Sell JSW Steel; target of Rs 256: Emkay Global Financial

Emkay Global Financial's report on JSW Steel

JSW Steel reported better results than our and Street estimates. Strong growth in pricing, especially in Sep, has resulted in upgrades to our FY21 estimates. However, we believe a large part of the price hikes is done and do not expect prices to improve sharply now. The strong price hike in Q2 was driven by shortage of steel in the trade segment. With some mills taking partial shutdowns, auto sheet deliveries ramping up improvement in infra demand and continued exports, trade segment was under-served, leading to price hikes. In our view, the BPSL acquisition will continue to be EPS dilutive for the next few years till further investments are made to increase capacity of the plant to 4mt from 2.6mt. In the near term, captive iron ore cost will likely restrict EBITDA expansion due to price hikes.

Outlook

We raise FY21 EBITDA estimate by 29% but leave FY22E largely unchanged. We believe strong cash flows will result in higher capex as JSW completes pending projects. High leverage with impending BPSL acquisition remains our key concern. Maintain Sell with a revised TP of Rs256 (up from Rs161), driven by higher multiple (6.5x vs. 5.5x earlier) as steel remains strong but substantial price hikes are now difficult.

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