PL Stock Report: JSW Steel (JSTL IN) - Q2FY24 Result Update – Higher coking coal prices to haunt in 4Q - BUY

JSW Steel (JSTL IN) - Tushar Chaudhari - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: BUY | CMP: Rs769 | TP: Rs903

Q2FY24 Result Update – Higher coking coal prices to haunt in 4Q

Quick Pointers:

§ 8.5mtpa capacity is being added in the next 18 months from Brownfield expansions of Vijayanagar & BPSL.

§ 10% QoQ volume growth in seasonally weak quarter, as demand from user industries showing signs of uptick. Indian steel demand grew 14.8% YoY in 1H

We cut our FY24E/FY25E EBITDA estimates by 9%/8% on higher coking coal price assumption. JSW Steel (JSTL) reported robust operating performance in 2Q, driven by 10% QoQ volume growth in standalone business. Cons. EBITDA was 4% above our estimates led by strong India performance, lower coking coal prices of prior period inventory and lower mining royalties. The company is expected to deliver 16% volume CAGR over FY23-26E led by ongoing capacity additions and robust infrastructure activities in domestic market. However, recent sharp uptick in coking coal prices can put pressure on margins from 4QFY24 unless global steel players are able to take price hikes. Mgmt. believes that global steel prices have bottomed out and Chinese market is also showing some signs of demand improvement. JSTL’s rising focus on value added and specialized portfolio is expected to improve product mix and resilience for withstanding steel price volatility.

We believe that JSTL with its superior execution skills will be key beneficiary of strong domestic demand scenario over next few years. We expect Revenue/EBITDA/PAT growth of 15%/31%/74% over FY23-26E. At CMP, stock is trading at 6.7x/5.7x EV of FY25E/FY26E EBITDA. Retain ‘Buy’ rating with revised TP of Rs903 (earlier Rs925) valuing at 7x EV of Sept 2025E EBITDA, as we roll forward.

Volume driven revenue growth: Cons. revenues grew 6.7% YoY to Rs445.8bn on strong volume growth in domestic operations (10% QoQ to 5.41mt Vs PLe 5.3mt). Average Realization declined 6.2% QoQ to Rs 62,362 (lower than PLe of Rs64k/t) as steel prices were on a downward trend post Mar-23.

Lower RM prices drove EBITDA/t: Standalone EBITDA grew robust 42% QoQ to Rs 68.9 bn (up 4x YoY on lower base & lower coking coal costs; better than PLe: Rs 62b) on lower raw material, power & fuel and other costs. EBITDA per ton improved by Rs2,890/t QoQ to Rs 12,750 (PLe: Rs11,605/t). Cons. EBITDA increased 12% QoQ to Rs 78.8 bn (up 4.5x YoY) better than PLe of Rs 76 bn.

Concall highlights: (1) JSTL to incur capex of Rs520bn till FY26 to reach 37mtpa capacity majorly funded by internal accruals (2) Cons. capex for 2QFY24 stood at Rs38.2bn (3) Brownfield expansion at Vijaynagar is expected to be completed by end FY24 (4) Benefits from BPSL expansion shall start flowing from Q4FY24 (5) JSTL has liquidated 300kt of inventory in 2Q (6) Avg Coking coal cost in 2Q fell by USD54/t to USD231 CFR; to increase by USD30 in Q3 (7) Captive iron ore mining capacity is likely to increase to 16mtpa from 7mtpa in Karnataka by FY26E.

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