JSW Steel Rating | Buy — Showing beat Street figures on all counts

Q4 results were ahead of the Street at all levels (though it was slightly below our estimates). Considering the demand slowdown and liquidity concern in the system in Q3 which continued into Q4, we are of the view that the results reflect strong sales volumes and market share gain (50bps y-o-y to 13.6%) for JSTL.

Further, auto sales have been unusually weak (declining 22% y-o-y), though management expects the situation to revive in 2HFY20 (generally auto sales revive post elections, according to management). On top of this, the company has liquidated earlier inventory build-up which is a key positive.

Q1FY20F results expected to be relatively stable
Steel prices have recovered from the lows of Jan-Feb’19 (below $500/t) to levels of $520-530/t (recently moderating to $510/t); thus, steel prices remain range-bound. Further, management has guided for coking coal cost remaining stable in Q1 vs Q4. We believe this will lead to stable spreads as we do not envisage a sharp increase in domestic iron ore prices.

Bhushan Power and Steel (unlisted) acquisition
Management is looking at getting an equity partner on-board and will likely structure the deal in a manner that the entity will not be consolidated. Management guides that leverage ratios will be maintained. We estimate that JSW Steel needs external equity funding of at least `50 bn to maintain its leverage ratios.

Outlook for the company
Production guidance of 16.95mnt for FY20: The production and sales guidance are up 1.5% y-o-y for FY20. We note that at present JSTL is undergoing capacity expansion at Dolvi (+5mntpa) which once complete should lead to a boost in volumes only from FY21.

Management to incur `157 bn in capex in FY20: JSTL has revised its capex plan for FY18-22 from `444 bn to `487 bn. While the 0.7 mnt (`13.75 bn) Dolvi DRI capacity expansion has been shelved, several cost-saving projects have been added (with hurdle IRR >15%).

Domestic iron ore prices likely to remain weak in FY20: Management expects the weakness in domestic iron ore prices to continue into FY20 as with several mining concessions set to expire in March, 2020, miners are producing at peak permissible levels.

Management expects substantial cost savings in FY20/21: Certain projects like commissioning of the piped conveyor belt for iron ore could lead to cost savings of `200/T (or `350/T of steel) on 11 mnt of iron ore in FY20 (and for entire 22 mnt needed at Vijayanagar plant in FY21).

We value JSW Steel at 2.17x 1-year fwd P/BV and add `5.3/sh on account of value added by the Monnet Ispat acquisition to arrive at our TP of `365. Key risks: (i) relatively higher domestic iron ore prices from NMDC; (ii) slowdown in global demand and hence dumping from China, Korea; and 3) compression of steel spreads from supply-side shocks.

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