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Investment Guru India 2019-08-13 09:10:06

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Weak earnings in overseas ops drag earnings – Maintain Reduce

Marred by inventory write-down and weak earnings in overseas operations, JSW Steel (JSTL) posted consolidated EBITDA below ours/consensus expectations by 3%/9%. Domestic operations performed in line with expectation. Domestic volumes fell 2% YoY to 3.75mnt (PLe:3.87mnt). Unitary EBITDA remained flat QoQ (down 21% YoY) to Rs9,936 (PLe:Rs9,935). Realisations rose 1.8% QoQ or Rs830 to Rs45,735 (PLe:Rs45,000).

Industry continues to demand measures to curb imports despite reduction in imports. In fact, imports have fallen 9% in Q1FY20 against 4% growth in domestic crude steel production. The key issue remains weak demand (PLe: +3.5% YoY) and steep fall in exports (down 27% YoY). As a precautionary measure, the Govt could impose provisional safeguard duty on suo moto basis for six months. It would result in temporary relief to the sector. However, we believe that it would fail to revive the sentiments on sustainable basis due to temporary nature of measure, weakness in domestic demand and sluggish exports market. We maintain Reduce on JSTL due to the weak outlook on steel prices, stretched valuations and overhang of Bhushan Power and Steel acquisition. We value the stock at Rs250, EV/EBITDA of 6x FY21e

* Losses in overseas assets continue to drag consol earnings: Impacted by fall in prices and inventory write down, USA based Acero/Italy based Aferpi operations reported EBITDA losses higher than our estimate at USD36mn/USD4mn (PLe: Loss US$27mn/US$3mn). Hence, consolidated EBITDA came below our estimate at Rs37bn (PLe:Rs40.5bn), down 16% QoQ (↓27% YoY). Owing to high tax rate (42.6% v/s PLe:32%) and lower earnings in overseas biz, PAT came below our estimate at Rs10.3bn (PLe:Rs13.9bn), down 33% QoQ/57% YoY.

* Key highlights of Con-call:

1) Provided inventory write down of US$21mn in overseas operations due to steep fall in prices

2) NSR fell by 7% YoY/flat QoQ in Q1

3) Realisations expected to fall by Rs1,500/t QoQ in Q2

4) Inventory increased by 300kt QoQ

5) Exports (17% of total vols) rose 34% YoY due to weak domestic demand

6) Sales to Auto sector fell 20% YoY

7) Demand is expected to pick-up in H2 on account of festive season and release of funds by Govt to contractors

8) Reiterated capex guidance of Rs157bn for FY20e (Spent Rs28bn in Q1FY20)

9) JSTL declared successful bidder for three iron ore mines recently auctioned in Karnataka having annual capacity of 2.5mtpa (scalable to 4mtpa)

10) Will source 5m/7.5mn-10mnt iron ore in FY20e/FY21e from captive mines, meeting 16%/25% of requirement

11) Auction of 44 iron ore mines in Odisha is expected to start in Aug'19

12) Realised savings of Rs155/t of iron ore in Q1 on transportation through conveyor belt

13) Recently acquired entities Acero (USA)/Aferpi (Italy) would turn EBITDA positive by Q4FY20e

14) Renegotiations on long term contracts with Auto/White goods customers will take place in Oct’19

15) Expect coking coal cost to fall by US$5/t QoQ in Q2.


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