Trading Idea: JSW Steel
CMP: 1320
Either sell below 1335-1350 or on rise around 1375-1400;
TGT: 1290-1260-1235*-1215-1185-1160*-1100-1050-1030-1015* (1-3M)
TGT: 995-950-930*-870 (6M)
TSL> 1435
Note: Consecutive closing (3 days) above 1435 zone for any reason, JSW Steel may further rally up to 1485-1560 & 1615-1700-1810 in the near to long term (alternative bullish case scenario from the current trading level).
For JSW Steel (Consolidated):
Q4FY16 TTM EPS: (-) 32.08
Q4FY16 EPS: 6.74 (AT THIS RUN RATE, IT MAY REPORT POSITIVE EPS AFTER 6 QTRS)
PROJECTED EPS: 15.15-17.05-19.10 (FY:17-19)
AVERAGE PE: 40 (PRESENT INDUSTRY PE AROUND 8; IDEAL PE SHOULD BE 20)
PROJECTED FAIR VALUE: 800 (FY:19)
FY16 NET DEBT/EBITDA: 6.33 (ALARMING SITUATION ABOVE 2-4 ??)
FY16 NET DEBT/EQUITY: 1.78
More updates about Q4FY16 result:
Q4 net revenue of Rs.10697.52 cr lagged estimates of Rs.10870 cr by 1.59% and higher by 22.98% (QOQ) & down by 15.10% (YOY).
Q4 EBITDA of Rs.1824.62 cr beat consensus of Rs.1560 cr by 16.96% and was higher by 104.59% (QOQ) & 8.45% (YOY).
Q4 NP was reported at Rs.171.25 cr and beat estimate of (-) 56 cr by 405.80% and was higher by 174.53% (YOY); sequentially Q3FY16 NP was at (-) 981.73 cr as there was an exceptional item of (-) 2122.11 cr (impairment charges).
Q4FY16 higher sales (QOQ) came higher on the back of higher inventory liquidation (sequentially higher sales by 21.45%) partly helped by imposition of MIP, resumption of 3 blast furnaces, and some higher infra demand for the standalone entity.
EBITDA & PAT was higher because of higher operating income (QOQ:194.75%), other income (QOQ:257.23%) along with marginal increase in total operating expenses (QOQ:1.30%), aided by lower coking coal costs but higher/same iron ore prices (as the supplier NMDC did not follow steep fall in global prices but quick to increase, when there is reversal).
Blended realisations was improved by 2.1% QOQ and some analysts are expecting higher domestic steel prices will be visible in the Q1FY17 result following the full implementation of MIP as domestic prices has bounced back by almost 25% from the Jan'16 lows on the back of sharp rebound in the global steel prices led by China speculation, record Chinese bank credit ($1 trn) and some other Chinese stimulus along with surge in RE prices in parts of China & some seasonal factors/demands.
But the JSW management is itself not so confident about the sustainability of such higher global steel prices and apprehending some steep correction/volatility. In fact, global steel prices had bounced from recent Jan low of $270/T to around $470/T in March'16 (74% rally) and now again corrected by some extent to around $370/T.
As par various reports, there is no fundamental reason for such huge spike/volatility is steel prices as root cause of low demand & excess supply dynamics is still there and it will take significant time (at least five years) to re-balance this equation (because there will be huge social impact/unrest in China, if the Govt there decides to close all the excess supplies/steel factories in a short span of time; although Chinese Govt is preparing a bail out package of $10 bln).
Incidentally, China credit & consequent Yuan devaluation is a cause of serious concern for China as well as global market and its the primary reason for the Fed to be in hold. But eventually, China is going to burst (either by default by Chinese companies or Yuan devaluation to 6.75-6.95 from present 6.50 level), but its only the question of time.
The management of JSW has projected a strong guidance of around 24% volume growth in FY17 from 12.13 MT to 15 MT (saleable steel).
But apart from China & other import threats, India is itself an excess steel producing country. In 2014-15, total domestic steel supply was at 92.16 MT against demand of 76.99 MT. In 2015-16, as par JSW data, domestic steel demand increased by around 4.55% to 80.50 MT and JSW is projecting a consensus growth of around 6% in FY17.
Presently JSW is enjoying a market share of around 15% and at this rate, its volume should come around 13 MT instead of 15 MT (FY17 projected domestic steel demand is around 85.33 MT and 15% of this will be around 13 MT); i.e. FY17 volume growth should be around 7% instead of projected 24%, unless and until some other inefficient domestic producers go offline and JSW is able to grab a major part of the market either by price competition or by its quality.
But, ultimately bottom line is the main thing and going by the result, Q4FY16 EPS is reported as 6.74 (diluted) and TTM EPS is at (-) 32.08 (FY16).
Average EBITDA margin for the last 5 quarters is around 14.11% & last 5 years its around 10.63%; i.e. average EBITDA margin is around 12.37% and FY17 projected EBITDA margin should be around 15% on the back of MIP/other operational leverage.
Current average PAT margin is around 1.87% (for last 5 years).
Thus projected EPS should grow by around 15% CAGR to 20-23-26.45-30.45 for FY17-20 (last 5 years average EPS is 25.52) in normal circumstances without China related import threats.
The average historical PE of JSW is around 25 and in that scenario fair value should be around 625 (500-750) and in a 40 PE scenario, median valuation may be around 1000 (800-1200).
But the main risk of such 15% CAGR EPS growth may be possibility of removal of MIP or other safety/protection measures after Aug'16. Certainly a Govt can't encourage inefficiency in a market economy unless its an old fashioned socialistic country and for the protection/interest of a few corporate groups/PSBS, a Govt should not jeopardize viability of other down stream industry. Already, there are quite a few cases against MIP by the steel user industry in various HC(s) and SC has taken the issue.
Also, there will be various counterproductive reaction by other countries/WTO against such MIP/other safeguard measures/duties by India on specific products such as steel. Its like asking/forcing a domestic user to buy crude from a domestic supplier at $70, whereas current global price is $48. Like oil, globally steel is available at abundance and there is no dearth of supply like oil, but demand is still tepid (another byproduct of decades of QQE and easy money).
Another point is JSW Steel's huge debt of Rs.38460 cr (FY16), which was grown by almost 131% from FY12 level of Rs.16644 cr; QOQ declined by 2.59% from 39483 and YOY increased by 7.42% (35805).
FY16 NET DEBT/EBITDA ratio stands at 6.33 against last 4 years average of 3.31; i.e. around 91% higher leverage. Sequentially the ratio was almost at the same level of 6.66, but on YOY basis it was at 3.81.
On an average, except, Q3FY16, its interest payment obligation is almost 50% of its quarterly EBITDA and its around 35% in the last 5 years.
In short, JSW Steel is one of the highly leveraged steel company and its producing a product (steel), which is in far excess supply than demand. Thus, any roll back in MIP/other safe guard measures and lack of sufficient/anticipated domestic steel demand may affect the company to a great extent as the scrip is already trading at significantly higher premium (PE) and may also discounted almost all the possible positive scenario and rallied by almost 75% in the past eleven months (from Aug'15).
Apart from MIP, if there is another crash is global steel prices because of demand/supply mismatch and China jitters, domestic price is also bound to fall similarly irrespective of MIP and that will be also negative for all the steel companies in India, including JSW Steel.
More updates about Q4FY16 result:
Q4 net revenue of Rs.10697.52 cr lagged estimates of Rs.10870 cr by 1.59% and higher by 22.98% (QOQ) & down by 15.10% (YOY).
Q4 EBITDA of Rs.1824.62 cr beat consensus of Rs.1560 cr by 16.96% and was higher by 104.59% (QOQ) & 8.45% (YOY).
Q4 NP was reported at Rs.171.25 cr and beat estimate of (-) 56 cr by 405.80% and was higher by 174.53% (YOY); sequentially Q3FY16 NP was at (-) 981.73 cr as there was an exceptional item of (-) 2122.11 cr (impairment charges).
Q4FY16 higher sales (QOQ) came higher on the back of higher inventory liquidation (sequentially higher sales by 21.45%) partly helped by imposition of MIP, resumption of 3 blast furnaces, and some higher infra demand for the standalone entity.
EBITDA & PAT was higher because of higher operating income (QOQ:194.75%), other income (QOQ:257.23%) along with marginal increase in total operating expenses (QOQ:1.30%), aided by lower coking coal costs but higher/same iron ore prices (as the supplier NMDC did not follow steep fall in global prices but quick to increase, when there is reversal).
Blended realisations was improved by 2.1% QOQ and some analysts are expecting higher domestic steel prices will be visible in the Q1FY17 result following the full implementation of MIP as domestic prices has bounced back by almost 25% from the Jan'16 lows on the back of sharp rebound in the global steel prices led by China speculation, record Chinese bank credit ($1 trn) and some other Chinese stimulus along with surge in RE prices in parts of China & some seasonal factors/demands.
But the JSW management is itself not so confident about the sustainability of such higher global steel prices and apprehending some steep correction/volatility. In fact, global steel prices had bounced from recent Jan low of $270/T to around $470/T in March'16 (74% rally) and now again corrected by some extent to around $370/T.
As par various reports, there is no fundamental reason for such huge spike/volatility is steel prices as root cause of low demand & excess supply dynamics is still there and it will take significant time (at least five years) to re-balance this equation (because there will be huge social impact/unrest in China, if the Govt there decides to close all the excess supplies/steel factories in a short span of time; although Chinese Govt is preparing a bail out package of $10 bln).
Incidentally, China credit & consequent Yuan devaluation is a cause of serious concern for China as well as global market and its the primary reason for the Fed to be in hold. But eventually, China is going to burst (either by default by Chinese companies or Yuan devaluation to 6.75-6.95 from present 6.50 level), but its only the question of time.
The management of JSW has projected a strong guidance of around 24% volume growth in FY17 from 12.13 MT to 15 MT (saleable steel).
But apart from China & other import threats, India is itself an excess steel producing country. In 2014-15, total domestic steel supply was at 92.16 MT against demand of 76.99 MT. In 2015-16, as par JSW data, domestic steel demand increased by around 4.55% to 80.50 MT and JSW is projecting a consensus growth of around 6% in FY17.
Presently JSW is enjoying a market share of around 15% and at this rate, its volume should come around 13 MT instead of 15 MT (FY17 projected domestic steel demand is around 85.33 MT and 15% of this will be around 13 MT); i.e. FY17 volume growth should be around 7% instead of projected 24%, unless and until some other inefficient domestic producers go offline and JSW is able to grab a major part of the market either by price competition or by its quality.
But, ultimately bottom line is the main thing and going by the result, Q4FY16 EPS is reported as 6.74 (diluted) and TTM EPS is at (-) 32.08 (FY16).
Average EBITDA margin for the last 5 quarters is around 14.11% & last 5 years its around 10.63%; i.e. average EBITDA margin is around 12.37% and FY17 projected EBITDA margin should be around 15% on the back of MIP/other operational leverage.
Current average PAT margin is around 1.87% (for last 5 years).
Thus projected EPS should grow by around 15% CAGR to 20-23-26.45-30.45 for FY17-20 (last 5 years average EPS is 25.52) in normal circumstances without China related import threats.
The average historical PE of JSW is around 25 and in that scenario fair value should be around 625 (500-750) and in a 40 PE scenario, median valuation may be around 1000 (800-1200).
But the main risk of such 15% CAGR EPS growth may be possibility of removal of MIP or other safety/protection measures after Aug'16. Certainly a Govt can't encourage inefficiency in a market economy unless its an old fashioned socialistic country and for the protection/interest of a few corporate groups/PSBS, a Govt should not jeopardize viability of other down stream industry. Already, there are quite a few cases against MIP by the steel user industry in various HC(s) and SC has taken the issue.
Also, there will be various counterproductive reaction by other countries/WTO against such MIP/other safeguard measures/duties by India on specific products such as steel. Its like asking/forcing a domestic user to buy crude from a domestic supplier at $70, whereas current global price is $48. Like oil, globally steel is available at abundance and there is no dearth of supply like oil, but demand is still tepid (another byproduct of decades of QQE and easy money).
Another point is JSW Steel's huge debt of Rs.38460 cr (FY16), which was grown by almost 131% from FY12 level of Rs.16644 cr; QOQ declined by 2.59% from 39483 and YOY increased by 7.42% (35805).
FY16 NET DEBT/EBITDA ratio stands at 6.33 against last 4 years average of 3.31; i.e. around 91% higher leverage. Sequentially the ratio was almost at the same level of 6.66, but on YOY basis it was at 3.81.
On an average, except, Q3FY16, its interest payment obligation is almost 50% of its quarterly EBITDA and its around 35% in the last 5 years.
In short, JSW Steel is one of the highly leveraged steel company and its producing a product (steel), which is in far excess supply than demand. Thus, any roll back in MIP/other safe guard measures and lack of sufficient/anticipated domestic steel demand may affect the company to a great extent as the scrip is already trading at significantly higher premium (PE) and may also discounted almost all the possible positive scenario and rallied by almost 75% in the past eleven months (from Aug'15).
Apart from MIP, if there is another crash is global steel prices because of demand/supply mismatch and China jitters, domestic price is also bound to fall similarly irrespective of MIP and that will be also negative for all the steel companies in India, including JSW Steel.
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