Guides for rise in profitability, expansion plan intact…
About the stock: JSW Steel (JSW), the flagship company of the JSW group, is one of the largest and most diversified steel producers’ companies in India.
• Steel Capacity as of FY24: India- 28.2 million Ton (MT) & US- 1.5 MT
Q4FY24 Results: JSW Steel reported muted performance in Q4FY24 results. Consolidated topline stood at ₹46,269 crore (flat YoY, up 10% QoQ) with steel sales volume of 6.7 MT (up 3% YoY, 12% QoQ). Reported EBITDA for the quarter came in at ₹6,124 crore vs ₹7,180 crore in Q3FY24, largely attributed to higher raw material cost at its Indian operations and drop in metal realisations. Standalone operations reported EBITDA/tonne of ₹7,807 vs ₹11,113 in Q3FY24 vs ₹10,998 in Q4FY23.
Investment Rationale
• Ambitious capacity expansion aligns with growing steel demand in domestic market: Despite being the world’s second largest consumer of finished steel, India’s per capita steel consumption at 77 per kg lags far behind the global average of 233 per kg. Aiming to increase per capita steel consumption to 160 per kg by 2030-31, the government is targeting a crude steel capacity of 300 MT. As a prominent player with decades of experience in this space, JSW Steel has embarked on an expansion path with the goal of increasing its steel production capacity domestically to 42 MTPA by Sept’27, and gradually expanding it to 50 MTPA by FY31. Most of the capacity expansions will be brownfield in nature at its existing plants, including Vijayanagar, which is the largest integrated steel facility in India, undergoing an expansion from ~12 MT to ~19 MT by FY25. Moreover, JSW also aims to augment its downstream capacities, targeting an increase in the share of high-margin value added products. Going forward, on consolidated basis, we have modelled in a volume growth of 10% CAGR over FY24-26E to 30 MT in FY26 vs. 25 MT clocked in FY24.
• EBITDA/tonne set to improve owing to better steel prices and lower raw material costs: With demand recovery in global markets, improved steel prices and lower coking coal costs, EBITDA per ton is expected to improve for the company in coming quarters. With the aim of securing critical raw materials for steel making, it is also aggressive on scouting mines (iron ore, coal) with captive share of iron ore requirements set to increase from ~35% currently to ~50% by FY25E. It has also announced acquisition of coking coal mines (pre-developmental stage) in Mozambique. With raw material security in sight, better ASP’s and decline in coking coal costs, we built in EBITDA/tonne at JSW to improve to ₹12k/13.5k per tonne for FY25E/26E.
Rating and Target Price
• With strategic capacity expansion in place, favourable steel demand and improvement in profitability, JSW Steel is poised to deliver record performance (450 bps improvement in margins) going forward. We assign BUY rating to the stock and value it at ₹ 1,125 i.e. 8x FY26E EV/EBITDA.
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