Accumulate JSW Steel; target of Rs 779: Aditya Birla Money

“JSW Steel’s standalone net sales increased 32.1% YoY to 76.3bn on account of sales volume growth and higher steel realisations. Sales volume of saleable steel grew 19.0% YoY and 9.8% QoQ to 1.88mn tonnes. The QoQ increase was on account of release of inventory and higher purchases from JSW Ispat. Crude steel production grew 10.6% YoY to 1.68mn tones. JSW Steel’s standalone EBITDA rose 30.6% YoY and declined 7% QoQ to 13.0bn. The QoQ decline in EBITDA was on account of higher iron ore costs. EBITDA margins declined 274bps QoQ to 17.0%. During the quarter, there were mark-to-market foreign exchange losses of Rs 10bn. Of this, Rs 5.1bn was related to acceptances-- this was accounted in the P&L-- and the remaining related to foreign currency borrowings which was capitalised. As a result, Reported PAT declined 71.5% YoY and 78%QoQ to Rs 1.3bn. While the FX losses are currently notional, if the rupee continues to be at the same levels for the next 2-3 quarters, FX losses on the acceptances would get realized. JSW Steel’s standalone adjusted net profit was up 46.1% YoY and down 16% QoQ to Rs 4.9bn. The QoQ decline was on account of lower EBITDA and higher interest costs.”

“We continue to value JSW Steel (ex-Ispat Industries) at a consolidated 5x EV/EBITDA, which gives a value of Rs 701. To this, we add the value of its investment in Ispat Industries at 0.8x the equity investment, which translates into a value of Rs 77.7. Our fair value for JSW Steel comes at Rs 779. We increase our target price per share for JSW Steel by 10.6% to Rs 779 from Rs 704, implying a potential return of ~9.4% from the last closing price. We downgrade our rating of JSW Steel to Accumulate from Buy on account of stock price appreciation,” says Aditya Birla Money research report.

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