Broker’s Call: JSW Steel (Add)

Kesavan A N 1612 | Updated on: Jul 25, 2022

Centrum Broking

Target: ₹613

CMP: ₹585.20

JSW Steel (JSTL)’s reported better-than-expected adjusted EBITDA of ₹5,060 crore, down 45 per cent quarter-on-quarter. Standalone numbers were affected from higher coal cost, lower volume after the government imposed 15 per cent export duty, partially offset by higher average steel prices.We expect JSTL’s margins to remain under pressure in Q2-FY23 amid softening steel prices, partially offset by lower RM cost. 

Lower volumes (down 21 per cent quarter-on-quarter to 4.03 MT), higher coking coal (up about $1,13/tonne quarter-on-quarter), higher power cost as it uses imported thermal coal and inventory write down due to fall in prices by quarter-end offset higher blended steel realisation (up about 9 per cent quarter-on-quarter). Volume was lower as customers defer purchase in anticipation of price fall. The management guides coking coal cost to decrease by $50-60/tonne quarter-on-quarter in Q2-FY23, but will not be sufficient to offset lower steel prices.

The sharp increase in working capital amid inventory accumulation and MTM increase in foreign loan led JSTL’s net debt to increase to ₹67,220 crore. JSTL cut its FY23 capex guidance to ₹15,000 crore from ₹20,000 crore earlier, indicating the pressure arriving due to lower profitability. Despite FY23 capex, we believe JSTL’s net debt to reduce to ₹49,900 crore (Net debt/EBITDA of 2x) by FY23-end with release of working capital.

The arrival of Russian HRC imports coming at lower prices (lesser than ₹52,000/tonne, arriving in September), the seasonal downturn leading to subdued volume and lower exports amid government’s imposition of 15 per cent export tax will lead to further cut in domestic steel prices in the next two months. The full effect of lower coking coal prices will start reflecting from Q3-FY23.

As a result, we expect even Q2-FY23 profitability to be under pressure. JSTL will reduce exports as it is not viable to export with fall in global prices and 15 per cent export duty. Removal of export tax is necessary for JSTL to achieve even 18.6 MT standalone volume (up about 13 per cent year-on-year) in FY23.

Published on July 25, 2022
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