Molten steel is poured at a factory in Haryana, India. (Photographer: Udit Kulshrestha/Bloomberg)

JSW Steel Is The World’s Best Steel Stock. Here’s Why

JSW Steel Ltd. is the world’s best-performing steel stock as its ability to maintain margins and lower costs helped it make most of growing steel demand in India.

Shares of the steelmaker have risen more than 30 percent so far this year, while its peers, including Jindal Steel and Power Ltd., Steel Authority of India Ltd. and Tata Steel Ltd. fell. Not only that, the Sajjan Jindal-led company, which is trading close to its 52-week high, outperformed major steelmakers globally.

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Here’s how JSW Steel compares with its margins, capacity expansion, focus on balance sheet and cost controls:

Ebitda Per Tonne Performance

JSW Steel, in line with most of its regional peers, reported consistent margins, making the most of its highest utilisation level. The company’s Ebitda per tonne in the first quarter of the ongoing financial year is the second-highest in nine years, driven by an increase in product spreads—difference between the cost of raw material and selling price. The year-on-year growth in Ebitda-per-tonne was the highest among peers.

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Capacity Expansion

JSW Steel remained India’s No. 1 steelmaker by volumes for the second straight year in 12 months to March 2018. And it continues to add capacity. Despite its not-so-aggressive bidding strategy for insolvent assets, JSW Steel, according to its investor presentation, expects to remain market leader for the next five years.

Lowest Capital Per Tonne

JSW Steel will spend about Rs 21,700 crore towards crude steel expansion and another Rs 5,300 crore to increase downstream capacity by nearly 3.2 million tonnes per annum. Still, the company has the lowest capital per tonne cost compared to Tata Steel and SAIL.

The return on capital employed for JSW Steel is higher than Tata Steel. JSW Steel will incur a cost of Rs 15,000 crore for a 5-million-tonne expansion at a plant in Dolvi, Maharashtra. In comparison, Tata Steel will spend Rs 23,500 crore for a 5-MT phase-II expansion at Kalinganagar, Odisha.

“Historically, JSW Steel had one of the lowest capital costs on a per-tonne basis among steel majors in India. Its latest expansion as well as the ongoing projects have significantly lower cost per tonne relative to other similar products being implemented by its competitors,” said Jayanta Roy, senior vice-president and group head, corporate sector ratings, ICRA. “This partially counter-balances the disadvantage of not having any meaningful supply of raw material from captive sources as of now.”

Focus On Balance Sheet

JSW Steel has been restrained in the ongoing bankruptcy court auction of stressed assets.

The company’s overall brownfield project spending will be around Rs 39,500 crore over the next three years, according to JPMorgan. Most of it, the brokerage expects, will be funded internally, with a minimal increase in debt. That will lead to minimum pressure on balance sheet, according to the brokerage.

Capital Controls

JSW Steel is ramping up its captive iron ore mines. The partial backward integration will help amid spiralling iron ore prices, helping the company cut costs. The company’s downstream capacity of 3.2 MTPA serves as a strong risk mitigation strategy, which is well supported strong pipeline of new products. That’s because these value-added products are not as volatile as other commodities and enjoy stable realisations.

The company also increased its focus on cold-rolled, galvanised and galvannealed products for body panels of automakers, which have been partly driving steel demand.

Valuations At A Premium

Given its outperformance, JSW Steel trades at 6.9 times its previous 12-month enterprise value-to-Ebitda, a 12 percent premium to the industry average of 6.2 times and 35 percent higher than Tata Steel.

Is There Any Upside?

More than 70 percent of the analysts covering the stock have a ‘Buy’ rating, according to Bloomberg data. But it implies a potential upside of only 2 percent. The stock, however, has defied the Bloomberg consensus price target on multiple occasions this year.

Citi upgraded the counter to ‘Buy’ from ‘Neutral’ and raised its target price to Rs 420, an upside of nearly 19 percent, citing strong steel demand and capacity constraints in China.

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