Reduce JSW Steel; target of Rs 700: Sharekhan

Sharekhan recommended Reduce rating on JSW Steel with a target price of Rs 700 in its research report dated October 20, 2023.

Broker Research

October 23, 2023 / 13:29 IST

Reduce

Sharekhan's research report on JSW Steel

Q2FY24 consolidated operating profit of Rs. 7,886 crore (up 12% q-o-q) was above our estimate as better-than-expected standalone volume/margin offsets weak performance of overseas subsidiaries. Adjusted PAT of Rs. 2,184 crore (down 10% q-o-q) was 18% below our estimate due to a substantially higher tax outgo. Standalone EBITDA grew strongly by 42% q-o-q to Rs. 6,898 crore (18% beat) as lower coking coal cost led to 29% q-o-q jump in EBITDA margin to Rs. 12,750/tonne (16% above estimate) and robust India demand led to better sales volume growth of 10% q-o-q to 5.41 mt. US subsidiaries posted weak performance on lower volumes/realisation due to adverse market conditions. India steel prices have been hiked for the past three consecutive months and that would largely offset recent surge in coking coal/iron ore price and thus steel spreads likely to sustain at current levels in Q3FY24.

Outlook

The company maintained FY24 steel sales volume guidance of 24mt and plans to expand steel production capacity to 37 mt/50 mt by FY25E/FY31E. Valuation of 7.7x FY25E EV/EBITDA seem rich to us and is factoring in expectation of margin/volume recovery. We do not find comfort in current valuations, given a premium to historical average EV/EBITDA of 6.7x and debt to remain elevated given capex plan. Hence, we maintain our Reduce rating on JSW Steel with an unchanged PT of Rs. 700.

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