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JSW Steel Rating: cut back; Sales at record excessive, but margins slipped in Q4

JSW Steel’s (JSTL’s) Q4FY22 Ebitda was up 8.8% y-o-y to Rs 91.8 bn, beating Street’s and our estimates. Key factors: i) Domestic EBITDA/t slid 32% y-o-y to Rs 13,517. ii) Overseas subsidiaries (besides Lucchini) carried out comparatively properly. iii) Net debt (excluding Acceptances) decreased Rs 97 bn q-o-q to Rs 566 bn. iv) Working capital build-up owing to greater stock.

Going forward, whereas we count on JSTL to realize its daunting quantity steering of twenty-two.6mt, excessive capex depth is a trigger for concern in the present setting of declining metal costs. Maintain ‘Reduce’ with an unchanged TP of Rs 471 valuing the stock at 5.6x Q2FY24E Ebitda.

Beats estimates; difficult outlook: JSTL’s Q4FY22 Ebitda of Rs 91.8 bn is forward of our and Street’s estimates. Key factors: i) Blended realisation of standalone business was down Rs 3,400/t, mirroring home HRC value decline and decrease export costs. ii) Coking coal value was up $52/t, impacting profitability. iii) Highest-ever standalone gross sales quantity of 5.11mt as Dolvi ramped up. iv) Exports decreased to a mere 21% of total combine as home demand elevated 7.4% q-o-q. v) US Plate/Pipe mill posted a robust efficiency. vi) Consolidated gross debt dipped Rs 37 bn because the company pay as you go Rs 73.8 bn of debt. For Q1FY23E, administration expects coking coal value to rise by $125/t. In our view, this may result in vital stress on profitability, regardless of greater quantity from standalone operations.

High capex depth amid falling spreads a key challenge: We are optimistic on JSTL coming near its aggressive gross sales quantity steering of 24mt (India: 23.3mt). However, we imagine standalone Ebitda/t would possibly shrink to Rs 11,500–13,000/t, even contemplating moderating coking coal and iron ore costs by means of FY25E. This coupled with deliberate capex of Rs 200 bn in FY23E and Rs 191 bn in FY24E implies debt is prone to stay elevated. While administration has indicated that capex is likely to be pruned in case spreads erode materially, we see JSTL extra precariously positioned than its friends.

Outlook: High capex depth – While we’re optimistic about JSTL ramping up quantity, we’re involved about its excessive capex depth in occasions of declining metal costs. This is exacerbated by the overhang created by the latest regulatory blow. We preserve ‘REDUCE/SU’ on JSTL with an unchanged TP of Rs 471/share.

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