For JSW, 1060-1075 may be a good supply zone
CMP: 1048
Sell on rise around: 1060-1075-1090
TGT: 1005-970*-935 (1-3M)
TSL>1100
Note: Consecutive closing above 1100 for any reason, JSW may scale up to 1135-1175-1230 area in the mid to long term.
JSW ran a dream rally of over 30% in the last six months and more importantly rallied by over 20% in the last few weeks alone.
The rally was fulled primarily by the Govt's clampdown initiative on imported steels from China & other CIS/SAFTA countries. Beside imposition of huge import duties, there is a market buzz of MIP (minimum import price).
Also BIS approval will be needed for exporting steel to India (as majority of the China steel factories don't have any BIS approval from India).
Also BIS approval will be needed for exporting steel to India (as majority of the China steel factories don't have any BIS approval from India).
Thus, Govt is extending all types of possible support to protect domestic steel manufactures from aggression of China steel industry. But is it sufficient enough for a stupendous jump in JSW's net bottom line (earnings) in the days ahead ?
The problem with Chinese imports that they are ready to sell their excess steels at any prices, even incurring huge loses. As many Chinese steel factories are regional state owned, they are enjoying Govt. subsidies and not keen to close factories for job loss factor amid China slowdown and preferring to continue production. Also cost of production of steel in China is significantly lower comparing to other DM/EM & India.
Indian importers of Chinese steel are also bypassing various trade restrictions and importing cheap Chinese steel products like sheets or slabs that don't incur import duties !!
Also China is steadily devaluing its currency (CNY) against USD, which may put further pressure on domestic steel industry, including JSW.
Consolidated Q2FY16 result of JSW was above street estimates. Q2 PAT was around Rs.117 cr against loss expectations of (-)Rs.150 cr (YOY- Rs.749 cr & QOQ- (-)Rs.125 cr).
Q2 EPS was at 4.49 against YOY of 30.63 & QOQ of (-) 4.77.
Though the Q2 PAT was down by over 84%, as the result was above street estimates, the stock consolidates around 870 in late Oct'15 and then rallied by over 20% towards 1055 area few days ago on the back of imports restriction from China/CIS/SAFTA Countries.
The higher than expected bottom line in Q2FY16 was primarily due to lower depreciation & finance cost (down by 20 & 2% YOY) and higher other income (up by 47%)
Q2EBITDA declined by over 38% to Rs.1729 cr and OM contracted by over 4%.
In Q2FY16, JSW was benefited from lower raw material (iron ore) costs. But having said that, this benefit may not be repeated in the quarters ahead as domestic iron ore prices are at multiyear low and there may not be any significant fall from this level.
The problem with Chinese imports that they are ready to sell their excess steels at any prices, even incurring huge loses. As many Chinese steel factories are regional state owned, they are enjoying Govt. subsidies and not keen to close factories for job loss factor amid China slowdown and preferring to continue production. Also cost of production of steel in China is significantly lower comparing to other DM/EM & India.
Indian importers of Chinese steel are also bypassing various trade restrictions and importing cheap Chinese steel products like sheets or slabs that don't incur import duties !!
Also China is steadily devaluing its currency (CNY) against USD, which may put further pressure on domestic steel industry, including JSW.
Consolidated Q2FY16 result of JSW was above street estimates. Q2 PAT was around Rs.117 cr against loss expectations of (-)Rs.150 cr (YOY- Rs.749 cr & QOQ- (-)Rs.125 cr).
Q2 EPS was at 4.49 against YOY of 30.63 & QOQ of (-) 4.77.
Though the Q2 PAT was down by over 84%, as the result was above street estimates, the stock consolidates around 870 in late Oct'15 and then rallied by over 20% towards 1055 area few days ago on the back of imports restriction from China/CIS/SAFTA Countries.
The higher than expected bottom line in Q2FY16 was primarily due to lower depreciation & finance cost (down by 20 & 2% YOY) and higher other income (up by 47%)
Q2EBITDA declined by over 38% to Rs.1729 cr and OM contracted by over 4%.
In Q2FY16, JSW was benefited from lower raw material (iron ore) costs. But having said that, this benefit may not be repeated in the quarters ahead as domestic iron ore prices are at multiyear low and there may not be any significant fall from this level.
JSW is now quoting around 29 P/E against average industry P/E of around 6. Present TTM EPS of JSW is around 36.21 (stand-alone) & 16.61 (consolidated). Analysts are expecting an EPS of 60.80 & 84.50 on an average for FY:17-18; i.e a jump of around 68-133% in 1-2 year !!
Considering even the likely savings on account of iron ore, cocking coal and other operating leverages (logistics/spares etc), the above jump in EPS is looking quite stretched and may be on the higher side.
JSW has also huge debt of around Rs.35000 cr at FY-15 (D/E at 1.60) and at Q2 its around Rs.39000 cr (estimated debt at FY16 is around Rs.40000 cr); i.e. a significantly stretched BS.
In Q3FY16, the management guided lower volume due to planned shut down in some of its plants. The company has also warned for worst case of Karnataka Iron Ore out put at 4-5 mt and best case at 11 mt. The company is unhappy with GOI decision for allowing NMDC to export iron ore at 10% duty. Its Chile iron ore operations remain under care & maintenance and is also not helping in the bottom line either.
Considering all the above pros & cons (iron ore price advantage/rich product mix/lower coal prices/possible stable steel prices due to China clampdown/better operating leverages) and the price action for the last few months, JSW already rallied quite significantly and the current price zone of 1060-1075-1090 may be proved to be a strong supply zone for the scrip.
Thus portfolio buying on major dips around 935-870 area may not be a bad idea under the current market scenario, keeping in mind better risk reward ratio.
There is no doubt that Indian steel sector is undergoing a structural improvement by various initiatives and domestic demand may increase incrementally higher from FY-17 for planned infra push & expected overall economic recovery and improvement in CV & PV sales etc, but at the same time steel prices need to be stabilized at some point and for that excess dumping from China/CIS/SAFTA need to be reduced significantly. For that, it may take another 2-3 years, till China & overall global demand accelerates as past effect of cheap money and excess capacity is still there.
JSW has also huge debt of around Rs.35000 cr at FY-15 (D/E at 1.60) and at Q2 its around Rs.39000 cr (estimated debt at FY16 is around Rs.40000 cr); i.e. a significantly stretched BS.
In Q3FY16, the management guided lower volume due to planned shut down in some of its plants. The company has also warned for worst case of Karnataka Iron Ore out put at 4-5 mt and best case at 11 mt. The company is unhappy with GOI decision for allowing NMDC to export iron ore at 10% duty. Its Chile iron ore operations remain under care & maintenance and is also not helping in the bottom line either.
Considering all the above pros & cons (iron ore price advantage/rich product mix/lower coal prices/possible stable steel prices due to China clampdown/better operating leverages) and the price action for the last few months, JSW already rallied quite significantly and the current price zone of 1060-1075-1090 may be proved to be a strong supply zone for the scrip.
Thus portfolio buying on major dips around 935-870 area may not be a bad idea under the current market scenario, keeping in mind better risk reward ratio.
There is no doubt that Indian steel sector is undergoing a structural improvement by various initiatives and domestic demand may increase incrementally higher from FY-17 for planned infra push & expected overall economic recovery and improvement in CV & PV sales etc, but at the same time steel prices need to be stabilized at some point and for that excess dumping from China/CIS/SAFTA need to be reduced significantly. For that, it may take another 2-3 years, till China & overall global demand accelerates as past effect of cheap money and excess capacity is still there.
Technically, JSW may be in the 5-th Wave of daily EW cycle and the extended target of the same may be around 1062. In that scenario, corrective target of A-Wave may be around 995-980 & 935.
As par BG metrics & current market scenario:
(on stand alone TTM & FWD EPS)
Present median valuation of JSW may be around : 800-840 (FY:15-16/TTM)
Projected fair valuations might be around : 1025-1210 (FY:17-18/FWD)
| SCRIP | EPS(TTM) | BV(Act) | P/E(AVG) | Low | High | Median | 200-DEMA | 10-DEMA |
| JSWSTEEL | 36.21 | 1030.07 | 18 | 781.21 | 801.92 | 791.57 | 936.34 | 986.65 |
| JSWSTEEL | 40.5 | 1092.55 | 18 | 826.19 | 848.10 | 837.14 | 936.34 | 986.65 |
| JSWSTEEL | 60.8 | 1162.95 | 18 | 1012.29 | 1039.13 | 1025.71 | 936.34 | 986.65 |
| JSWSTEEL | 84.5 | 1244.25 | 18 | 1193.39 | 1225.03 | 1209.21 | 936.34 | 986.65 |
Analytical Charts:
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