Buy JSW Steel, target Rs 484: Nomura, India
Nomura, India has a buy call on JSW Steel with a target price of Rs 484.
The current market price of JSW Steel is Rs 416.60.
Time period given by the financial firm is one year when JSW Steel price can reach the defined target.
Investment rationale by Nomura:
Indian steel on cusp of strong demand growth, but capacity expansion is slow. We expect Indian steel demand to grow at 5-7 per cent over the next decade driven by large-scale infra spending and consumption growth. Steel capacity expansion in FY18-21F likely to be limited, which will likely saturate capacity in next 3-4 years, in our view. Already in FY19 we are seeing steel demand growing faster than GDP.
JSW Steel (JSTL) is favoured, in our view, due to its history of timely capex and lowest capacity-expansion costs. JSW Steel is incurring Rs 440bn capex programme on expanding capacity from 18mnT (currently) to 24.7mnT by FY21F and adding value-added products (improving product mix). This will drive EBITDA margins and profitability growth while maintaining balance sheet strength, in our view.
Balance sheet remains strong despite capex-intense phase, as cost-saving measures and increased share of value-added products has led to strong operating cash flows. Even FY18 OCF of Rs 124bn largely covers FY19F capex of Rs 100bn and estimated interest expenses; hence, we believe debt metrics are likely to improve despite heavy capex.
JSTL could incur capex on acquisitions (inorganic) for 4.5-8.0mnT while maintaining net debt metrics. With lots of stressed assets up for sale in India, we see great value-addition potential (historically JSTL has turned around acquired assets, transforming them into low-cost steel converters).
Valuation- Trading at 6.7x FY20F EV/EBITDA; initiate at Buy: We value JSTL at 2.53x one-year forward P/B (regression justified) and add Rs 7.9/share value accretion from Monnet Ispat to arrive at a target price of Rs 484, implying 18 per cent upside, and hence we initiate with Buy. Key risks are sharp compression in steel spreads and risks to supply of iron ore and coking coal.
The current market price of JSW Steel is Rs 416.60.
Time period given by the financial firm is one year when JSW Steel price can reach the defined target.
Investment rationale by Nomura:
Indian steel on cusp of strong demand growth, but capacity expansion is slow. We expect Indian steel demand to grow at 5-7 per cent over the next decade driven by large-scale infra spending and consumption growth. Steel capacity expansion in FY18-21F likely to be limited, which will likely saturate capacity in next 3-4 years, in our view. Already in FY19 we are seeing steel demand growing faster than GDP.
JSW Steel (JSTL) is favoured, in our view, due to its history of timely capex and lowest capacity-expansion costs. JSW Steel is incurring Rs 440bn capex programme on expanding capacity from 18mnT (currently) to 24.7mnT by FY21F and adding value-added products (improving product mix). This will drive EBITDA margins and profitability growth while maintaining balance sheet strength, in our view.
Balance sheet remains strong despite capex-intense phase, as cost-saving measures and increased share of value-added products has led to strong operating cash flows. Even FY18 OCF of Rs 124bn largely covers FY19F capex of Rs 100bn and estimated interest expenses; hence, we believe debt metrics are likely to improve despite heavy capex.
JSTL could incur capex on acquisitions (inorganic) for 4.5-8.0mnT while maintaining net debt metrics. With lots of stressed assets up for sale in India, we see great value-addition potential (historically JSTL has turned around acquired assets, transforming them into low-cost steel converters).
Valuation- Trading at 6.7x FY20F EV/EBITDA; initiate at Buy: We value JSTL at 2.53x one-year forward P/B (regression justified) and add Rs 7.9/share value accretion from Monnet Ispat to arrive at a target price of Rs 484, implying 18 per cent upside, and hence we initiate with Buy. Key risks are sharp compression in steel spreads and risks to supply of iron ore and coking coal.
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