Motilal Oswal thinks JSW Steel Q2 FY21 results were impressive as consolidated EBITDA grew 85 pct YoY to Rs 42.5 bn, beating estimates by 24 pct. Jefferies says JSW Steel's Q2 EBITDA rose 53% YoY and was a 33% beat led by better than expected sales volumes and realizations. Jefferies says higher exports to China have also reduced domestic ore availability. Sharekhan says Management has maintained FY 2021E sales volume guidance of 15 mt, which implies 5% YoY growth in H1 FY 2021E.

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Motilal Oswal believes JSW Steel posts an Impressive performance on all fronts. They raise near term earnings outlook strong, raise EPS and target price to Rs 372 (16% potential upside). JSW Steel’s Q2 FY21 results were impressive as consolidated EBITDA grew 85% YoY to Rs 42.5 bn, beating estimates by 24%. The beat was led by lower costs, leading to standalone EBITDA/t of Rs 10,136 (estimate of Rs 8,754).
Motilal Oswal expects Q3 FY21 margins to be even stronger as higher steel prices (HRC price currently is Rs 4,000/ton higher than Q2) and upward revision in fixed price contracts should lead to higher realization. Motilal Oswal raises their FY21E/FY22E EBITDA by 25%/5% to factor in higher realization.

Highlights from management commentary:

1) The company took price hikes of Rs 2,000/ton in Oct’20, which has been absorbed by the market. Spot prices were higher by 10% v/s Q2 FY21 average prices.
2) Half-yearly and quarterly pricing contracts should see upward revision.
3) Sales guidance of 15 mt has been maintained for FY21 (6.8 mt in first half of FY21), implying an ask rate of 4.1 mt/qtr. Motilal Oswal factors in volumes of 14.8mt in FY21.
4) Costs are likely to remain flattish in Q3 FY21.
 
Jefferies highlights Key Takeaway from JSW Steel’s results:
 
Jefferies maintains buy rating on JSW Steel, raising target to Rs 380. JSW Steel's Q2 EBITDA rose 53% YoY and was a 33% beat led by better than expected sales volumes and realizations. EBITDA/ton doubled QoQ to Rs10000, an eight-quarter high. Jefferies expects realizations to improve further in Q3 as the benefit of higher spot and contract prices flows through. Iron ore cost should rise sequentially, but Jefferies expects margins to expand further from the Q2 level. Jefferies upgraded FY21-23 EPS by 10-69%.
 
Realizations should improve further in Q3:
 
Indian spot flat steel prices are Rs 3500 - 4000 higher than Q2 average and the benefit should flow through in Q3. Prices for quarterly and half-yearly contracts, 20% of volumes, are also getting revised with 10-12% hikes. The combined effect should drive another strong uptick in JSW Steel's steel realizations in Q3.
 
Margins to expand despite iron ore cost pressure:
 
India is facing iron ore availability issues as many of the recently auctioned mines are yet to start production or are facing evacuation challenges. Higher exports to China have also reduced domestic ore availability. JSW Steel's raw material cost was flattish QoQ in Q2 but likely to rise in 3Q on higher iron ore cost. Jefferies expect higher steel realizations to more than offset the cost pressures though, and expect EBITDA/ton to expand to Rs11500 in second half of FY21.

Sharekhan recommends Buy on JSW Steel with a price target of Rs. 375, given strong earnings growth outlook, decent RoE of 15%, and reasonable valuation of 6.6x its FY22E and 6x its FY23E EV/EBITDA, given an early recovery in the steel profitability cycle. JSW Steel’s consolidated EBITDA stood at Rs. 4,186 cr (up 85% YoY) was significantly estimates, led by higher than expected EBITDA/tonne at Rs. 10,087/tonne (up 59% YoY) and strong sales volume at 4.2 mt (up 16.6% YoY).

Management has maintained FY 2021E sales volume guidance of 15 mt, which implies 5% YoY growth in H1 FY 2021E. Capacity expansion at Dolvi plant (undergoing 5 mtpa capacity expansion) is on track to get commissioned by Q4 FY 2021. Higher steel price (revision in contractual steel price for the auto sector from October), improving revenue mix (with higher domestic sales), higher operating leverage, and volume growth from Dolvi expansion to drive 27% PAT CAGR over FY2020-FY2023E.