JSW Steel: Need To Stay Above 1775-1805 Area For Further Rally; Otherwise Will Come Down; Despite Best Ever Quarter, Debt Profile Is At Significant Elevated Level

Incremental demand & benefit of lower raw material costs/better realizations may not be visible in the coming quarters apart from "big worries" of China steel over-capacity & tepid India demand

Trading Idea: JSW Steel

CMP: 1675

Either sell 1675-1695 OR on rise around 1745-1765 OR  around 1795-1805;

TGT: 1625*-1540-1375-1245*-1175-1080-1015*-970 (1-6M)

TSL> 1710 OR > 1775* OR > 1825

Note: Sustaining above 1710 area, JSW may further rally towards 1775-1805, which might be again a strong resistance zone and only consecutive closing (3 days) above 1825 area for any reason, JSW may further rally up to 1855-1875* and 1925-1980* & 2140*-2340 in the near to long term (alternative bullish case scenario from the current trading level).

Any one, holding long position in the counter, may also watch 1645-1625 area as the immediate positional support for the scrip.

For JSW Steel: Q1FY17 (Consolidated)

Q1FY17 EPS: 45.88 (Reported Diluted EPS) against street estimates of 30.90 (beat by over 48%)

Q1FY17 TTM EPS: 21.74

FY-16 EPS: -16.39

Projected FY-17 EPS: 90-112 

Average PE: 12 

Projected median valuation:1212 for FY-17 (mean of 1080-1344)

At recent high of around 1760, TTM PE was around: 81

As there was various exceptional items, EBITDA/Share may be a better parameter for JSW.

Q1FY17 EBITDA/Share: 136.02

Q1FY17 TTM EBITDA/Share: 324.67

FY16 EBITDA/Share: 211.43

5 YRS AVERAGE EBITDA/Share: 253.67

Projected FY-17 EBITDA/Share: 375 (based on the Q1FY17 trend)

Average PE: 4 (On EBITDA/Share)

Present median valuation: 1300 (Q1FY17 TTM)

Projected median valuation: 1510 (FY-17)

Average of projected median value: 1361 (FY-17)

For Q1FY17, JSW reported an increase of overall revenue of 1.89% (YOY) and 9.69% (QOQ). 

But EBITDA was increased by almost 91.60% (YOY) & 69.60% (QOQ) as EBITDA/Operating margin expanded by almost 11.88% (YOY) and 8.99% (QOQ). 

EBITDA margin was reported as 25.37% against 16.38% (QOQ) & 13.49% (YOY). Last 4 QTR average OM was around 14%.

Some of the primary reasons for the "unexpected" operating margin expansion & other notable points may be:

1. Lower cost of raw materials (iron ore); JSW has also imported a major portion of its raw materials apart from local sourcing (NMDC). Looking ahead, price differential between iron ore and finished steel may decrease owing to tepid demand from advanced economies (DM)/Brexit and China jitters. Also, JSW is planning to take some iron ore mines in Karnataka in the next auction process, probably due to logistical savings but the relatively higher iron ore prices there may cause some headwinds too. JSW is planning to further cost cutting in the logistics area in the coming quarters.

2. Power & Fuel costs was almost down by 26.47% sequentially supported by cheaper imported coke pet/coal. Also, change in accounting norms to new Ind-AS  has helped the Q1 numbers to a small extent and also net debt rose by around 10%.

3. Significant decrease in inventory stocks by Rs.857.6 cr against the reported EBITDA of Rs.3269.43 cr. The co replenished the finished goods stock in the Q1FY17 to meet the pending customer demands arising out of earlier planned shut downs and with this, JSW has bring down its inventories level to normal. The co also benefited from its recent capacity expansions.

4. The operating margin has also expanded due to Govt support like MIP and various types of anti dumping duties on imported steel, specially from China, Korea, Japan & CIS countries. But, looking ahead, this MIP support may not last for ever as user industry (such as automobiles & engineering) is objecting to it vigorously. In a free market economy, protectionism will not work for ever as there will be similar reaction from the other countries also. Govt will take a decision regarding the extension of MIP & other anti dumping duties  beyond Aug'16 and any unfavorable decision can affect a high leverage steel co like JSW to a great extent.

5. Though steel demand/consumption in India was flat in the Q1FY17 (0.4% on YOY basis), JSW was benefited by refocusing on exports, which was grown by almost 39% and at 19% of total sales volume (14% YOY). India steel demand grew by (-) 4.3% YOY in June'16.

6.Q1FY17 EBITDA/Ton was at around Rs. 9568.63 (QOQ: 66.85%; YOY: 78.40%); Average EBITDA/Ton was at around 5320 for the last 4 QTR.

7. JSW management has maintained its FY-17 sales volume guidance at 15 MT. Till Q1FY17, it achieved a figure of 3.34 MT. The ongoing production ramp up at Dolvi & Bellary may support its capacity expansion plan in the coming quarters. Although steel imports was down by around 26% in Q1FY17, it was at elevated levels and the JSW/steel industry was expecting for a 50% fall from Pre-MIP level. So they are pitching for extension of MIP post Aug'16 for the "health" of the overall steel industry. Present installed capacity for JSW is around 18 MTPA.

9. As par the JSW management, normal/good monsoon along with 7PC induced liquidity driven consumption, Govt's infra and incremental reform policy push may help to pump the overall Indian economy in the coming quarters and there may be some visible uptick in steel demands too.But they are also apprehending some price reduction of steel in the coming quarters because of tepid demand and excess supply. In Q1, India steel production was grown by around 4.8%, whereas demand remains flat at 0.40% (YOY).

8. But there may be some headwinds too in the coming quarters such as benign nature of global steel prices which may correct significantly as the recent rise is not supported by any fundamentals, but was more speculative. Due to monsoon, construction activity is traditionally tepid in Q2 (July-Sep) and we may see less demand for steels, specially long products.

9. Real effectiveness of MIP may be in question: Steel imports was around 10 MT (monthly) before MIP was announced. Subsequently it jumped to around 16 MT after MIP notification and now stands around 7 MT. As par JSW presentation, more than 50% of  the current imports are happening below MIP prices. Chinese excess capacity is around 400 MT and for a 10 MT export market, they may not bother too much.

10. India is itself producing more steels than it consume. In FY1-16, total steel demand was around 80.50 MT against domestic production of around 95 MT. (FY-15 figure was at 76.99 MT vs 92.16 MT). Thus the domestic steel industry is producing almost 15 MT excess than demand and this may cause to check the domestic price rise, unless & until we have incrementally higher demands for steels.

11. By FY-25, Govt is planning to increase the domestic production to around 300 MT and thus the corresponding demand for such huge expansion is possible, only if India achieved the $10 tln GDP tag in line with today's China. Till now, India's GDP growth of around 8% is not tallying with its tepid growth in steel consumption (projected growth is around 6% in FY-17 against the figure of 4.55% in FY-16; whereas actual growth in Q1FY17 is a mere 0.40%). Apart from public investment by the Govt, private investment/capex is also necessary in India for visible thrust in overall economic activity. 

12. Despite, blockbuster Q1FY17 result, there was no significant improvement in JSW's debt profile. Net debt increased to Rs.45356 cr from Rs.38461 sequentially. Net debt/TTM EBITDA was around 5.80% in Q1 against 6.15% sequentially. Total debt servicing (interest + principal) was at 52.24% of EBITDA in Q1 against 152.15% on QOQ basis. In Q1, JSW paid around 28.68% of its EBITDA as interest against 44.48% QOQ and 53.72% YOY basis. All these are indicating that there may be some visible improvement in its debt profile backed by the best ever quarterly numbers in the recent times, but all the debt parameters are still at very elevated levels.

13.No doubt JSW is now one of the leading integrated steel companies in India backed by a strong & influential industrial family/group. But its highly leveraged too. Thus any significant downturn in global steel prices, where there is significant mismatch in demand-supply dynamics and other policy matters of the Govt (such as MIP) may affect all the high leveraged steel cos including JSW also.

14. Another point is that being an influential & large group, JSW is able to negotiate with banks for its debt servicing and taking fresh loans too while most of the others are not in a position to do so (except Tata Steel). In the last two quarters, JSW took a fresh loan/line of credit for around Rs.5393 cr while it paid back around Rs.2844 cr. in principal amount (like taking a Amex card loan to pay off the City card !!). JSW is also planning to raise Rs.14000 cr by way of NCD/QIP/FCNR ($2 bln) to pay off the earlier costly debt, funding for capex and for a buffer against any "unusual" financial conditions. If outlook for steel industry worsens, JSW may find it quite difficult to be out of this "debt trap".

15. JSW has also some advantage as there is lesser competition from other steel manufacturers as they are under some types of pressures. Tata Steel is struggling with its EU operations which is adversely affected by low demand, jitters of Brexit, high debt & pension liability, but domestic stand alone operation of Tata Steel is so far satisfactory. The PSU steel giant SAIL is less cost effective with huge overheads and Essar/Bhusan/Jindal steel are in dire fund crunch/worsened debt profile and are likely to face increasing working capital crunch. But, these groups may also flood the market with cheaper steel just to service the debt (like Chinese companies). Thus , we may see consolidation in the steel industry in India too apart from other parts of the world. JSW is also focusing on automobile high grade & branded steel products. JSW will also go slow for its capacity expansion by any organic or inorganic method for the next two years and aim to reduce its massive debt.

16. The scrip has already rallied by over 120% in the last one year on the back of MIP & some other protection measures by the Govt, massive infra push in the last FY-17 budget. Global steel prices also got some boost from some demand from Chinese real state market. No doubt, Q1FY17 result was also far ahead of street estimates. But going by the price action, the scrip may have already captured the large part of that and now fresh rally towards 2000-2300 level will come only sustaining above 1825 area; otherwise it may come down again to 1245-1015 zone depending upon the steel industry out look, its debt profile and overall market out look. As an investor, one may thus choose to accumulate on dips rather than chasing it at around multiyear life time high.

Q1FY17 & FY-16 results summary:

JSW STEEL-Q1FY17-CONSOLIDATED
	Jun '16	Mar '16	Dec '15	Sep '15	Jun '15	YOY(%)	QOQ(%)	AVG	AVG(%)
Net Sales/Income from operations	12,720.19	11,508.66	8,621.49	10,742.73	12,447.46	2.19	10.53	10830.09	17.45
Other Operating Income	165.62	238.5	76.78	164.17	199.89	-17.14	-30.56	169.84	-2.48
TOTAL REVENUE	12,885.81	11,747.16	8,698.27	10,906.90	12,647.35	1.89	9.69	10999.92	17.14
EXPENDITURE
Consumption of Raw Materials	5,805.75	4,680.30	4,989.70	5,345.86	6,189.65	-6.20	24.05	5301.38	9.51
Purchase of Traded Goods	0	14.63	21.08	51.96	0	0.00	-100.00	21.92	-100.00
Increase/Decrease in Stocks	-857.6	821.16	-107.25	441.74	226.06	-479.37	-204.44	345.43	-348.27
Power & Fuel	1,087.90	860.22	671.57	980.95	1,084.15	0.35	26.47	899.22	20.98
Employees Cost	435.6	347.88	368.16	414.24	410.9	6.01	25.22	385.30	13.06
Other Expenses	3,144.73	3,098.65	1,863.18	1,942.89	3,030.19	3.78	1.49	2483.73	26.61
TOTAL OP EXPENSES	9,616.38	9,822.84	7,806.44	9,177.64	10,940.95	-12.11	-2.10	9436.97	1.90
EBITDA	3,269.43	1,924.32	891.83	1,729.26	1,706.40	91.60	69.90	1562.95	109.18
Depreciation	831.47	827.96	773.38	682.21	832.35	-0.11	0.42	778.98	6.74
EBITA	2,437.96	1,096.36	118.45	1,047.05	874.05	178.93	122.37	783.98	210.97
Other Income	33.42	68.05	22.61	39.03	36.25	-7.81	-50.89	41.49	-19.44
PBIET	2,471.38	1,164.41	141.06	1,086.08	910.30	171.49	112.24	825.46	199.39
Interest	935.82	855.9	810.66	836.32	916.6	2.10	9.34	854.87	9.47
PBEIT	1,535.56	308.51	-669.60	249.76	-6.3	-24473.97	397.73	-29.41	-5321.66
Exceptional Items	0	-1.14	-2,122.11	-1.42	-0.74	-100.00	-100.00	-531.35	-100.00
PBT	1,535.56	307.37	-2,791.71	248.34	-7.04	-21911.93	399.58	-560.76	-373.84
Tax	450.72	8.61	-1,809.98	142.35	2.35	19079.57	5134.84	-414.17	-208.83
PAT	1,084.84	298.76	-981.73	105.99	-9.39	-11653.14	263.11	-146.59	-840.04
Prior Year Adjustments	0	0	0	0	0	0.00	0.00	0.00	0.00
Extra Ordinary Items	0	0	0	0	0	0.00	0.00	0.00	0.00
Net Profit/(Loss) For the Period	1,084.84	298.76	-981.73	105.99	-9.39	-11653.14	263.11	-146.59	-840.04
Minority Interest	13.01	-61.19	61.01	-2.22	26.29	-50.51	-121.26	5.97	117.83
Share Of P/L Of Associates	11.15	1.93	-2.62	13.18	4.29	159.91	477.72	4.20	165.79
Net P/L After M.I & Associates	1,109.00	239.50	-923.34	116.95	21.19	5133.60	363.05	-136.43	-912.90
Equity Share Capital	240.37	239.87	241.72	241.72	239.19	0.49	0.21	240.63	-0.11
EPS	46.14	9.98	-38.20	4.84	0.89	5107.91	362.08	-5.62	-920.58
EPS Before Extra Ordinary
Basic EPS	46.18	10	-38.54	4.49	-0.89	-5288.76	361.80	-6.24	-840.66
Diluted EPS	45.88	9.91	-38.54	4.49	-0.88	-5313.64	362.97	-6.26	-833.49
EPS After Extra Ordinary
Basic EPS	46.18	10	-38.54	4.49	-0.89	-5288.76	361.80	-6.24	-840.66
Diluted EPS	45.88	9.91	-38.54	4.49	-0.88	-5313.64	362.97	-6.26	-833.49
TTM EPS	21.74	-25.02
EBITDA/SHARE	136.02	80.22	36.90	71.54	71.34	90.66	69.55	65.00	109.26
TTM EBITDA/SHARE	324.67	260.00
AVERAGE PE	4	4
MEDIAN VALUE	1298.7	1039.997
EBITDA MARGIN	25.37	16.38	10.25	15.85	13.49	11.88	8.99	14.00	11.38
PAT MARGIN	8.42	2.54	-11.29	0.97	-0.07	8.49	5.88	-1.96	10.38
INTEREST/REVENUE	7.26	7.29	9.32	7.67	7.25	0.02	-0.02	7.88	-0.62
INTEREST/EBITDA	28.62	44.48	90.90	48.36	53.72	-25.09	-15.85	59.36	-30.74
NET DEBT (Q4FY16)	38461	39483
IAS-ACCOUNTING IMPACT	2455	117
NEW LOAN	4561	832
REPAYMENTS	-772	-2072
FX IMPACT	394	-58
FD/MF IMPACT	256	159
NET DEBT(Q1FY17)	45355	38461
TTM EBITDA	7,814.84	6,251.81
NET DEBT/TTM EBITDA	5.80	6.15
INTT	935.82	855.9
REPMT	772	2072
TOTAL LOAN SERVICE(TLS)	1707.82	2927.9
TLS/EBITDA	52.24	152.15
SALABLE STEEL SALES	3.34	3.28	2.55	2.5	3.11	7.40	1.83	2.86	16.78
EBITDA/TON	9568.63	5734.93	3418.74	6761.52	5363.46	78.40	66.85	5319.66	79.87

JSW STEEL-CONSOLIDATED-FY-16	Mar '16	Mar '15	Mar '14	Mar '13	Mar '12	YOY(5Y)	YOY(1Y)	AVG	AVG(%)
Net Sales/Income from operations	45,288.10	52,050.57	50,408.87	38,094.96	34,123.65	32.72	-12.99	43669.51	3.71
Other Operating Income	688.63	920.94	810.75	114.69	244.4	181.76	-25.23	522.70	31.75
TOTAL REVENUE	45,976.73	52,971.51	51,219.62	38,209.65	34,368.05	33.78	-13.20	44192.21	4.04
EXPENDITURE
Consumption of Raw Materials	21,123.67	30,885.72	30,310.58	24,320.91	22,294.17	-5.25	-31.61	26952.85	-21.63
Purchase of Traded Goods	54.42	288.44	215.58	0	77.5	-29.78	-81.13	145.38	-62.57
Increase/Decrease in Stocks	1,368.69	-1,488.21	-192.18	-152.44	-443.65	-408.51	-191.97	-569.12	-340.49
Power & Fuel	3,657.88	4,123.10	3,813.31	2,041.00	1,751.87	108.80	-11.28	2932.32	24.74
Employees Cost	1,518.67	1,532.84	1,298.24	980.25	846.39	79.43	-0.92	1164.43	30.42
Other Expenses	11,852.39	8,227.33	6,608.63	4,516.01	3,739.88	216.92	44.06	5772.96	105.31
TOTAL OP EXPENSES	39,575.72	43,569.22	42,054.16	31,705.73	28,266.16	40.01	-9.17	36398.82	8.73
EBITDA	6,401.01	9,402.29	9,165.46	6,503.92	6,101.89	4.90	-31.92	7793.39	-17.87
Depreciation	3,322.56	3,434.49	3,182.61	2,237.48	1,933.15	71.87	-3.26	2696.93	23.20
EBITA	3,078.45	5,967.80	5,982.85	4,266.44	4,168.74	-26.15	-48.42	5096.46	-39.60
Other Income	180.48	111.44	85.81	69.73	76.85	134.85	61.95	85.96	109.96
PBIET	3,258.93	6,079.24	6,068.66	4,336.17	4,245.59	-23.24	-46.39	5182.42	-37.12
Interest	3,601.18	3,493.03	3,047.86	1,967.46	1,427.30	152.31	3.10	2483.91	44.98
PBET	-342.25	2,586.21	3,020.80	2,368.71	2,818.29	-112.14	-113.23	2698.50	-112.68
Exceptional Items	-2,125.41	-47.1	-1,712.75	-369.37	-824.94	157.64	4412.55	-738.54	187.79
PBT	-2,467.66	2,539.11	1,308.05	1,999.34	1,993.35	-223.79	-197.19	1959.96	-225.90
Tax	-1,966.21	819.41	920.08	845.25	500.15	-493.12	-339.95	771.22	-354.95
PAT	-501.45	1,719.70	387.97	1,154.09	1,493.20	-133.58	-129.16	1188.74	-142.18
Prior Year Adjustments	0	0	0	0	0	0.00	0.00	0.00	0.00
Extra Ordinary Items	0	0	0	0	0	0.00	0.00	0.00	0.00
Net Profit/(Loss) For the Period	-501.45	1,719.70	387.97	1,154.09	1,493.20	-133.58	-129.16	1188.74	-142.18
Minority Interest	88.53	74.77	50.44	34.34	-18.92	-567.92	18.40	35.16	151.81
Share Of P/L Of Associates	20.82	2.1	13.54	-225.32	-936.6	-102.22	891.43	-286.57	-107.27
Net P/L After M.I & Associates	-392.10	1,796.57	451.95	963.11	537.68	-172.92	-121.82	937.33	-141.83
Equity Share Capital	302.75	302.75	302.75	284.15	284.15	6.55	0.00	293.45	3.17
EPS	-12.95	59.34	14.93	33.89	18.92	-168.44	-121.82	31.77	-140.76
EPS Before Extra Ordinary
Basic EPS	-16.39	72.93	17.35	41.71	22.65	-172.36	-122.47	38.66	-142.40
Diluted EPS	-16.39	72.93	17.35	41.71	22.65	-172.36	-122.47	38.66	-142.40
EPS After Extra Ordinary
Basic EPS	-16.39	72.93	17.35	41.71	22.65	-172.36	-122.47	38.66	-142.40
Diluted EPS	-16.39	72.93	17.35	41.71	22.65	-172.36	-122.47	38.66	-142.40
EBITDA/SHARE	211.43	310.56	302.74	228.89	214.74	-1.54	-31.92	264.23	-19.98
AVEREAGE PE	4	4	4	4	4
MEDIAN VALUE	845.72	1242.25	1210.96	915.56	858.97
INTT/EBITDA	56.26	37.15	33.25	30.25	23.39
AVG INTT/EBITDA	36.06
AVG EBITDA/SHARE	253.67

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