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Motilal Oswal Report
Our analysis of JSW Steel Ltd.'s FY23 annual report showed that despite the adverse macro-economic condition, geopolitical tensions, high interest rates and levy of export duty at the start of FY23, domestic steel demand remained robust, led by a strong focus on infrastructure and construction.
Going ahead, domestic steel demand is expected to be driven by a strong capital base, expansion in public and private capex, urbanisation, improved standards of living, expansion of manufacturing capabilities, development of freight corridors and growth in roadways, waterways and railways network.
JSW Steel is adding capacity at the right time, which will increase its capacity from ~28.2 million tonne to over 37 mt by FY25 and around 50 mt by FY30-31.
JSW Steel's capacity expansion aligns well with the government's National Steel Policy target of 300 mt by FY30-31. Demand is expected to remain robust across key sectors such as automobiles, packaging, renewable energy, construction, power, consumer durables and engineering.
Focus on value-added products:
JSW Steel has a strong focus on VAP (~61% of sales from VAP and specialised products) and has significant capacity of 13.5 mt in downstream high-margin products. The contribution from the auto sector increased to 15% as of Q1 FY24.
Steel demand across key sectors such as infrastructure, construction, automobiles, railways and white goods is expected to remain robust and JSW Steel remains buoyant on domestic steel demand over next decade. The capacity expansion will help JSW Steel navigate steel cycles.
Financial highlights:
In FY23, consolidated revenue rose 13% YoY to Rs 1,660 billion; however, Ebitda/adjusted profit after tax were down 52%/83%YoY at Rs 185 billion/Rs 36 billion. The performance was impacted by higher coal and input costs, lower exports, high interest rates and geopolitical volatility.
Debt:
JSW Steel's net debt increased to Rs 668 billion as of June 2023 from Rs 585 billion in March 2023. The net debt-to-equity ratio stood at 0.96 times (0.9 times in March-23).
Valuation:
With volumes likely to be aided by a pickup in domestic demand and the benefits of low coking coal costs expected to accrue in Q2 FY24, we believe JSW Steel is well placed.
The stock trades at 6.5 times FY25E enterprise value/Ebitda and 2.2 times FY25E price/book.
We reiterate our 'Neutral' rating on the stock with a target price of Rs 730, as we believe the valuation fully prices in the above-mentioned positive factors.
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