Analyst Call Tracker: How JSW Steel became an expensive buy over the past year

Over the past year, JSW Steel has seen the maximum number of downgrades with ‘sell’ ratings on its stock increasing to 19, up 171 percent from 7 a year ago.

Also read: Analysts’ Call Tracker - Jan 2023

Concerns around JSW Steel’s rich valuation has been one of the biggest reasons for the downgrades, with analysts considering the valuation gap to be too high for any upside potential.

The slowdown witnessed by the steel industry in general in the past year also does not seem to have helped its case.

"Despite a plethora of operational positives and an unrelenting focus on digitisation and sustainability initiatives at the Dolvi plant of JSW Steel, we see the high valuation at 7.5x FY24E EBITDA as the key deterrent," according to ICICI Securities, which maintained a ‘sell’ rating with a price target of Rs 550.

As of December 2022, the company’s net debt was Rs 69,498 crore, an increase of 6 percent sequentially, as a result of high working capital and forex impact; the increase was 5 percent Year-on-Year. The company’s Net debt/EBITDA multiple also increased to 3.51 in Q3FY23 from 1.73 in Q3FY22.

The high debt has caused many analysts to consider JSW steel an expensive buy with many preferring its peers over it.

“The increase in debt in Q3 means that JSW steel’s enterprise value is now higher than previous peaks, while earnings improvement at present is better for peers,” according to Ambit Capital.

Securities firm Jefferies, in a September report, also mentioned preferring Tata Steel over JSW Steel, given a lower price-to-book valuation and better cash flow outlook.

The industry at large also suffered last year amid weak global demand, elevated prices, and imposition of higher export duty.

JSW Steel reported a 90 percent Year-on-Year decline in its December quarter profit at Rs 474 crore as a result of a decline in exports as well as high finance costs which jumped 42 percent on a yearly basis. Profit in the December 2021 quarter was Rs 4,516 crore.

On Friday, shares of JSW Steel closed 1 percent down on the National Stock Exchange at Rs 718.30 apiece.