Dear Friends,
We are recommending Buy on our Actionable ViewPoints "JSW Steel" as per following:-
CMP: Rs 354 Target: Rs 424 (20% Upside)
Key Points:
JSW Steel: Viewpoint - Play on domestic steel demand growth; Upgrade to Positive view
· Recent correction of 10-15% in JSW Steel's stock price provides an opportunity to enter into the stock; Upgrade to Positive view with 20% upside potential: The stock price of JSW Steel has recently declined by ~10-15% primarily due to correction in benchmark indices given macro concerns. However, business fundamentals of the company remain strong, given strong steel demand growth in India (up 6.7% y-o-y during April-August 2018) and firm international steel prices (China's HRC export price increased by ~9.5% in FY2019 YTD as compared to average price for FY2018). Moreover, likely acquisition and subsequent turnaround of distressed steel assets could create long-term value for JSW Steel. Hence, we upgrade our view on JSW Steel to Positive (from Neutral) with 20% upside potential from current levels.
· Capacity expansion to boost volume in FY2021; Expansion through inorganic route to create long-term value: The Board of Directors of JSW Steel has recently approved capacity expansion at its Vijayanagar and Dolvi plants by 6.7 mtpa by March 2020 at an estimated capex of Rs. 21,700 crore. The capacity expansion would increase JSW Steel's domestic capacity by 37% to 24.7 mtpa from 18 mtpa currently and would drive volume and earnings growth in FY2021E. Moreover, the company is leading the fray for the acquisition of bankrupt Bhushan Power and Steel with the highest bid of Rs. 19,700 crore (for a capacity of 3.5 mtpa) and majority of lenders have voted in favour of JSW Steel as per media reports. We believe strong execution capabilities of JSW Steel to turnaround distressed assets could create long-term value from the likely acquisition.
· Outlook – Strong domestic steel demand environment and firm steel prices bode well for JSW Steel: The revival in domestic steel demand witnessed in FY2018 (5.3% growth over FY2017) and FY2019YTD (up 6.7% y-o-y during April-August 2018) is expected to continue over FY2019E-FY2021E. We expect this to be driven by strong demand from infrastructure spending by government and low-cost housing projects. We highlight here that China's HRC export price is also up by ~9.5% in FY2019YTD, as compared to average price for FY2018 and, thus, expect strong realisation for JSW Steel in FY2019. Moreover, recent overseas acquisitions of U.S.-based Acero for $182 million (capacity of 1.5 mtpa) and Italy-based Aferpi for Euro55 million (capacity of 1.3 mtpa) could result into earnings upgrade for FY2020E and FY2021E once the clarity emerges in terms of turnaround of assets.
· Valuation – Upgrade to Positive view post the recent correction of 10-15% as business fundamentals remain strong; Expect 20% upside potential: The recent correction of 10-15% in JSW Steel's stock price provides an opportunity to enter into the stock as business fundamentals remain strong with robust domestic steel demand growth, firm steel prices and strong management capabilities to timely complete capacity expansion. Thus, we expect JSW Steel's EBITDA to report a strong CAGR of 11% over FY2018-FY2021E. Hence, we upgrade our view on JSW Steel to Positive (from Neutral) with upside potential of 20% from current levels.
· Key risks: Acquisition of distressed steel assets at rich valuations could stress the balance sheet of JSW Steel and the same remains key risk to our call.
Regards,
F1,Achyuta,111,bharathidasan salai,
Cantonment
Trichy-620001
Tel:04314000706
Ph:8144517351
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