JSW Steel (JSW) reported highest ever EBITDA of Rs 104 billion (+1.4x YoY) in Q2FY22. The key positives were: 1) share of value added products remained high at 60% (61% in Q1FY22, 51% in Q2FY21) driven by increased domestic sales to automotive, solar and appliance segments and 2) there was higher usage of captive iron ore (50% self-sufficiency). JSW's net debt remained flat QoQ at Rs 554 billion.

"We raise our FY23 realization and EBITDA estimates given rise in steel prices during October - we expect the prices to sustain. Our FY23 EBITDA is revised higher by 13%. We introduce FY24 estimates in this report and base our target price on FY24 estimates. We now value the stock at an EV/EBTIDA multiple of 6x FY24 EBITDA as JSW’s expansion plans provide strong volume growth visibility over FY21-FY25. We derive a target price of Rs 876 (earlier Rs 856) and maintain our BUY rating on the stock," stated IDBI Capital Equity Research.

Key highlights and investment rationale

Captive iron ore usage up: During Q2FY22, JSW’s standalone realization increased 5% QoQ, driven by higher realizations from export and also due to better sales mix. Standalone sales volumes increased 5% QoQ to 3.8 million tonnes driven by higher exports (+26% QoQ).  JSW mined 7.6 million tonnes of iron ore in Q2FY22 (self-sufficiency of 50% achieved).

Project updates: JSW has commenced production from its 5 mtpa Dolvi plant. Also, it is increasing its Vijayanagar steel capacity by 5 mtpa to 12 mtpa by FY24 with a capex of Rs 150 billion. JSW’s working capital has increased in Q2FY22 due to rising prices of key inputs in Q2FY22 which is likely to come down partially in H2FY22.

Outlook: In the near-term, we anticipate Indian companies to export higher proportion of steel if the domestic demand weakens. Moreover, we expect steel prices to remain firm in H2FY22 as China continues to curbs its steel capacities during coming 3-5 months. Over the coming five years, JSW Steel’s volume growth is likely to remain strong alongside robust return ratios given the strong steel cycle and JSW’s low-cost brownfield expansions.

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