JSW Steel shares may have limited upside potential as valuations factor in most positives

JSW Steel Ltd's March quarter results beat Street estimates on Ebitda front, led by higher volume, low raw material cost, in addition to reduced power and fuel (P&F) costs. Indian subsidiaries too surprised positively, analysts said highlighting a 15 per cent growth in volumes, a fall in net debt due to release of working capital and an improvement in Ebitda per tonne to Rs 10,998 from December quarter's Rs 8,141. That said, the stock trades at high valuations, leaving limited scope of upside ahead. Post JSW Steel's quarterly results, a few analysts maintained their 'Reduce' rating on the stock.

Nuvama Institutional Equities said June quarter is likely see an impact from lower volume and prices with a marginal increase in coking coal cost. For now, the brokerage has raised its Ebitda estimates by 2-2.3 per cent for FY24 and FY25, factoring in higher volume and prices. It has revised its target price to Rs 731 from Rs 668, rolling over to FY25E and value the stock at 7.5 times EV/Ebitda. "Given the high valuation, we retain ‘Reduce,’ it said.

JSW Steel had on Friday reported a 11.9 per cent year-on-year (YoY) rise in consolidated net profit at Rs 3741 crore compared with Rs 3,343 crore in the same quarter last year. Net sales for the quarter grew 0.14 per cent YoY to Rs 46,962 crore from Rs 46,895 crore in the corresponding quarter last year.

JSW Steel said it recorded highest ever crude steel production at 6.58 million tonnes for the quarter, up 6.8 per cent sequentially. This was mainly due to a ramp-up of the 5 mtpa Dovli Phase II, which achieved capacity utilisation of 91 per cent. BPSL also saw ramp-up from 2.75 mtpa to 3.5 mtpa. The quarter also saw highest ever saleable steel sales of 6.53 million tonnes, JSW Steel said.

Motilal Oswal Securities said the current valuations at 6 times FY24E EV/Ebitda and 2 times FY24E price to book value fully price in the positive factors. It has reiterated its ‘Neutral’ rating on the stock with a revised target of of Rs 700. Nomura India has a revised target of Rs 605 on the stock, as it believes a decline in steel prices to offset the benefits of coking coal cost decline.

"We expect volumes to be aided by a pickup in domestic demand and a higher share of VAP. The coking coal cost has cooled off and its benefits are expected to accrue from Jun’23 onward," Motilal Oswal Securities said. This brokerage expects an incremental volume to flow in once the Vijayanagar facility comes on stream and after the Phase II capacity expansion at the BPSL plant. The commissioning of a tinplate line at Vijayanagar, a plate mill at Anjar and a CAL line at Vasind is expected to support margin.

"Considering a pickup in demand, an increasing share of VAP and cost reductions expected in coming months, we have slightly increased our FY24 revenue/Ebitda/adjusted PAT estimates by 3 per cent/3 per cent/4 per cent," it said.

ICICI Securities finds the risk-reward balanced for JSW Steel. On one hand, volume growth in FY24E/FY25E is likely stay ahead of peers and, on the other, debt remains high and is unlikely to come off in light of the company’s capital commitments.

"The stock price has corrected and is trading near its 10- year historical mean EV/EBITDA. We introduce FY25E numbers at this stage and roll over to FY25E valuations. Our revised target price is Rs 675 (earlier: Rs 550) on an unchanged multiple of 6.2x FY25E EBITDA. We upgrade the stock to HOLD from SELL)," it said.

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