JSW Steel (JSWS) reported far better than anticipated realisation and ebitda for Q1FY22. Realisation enhanced ~ Rs 11,765/te QoQ ( Similar to Q4 more than Q3), considerably greater than expectations. Ebitda enhanced Rs 6500/te QoQ to Rs 26,291/te. Raw material charges + mining premium enhanced by Rs 3784/te QoQ. Increase in raw material charges also entailed boost in coking coal. While, one is tempted to extrapolate the superlative functionality this outcome entails for an integrated player like Tata Steel, the distinction in auto contracts (timing), export and other sales (like iron ore) can also ascertain price tag variation, and might not reflect in Tata. Increase in working capital led to QoQ boost in net debt (such unexpected net debt movements can be witnessed in other steel players as properly). Investments into associated parties (JSW Paints in specific) have been a unfavorable surprise. Maintain ‘hold’ with a revised target of Rs 682 (Rs 660 earlier).
Investments into ‘related party’ entities: JSWS will invest Rs 7billion in tranches into JSW paints more than FY22-25E. First tranche will see Rs 3billion investment for 6.68% stake. This, as per management, is to make sure uninterrupted provide of industrial paint as JSWS’s requirement increases with close to quadrupling of colour-coated capacity. PPA for wind and solar energy has been entered into with JSW Energy wherein to keep 26% stake in a new SPV, Rs 4.45billion will be invested. This will aid decrease renewable acquire obligation for JSWS and will aid keep away from cross subsidy charges though procuring more energy from JSWS as Vijaynagar steel production ramps up to 18mtpa.
Projects update – 70% close to-term development to take India capacity to 30.5mtpa: 5mtpa Dolvi expansion to commence operations by Sep,’21. Project to boost steel-creating capacity by 5mtpa at Vijayanagar from the current 12mtpa is also underway. Total estimated capex is Rs 150billion. Expansion is anticipated to be completed by FY24.
Management expects to leverage current facilities at Vijayanagar i.e surplus pellets, sinter, coke creating facilities at current operations to meet the essential raw material needs.
Maintain ‘hold’: The completion of the upstream and downstream capex can aid strengthen the throughcycle ebitda and RoE profile. This really should manifest in the next downturn. Also JSWS is quickly featuring as a regional development play on steel.