, (down 1,237bps YoY/up 743bps QoQ), vs. our estimate of 13.5%. EBITDA/tonne stood at Rs9,186, down steeply by 60% YoY (up 163% QoQ), 15.5% below our estimate of Rs10,869, due to higher Other expenses, inventory losses and adverse forex impact, despite lower coking coal prices. Coking coal cost declined by US$100/tonne in 3QFY23 sequentially and is expected to remain around similar range in 4QFY23. Though domestic steel prices started improving recently, iron ore prices also started inching up. Moreover, other input cost inflation still remains elevated. Therefore, we expect JSTL’s margins to remain under pressure over near term, while we expect improvement in 2HFY24E and FY25E. Also, the global steel companies are currently operating at negative profitability. Considering tough global business environment and limited visibility over near term, higher capex, surplus capacity, high debt and expensive valuation post recent sharp run up in stock price, we maintain SELL on JSTL with a revised TP of Rs650 (vs. earlier Rs590), valuing the stock at an unrevised EV/EBITDA multiple of 5.5x FY25E.

Steady Margin Improvement ahead…but remains way below Peak Level

Coking Coal prices in India have corrected by US$100/tonne QoQ in 3QFY23 and is expected to remain flat in 4QFY23. Domestic steel prices have also corrected due to correction in regional prices amid weak demand and global steel price correction. Demand revival would be much slower than expectation in near term. In the current slow demand environment, we expect steel price weakness to outpace cost deflation and margins to remain under pressure in 4QFY23, though we see improvement over next 2 years. Overall demand would continue to improve in 4QFY23 due to seasonality, post monsoon pick up in construction and infra project and re-stocking with steep price correction, however, margin spread would be way below peak level. Moreover, likely global slowdown would continue pressure on global metal industry over next 1 year. Therefore, we expect its consolidated EBITDA margin to fall to 11%, 17.9% and 18.5% in FY23E, FY24E and FY25E respectively, from the peak level of 26.6% recorded in FY22.

Outlook & Valuation 

We expect the company to report a 14% CAGR in volumes over FY22-FY24E. Considering stable steel prices and volume as per our expectation, we broadly maintain our consolidated revenue estimates for FY23E while we increase it by 8.7% for FY24E considering commencement of new capacity by mid of FY24 and ramp up at BPSL. We lower our FY23E/FY24E consolidated EBITDA estimate by 13%/11%. Considering uncertainty on steel prices on tough global business environment, low export volumes, higher capex, surplus capacity, high debt and expensive valuation, we maintain SELL on JSTL with a revised TP of Rs650 (earlier Rs590), rolling forward our valuation to FY25E at an unrevised valuation of 5.5x.

Conference Call – Key Take aways

      Global/India Steel Industry Update:

• Globally the demand for steel sector declined due to higher inflation and higher interest rates.

• In 9MFY23, the steel consumption grew by 12% YoY in India 

• Imports grew by 47% QoQ while exports de-grew by 27% QoQ and 59% YoY in 3QFY23 in India

Company Update:

The total production including Bhushan power and steel stood at 6.06mn tonne with
the capacity utilisation of 91%. The total sales volume on standalone basis stood at
4.95mn tonne and on consolidated basis stood at 5.55mn tonne (~5.16mn tonne
– domestic market -up 2% QoQ). Bhushan power and steel’s capacity utilisation
stood at ~85% in 3QFY23 compared to 72% in 2QFY23.

• Exports constitute to ~7% of total sales. 3QFY23 performance has also been
impacted by Rs1.05bn due to NRV losses owing to higher cost of HRC.

• In 3QFY23, the margins were under pressure due to fall in net realisations by
Rs3,900/tonne QoQ and is expected to trend higher in 4QFY23, in line with global
steel prices.

• Overall inventory accretion was 180k tonne in 3QFY23. Finished products inventory
stood at 2.09mn tonne. The company expects its inventory to decline in 4QFY23 as
export opportunities have opened up, post recent withdrawal of duty.

• Inventory losses and forex impact stood at Rs9.8bn in 3QFY23 (~Rs1,750/tonne).
Excluding the losses, EBITDA/tonne would have been ~Rs9,900/tonne in 3QFY23
on standalone basis.

• Contribution from subsidiaries was subdued with Indian subsidiaries reporting an
EBITDA of Rs4.5bn and overseas subsidiaries reporting EBITDA of Rs1.1bn.

Steel Prices & Cost Outlook: Coking coal average prices declined by US$100/ton in 3QFY23 from US$381/ton in 2QFY23 and it expects costs to remain flat QoQ in 4QFY23. Iron ore price are also expected to remain at similar level in next quarters. Captive iron ore consumption was 41% of the total ore requirement, while management expects captive iron ore consumption to reach to 50% in FY24, post opening up of new mines in Odisha.

Volume Guidance: Management remains confident of a broad-based economic recovery in 4QFY23E on higher private and public infrastructure spends. Management expects steel demand to grow led by higher steel demand from announced government infrastructure projects. The company maintains its India sales volume guidance to 22.6mn tonnes (~15.51mn tonne achieved in 9MFY23) and a production volume guidance to 23.6mn tonnes (~17.25mn tonne achieved in 9MFY23) for FY23E. The company indicated that there could be some shortfall of ~1.4mn tonnes in its USOhio operations and JSW Ispat combined.

 Debt & Capex: The debt as of 3QFY23-end stood at ~Rs695bn (up 6.9% QoQ) due to adverse forex impact and working capital accretion. Average cost of debt has increased to 6.89%. D/E stood at 3.51x and Debt/EBITDA stood at 1.09x. The company spent a capex of ~Rs40bn in 3QFY23 and ~Rs107bn in 9MFY23. The company plans to spend a capex of Rs150bn in FY23.

Key Risks

• Higher-than-estimated volumes
• Significant expansion in realization
• Lower-than-expected coking coal costs