Steep valuation a sore point for JSW Steel

“The increase in debt in Q3 means that JSW Steel’s enterprise value is now higher than previous peaks, while earnings improvement at present is better for peers,” said Satyadeep Jain, analyst at Ambit Capital. Enterprise value of a company is its market capitalization plus net debt.

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In its December quarter (Q3FY23) earnings call on Friday, JSW’s management told analysts that the debt would reduce going ahead, helped by favourable currency movement and lower inventory. The company’s Q3 financials were decent. It swung to a net profit for the quarter from a loss in Q2 on a standalone as well as consolidated basis. However, earnings were sharply lower year-on-year driven by a drop in exports, among other factors. On the brighter side, lower coking coal prices (down about $100 per tonne sequentially), aided the strong rebound in standalone Ebitda per tonne in Q3 from the multi-quarter lows seen in Q2.

Overall, consolidated Ebitda stood at ₹4,547 crore.

The company expects coking coal costs to remain range bound in Q4. “With steel prices standing firm and no major cost increase, we should see margins improving in the near-term,” said analysts from Motilal Oswal Financial Services. Even so, high iron ore prices are expected to play spoilsport on the margin front. “Increasing iron ore prices might constrain profitability compared to integrated steel players,” said ICICI Securities Ltd analysts in a report on 21 January. The brokerage sees this as one factor that makes JSW more vulnerable to steel cycle compared to peers.

To be sure, JSW’s volume growth outlook is strong backed by its expansion projects. Better than expected demand growth in the coming quarters could offer a boost to earnings. Still, as mentioned earlier, valuations are expensive and that could well limit meaningful near-term upsides in the stock.

According to Jain, “JSW has superior ROCE track record over past few years. While we see upside in both, we peg Tata Steel higher in our pecking order as its deleveraging potential is higher and stock’s valuation is relatively cheaper.”