We maintain ‘buy’ on JSW Steel with a target price of R1,195 a share. We retain our FY15 and FY16 estimates with upside risk to margins.
At the CMP, the stock trades at 5.1x FY16e EV/Ebitda. With the company’s utilisation touching ~84% in FY15e, JSW is likely to announce the next phase of expansion, possibly at its Dolvi unit. After backward integration, Ebitda/t at Dolvi is expected to be higher than the Vijaynagar unit despite lack of proximate iron ore. JSW is likely to announce capacity expansion at Dolvi unit from 3.3 mtpa to 5 mtpa.
The management expects domestic steel demand to remain slow in FY15 in view of high interest rates and a weak investment environment. The company expects steel imports to decline further by 2 mt in FY15, but exports to remain flat y-o-y. Steel margins are expected to sustain/ improve from current levels on lower coking coal prices. However, steel margins are expected to sustain and possibly improve due to decline coking coal prices after considering a correction in steel prices.
The company expects India steel volumes to grow modestly in FY15. Backward integration projects (Ebitda benefit of R1,200 crore) and increase in value-added products (Ebitda benefit: R350-400 crore) remain on track. Iron ore production in Karnataka is likely to rise to 23-24 mt in FY15 and support the increase in steel production.