JSW Steel INORGANIC GROWTH TO STEEL ITS NUMERO UNO POSITION

Kiran Dhawale

JSW Steel, a part of the O.P. Jindal group, was incorporated as Jindal Vijaynagar Steel Ltd (JVSL). The company began its operations in 1999. The company was renamed JSW Steel in FY06 after its transformation into an integrated steel manufacturer. The current capacity of JSW Steel is 18 MTPA, which makes the company India’s largest steel manufacturer. In FY18, the company recorded highest ever crude steel production of 16.27 million tonnes. The company has seven production facilities spread across western and southern regions of the country. The company is continuously expanding its manufacturing capacity; from the capacity of 1.6 MTPA in 2002, the company expanded its crude steel production capacity to its present capacity of 18 MTPA. Going forward, JSW Steel aims to expand its capacity to 40 MPTA over the next ten years. 

The company has a wide portfolio of flat and long products and is one of India’s leading producers and exporters of coated flat steel products. The company’s product portfolio includes: 

• Hot rolled coils (HRC)
• HR sheets and plates
• Cold rolled coils and sheets
• Galvanised and galvalume products
• Pre-painted galvanised and galvalume products
• Thermo mechanically treated (TMT) bars
• Wire rods and special steel bars
• Rounds and blooms
• Plates and pipes of various sizes
• Cold rolled non-grain-oriented products 

The company’s wide product portfolio fulfils the demand of various industries such as construction, infrastructure, automotive, consumer durables, and many more. 

Notably, to ensure seamless raw material supply, the company has acquired five iron ore mines in Karnataka. 

One of these mines has become operational in February 2018 and other four mines are expected to get operational in FY19. Jointly, these four mines are expected to provide 4.7 MTPA of iron ore, which will be around 20 per cent of the company’s iron ore requirements at Vijayanagar. 

The management is bullish on the sales target of 15.5 MT as per the guidance given for FY18E. Owing to the positive traction in construction sector, the sales could improve. To encash the opportunity arising from growing automobile industry, the company is improving its focus on cold rolled, galvanised and galvanneal products for body panels of automobiles. 

The steel prices are expected to remain firm. The domestic prices are at 6 to 7 per cent discount to the international prices and that provides a headroom for domestic players to increase prices further, based on cost-push factors.

The improving outlook for the global steel sector augurs well for JSW Steel. The capacity cuts being implemented in China is also contributing to stable prices for steel globally

The National Steel Policy 2017, (NSP 2017) aims to make India a self-reliant steel producing country by 2030. The policy will promote the domestic industry to abolish steel imports in the country by 2030. 

Looking at the rural demand, the various policies of the government such as Food for Work Programme (FWP), Indira Awaas Yojana and Pradhan Mantri Gram Sadak Yojana are expected to boost rural demand and increase per capita consumption from 12.11 kg to 14 kg for finished steel by 2020. 

In terms of construction sector demand, the implementation of RERA has increased the confidence among the investor community as it has led to increase in transparency in the housing segment. Also, the government’s impetus to affordable housing is likely to accelerate demand for the housing sector which, in turn, will also boost demand for steel products. 

The company is seriously focusing on reducing its operational costs, and in line with this aim, it is setting up a pipe conveyor with a capacity of around 20 MTPA. This move is likely to help the company to reduce its freight costs from the present Rs 500 per tonne to less than Rs 100 per tonne. This facility is expected to get operational by September 2018. To capitalise on the opportunity arising from the growing steel sector, the company will invest around Rs 44,415 crore to expand its steel-making capacity from the present 18 MTPA to 24.7 MTPA by FY21 with downstream facilities. 

JSW Steel seems to be in good shape with the full impact of higher realisations likely to be seen in the coming quarters. The coated products prices are expected to improve even as the operating leverage benefits are expected to accrue due to higher traction in long products.

On a shopping spree 

In line with its aim to expand its production capacity, the company is doing inorganic expansion by way of acquiring small players and stressed assets. The company has acquired 100 per cent stake in the US firm Acero Junction Holdings Inc, which is likely to start its operation by October 2018. In addition to this, the company has acquired 100 per cent stake in Aferpi SpA, Piombino Logistics SpA and 69.27 per cent stake in GSI Lucchini SpA in Italy. Further, the company is in the process to acquire domestic stressed firm Monnet Ispat & Energy Limited, which has a steel-making and rolling capacity of 1.5 MTPA.

Risks factors 

Some of the risks facing JSW Steel are the drop in steel prices owing to fall in demand for steel, both domestically and globally. The higher acquisition costs of stressed assets may also prove negative for the industry in general, and JSW in particular. 

The Q2FY19 is seasonally weak quarter for steel manufacturers as monsoon drags down realisation. This impacts the profitability in the near term. However, the long-term growth prospects are intact. 

For anyone entering the stock at the current levels, he or she must factor in the fact that the stock has risen too soon too fast. 

Q1FY19 results 

In Q1FY19 , JSW Steel reported betterthan-estimated earnings, with support from other operating income. The highlight of the latest results was the near all-time high EBITDA/t of Rs 12,590 on the back of strong spreads. 

Financials :- 

In terms of financials, the consolidated revenue for the first quarter of FY19 rose 28.4 per cent to Rs 20,519 crore over the corresponding quarter of the previous year. The EBITDA during the quarter surged almost 95 per cent to Rs 5,105 crore over the corresponding quarter of last year, with corresponding EBITDA margin expansion of 850 bps. The EBITDA margin for the quarter stood at 24.9 per cent. JSW Steel’s net profit recorded significant growth of 274 per cent YoY to Rs 2,339 crore. The EBITDA/ tonne in Q1FY19 doubled to Rs 12,590 from Rs 6,280 in Q1FY18. Further, realisation per tonne during the quarter was up by almost 21 per cent to Rs 48,211. 

On the annual front, the consolidated revenue for FY2017-18 was at Rs 71,503 crore, as against Rs 60,536 crore in previous fiscal, which represents growth of 18 per cent YOY. The operating EBITDA for FY18 stood at Rs 14,794 crore as compared to Rs 12,174 crore in FY17. 

The company’s net profit for FY18 surged to Rs 6,113 crore from Rs 3,467 crore in FY17. During FY18, the company reduced its net debt on a consolidated basis by Rs 3,529 crore. 

In terms of valuation, JSW Steel is currently available at a valuation of 7.6x EV/EBITDA. In terms of P/E multiple, the stock is currently available at 11.9x on TTM earnings. Besides, JSW Steel has better ROCE of 16.8 per cent as compared to its peers. Owing to the above mentioned factors, we urge our reader-investors to HOLD the scrip.

The structural withdrawal of Chinese supplies, coupled with the continuous monitoring by Chinese authorities to keep pollution under check, should keep the global steel prices firm.

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