JSW Steel (Update) : Full steel ahead. Maintain BUY:: HDFC Securities

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Full steel ahead
Recent news reports on JSW Steel (JSTL) (shelving of
West Bengal project, denial of rumors regarding
Bhushan Steel acquisition and reported deferral of
investment in Lucchini) address some of the investor
concerns on likely cost of overseas acquisitions and
large greenfield projects. These events also underline
a focus on adding steel capacity domestically at a
low cost. We remain positive.
 Additional volumes by FY16: Expansion at Dolvi (1.7
mTPA, Rs 33 bn) will likely get commissioned in early
FY16 and will contribute to the volumes fully from
FY17. In addition the debottlenecking of BF -1 at
Vijayanagar (0.8 mTPA addition) will result in the
saleable steel capacity at 16.8 mTPA by end of FY16.
 Brownfield additions to augment capacity: JSW Steel
also outlined an ambitious project to set-up world’s
largest blast furnace with a size of 5,500 cu.m, resulting
in a metal capacity addition of ~5 mTPA. This will
require an investment of ~ Rs 25bn.
 Improving margins: Newly commissioned CRM-2 (2.3
mTPA) and increasing backward integration at Dolvi
(both pellet plant and coke oven now contributing) will
help aid margins, with improvement in EBITDA/t visible
over FY16-17. Value added products are already at 33%
of the sales mix. Acquisition of Welspun Maxsteel’s
assets will further aid in unlocking synergies via
product swaps, captive jetty and railway sidings.
 Raw material concerns peaked out: Given the hugely
constrained domestic iron ore scenario, JSW Steel has
resorted to large scale imports Any relaxation in iron
ore availability will be a further positive for the
company. It is also envisaging a slurry pipeline from
Jaigarh (Goa) to Vijayanagar plant to de-risk from
domestic iron ore concerns. With coking coal prices
expected to remain subdued we believe raw material
concerns have peaked out for JSW Steel.
 Lowering financing costs: Increase in overseas
borrowings (e.g. recent issue of 4.75% notes worth
US$500mn) and a likely softening of domestic rate
environment will aid reduction in the financing costs.
 Outlook and view: We remain constructive on JSW
Steel given its operational cost leadership, strong
capacity additions slate at a low cost and peaking out
of raw material concerns. While steel to raw materials
spreads may still play spoilsport, led by steel price
decline, continued improvement in product mix and
backward increasing backward integration will help
JSTL avoid some of the margin erosion. Maintain BUY
with a TP of Rs 1,475 (6.5x FY16 EV/EBITDA).