JSTL’s Q3FY21 outcomes are ahead of our estimates and that of the Street at operational levels. The powerful outcomes are supported by a sharp rise in steel costs in Q3FY21 top to fairly elevated levels of steel spreads (profitability by historic levels). However, we do not view these elevated spread levels to be sustainable.
Indian iron ore costs are increasing and so are these for coking coal, which could add to gross margin stress: Iron ore availability from Odisha has been impacted due to logistical concerns and the failure of new mining lease owners to ramp up. This has led to iron ore provide facing bottlenecks at a time of increasing demand, with costs increasing drastically more than the previous two months. Further, China is procuring coking coal at a premium to Australian costs, as it restricted imports from Australia. We anticipate Australian coking coal costs to trend upward.
However, management expects domestic steel costs to be variety-bound, with lengthy solution costs witnessing some moderation: The steel market had witnessed de-stocking earlier, as production was curtailed for the duration of lockdowns. However, demand rebounded sharply, top to provide gaps and rises in costs locally. With output and inventory levels normalising, we should really witness moderation in worldwide and neighborhood steel costs.
Longer term JSTL to advantage from iron ore provide safety and commissioning of new capacity from FY22F: JSTL targets to commission 5mntpa capacity at Dolvi by Q1FY22 which, coupled with current expense-saving initiatives, should really help development into FY22F. With 49% personal sourcing of iron ore in Q3, provide safety has enhanced.
Trading at 6.7x EV/Ebitda of FY23F retain Neutral, with TP raised to Rs 404: We raise our Ebitda estimates by 46%/5%/7% for FY21F/22F /23F to element in sharp cost rises in Q3FY21. We worth JSTL at 1.79x FY23F (vs 1.57x earlier) BV of Rs 227, factoring in larger ROE to arrive at our TP of Rs 404, implying ~8% upside. Any additional rise in steel costs is an upside danger iron ore availability constraints and increasing iron ore and coking coal costs are downside dangers.