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Narnolia Financial
JSW Steel (Buy)
CMP: ₹230.35
Target: ₹300
Some key points of Q1: a) Consolidated revenue for Q1 FY20 came in at ₹19,812 crore (down 11.4 per cent y-o-y), fall in
revenue was primarily on account of around 11 per cent fall in domestic steel prices.
Standalone steel volume for the quarter was at 3.75 mt (down 2.1 per cent y-o-y) and realisation was at ₹46 664/t (down 5.76 per cent). Coated products business did volume of 0.45 mt (up 4.7 per cent y-o-y) and realisation was at ₹66,444/t (down 5.7 per cent y-o-y).
We continue to remain positive on JSW Steel led by significant capacity addition in progress, cost cutting measures, increase in captive iron ore volume (expected to be around 5 mt in FY20 versus 1.8 mt in FY19) and its ability to alter between export and domestic sales. However, over near term slow down in auto industry and reducing spread due to falling steel prices and raw material prices remaining at the same level will be a concern.
We have reduced our FY20 EBITDA/PAT estimate by 11 per cent/24 per cent as we factor in higher operating expense but maintain our FY21 estimate. We value the stock at ₹300 (7x FY20e EV/EBITDA) and maintain ‘buy’.
Key risks: a) High volatility in coking coal and iron ore prices may impact gross margin.
b) Lower than expeted volume growth.
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