JSW Steel rating: Neutral; rise in steel prices led to strong numbers

JSTL’s Q3FY21 results are ahead of our estimates and that of the Street at operational levels. The strong results are supported by a sharp rise in steel prices in Q3FY21 leading to relatively elevated levels of steel spreads (profitability by historic levels). However, we do not view these elevated spread levels to be sustainable.

Indian iron ore prices are rising and so are those for coking coal, which could add to gross margin pressure: Iron ore availability from Odisha has been impacted due to logistical issues and the failure of new mining lease owners to ramp up. This has led to iron ore supply facing bottlenecks at a time of rising demand, with prices rising significantly over the past two months. Further, China is procuring coking coal at a premium to Australian prices, as it restricted imports from Australia. We expect Australian coking coal prices to trend upward.

However, management expects domestic steel prices to be range-bound, with long product prices witnessing some moderation: The steel industry had witnessed de-stocking earlier, as production was curtailed during lockdowns. However, demand rebounded sharply, leading to supply gaps and rises in prices locally. With output and inventory levels normalising, we should witness moderation in global and local steel prices.

Longer term JSTL to benefit from iron ore supply security and commissioning of new capacity from FY22F: JSTL targets to commission 5mntpa capacity at Dolvi by Q1FY22 which, coupled with recent cost-saving initiatives, should support growth into FY22F. With 49% own sourcing of iron ore in Q3, supply security has improved.

Trading at 6.7x EV/Ebitda of FY23F; maintain Neutral, with TP raised to Rs 404: We increase our Ebitda estimates by 46%/5%/7% for FY21F/22F /23F to factor in sharp price rises in Q3FY21. We value JSTL at 1.79x FY23F (vs 1.57x earlier) BV of Rs 227, factoring in higher ROE to arrive at our TP of Rs 404, implying ~8% upside. Any further rise in steel prices is an upside risk; iron ore availability constraints and rising iron ore and coking coal prices are downside risks.