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JSW Steel Q2 Review: Brokerages Cut Target Prices Citing Margin Pressure

Analysts say margins of steelmakers may have peaked.

<div class="paragraphs"><p>Signage for JSW Steel. (Photographer: Dhiraj Singh/Bloomberg)</p></div>
Signage for JSW Steel. (Photographer: Dhiraj Singh/Bloomberg)

Brokerages maintained their rating but reduced the target price on JSW Steel Ltd. after the steelmaker reported earnings in line with estimates in the quarter ended September.

While most analysts see pressure on the margins due to rising coking coal prices, they expect a further hike in prices, lower iron ore prices and sustained performance of overseas subsidiaries to mitigate this effect.

Shares of JSW Steel Ltd. fell as much as 1.86% in morning trading before paring some losses to trade 1.28% lower compared with 0.6% gain in Nifty at 10.15 a.m.

Of the 33 analysts tracking the company, 19 recommend 'buy', eight suggest 'hold' and six have a 'sell' rating. The consensus price of analysts tracked by Bloomberg implies an upside of 18.4%.

Here's what brokerages had to say about JSW Steel’s Q2 earnings:

Credit Suisse

  • Maintain 'underperform' rating with a target price of Rs 550, downside of 18.3%.

  • Second quarter of FY22 is inline as global operations offset standalone miss.

  • Coking coal costs are a worry.

  • Expects Q3 costs to be $95-100 per tonne higher.

  • JSW currently has two months of inventory.

  • JSW is contemplating charging an energy surcharge if coking coal costs remain elevated.

  • JSW may hike prices further in November.

  • JSW Steel to consolidate Bhushan Power & Steel Ltd. in the third quarter.

  • The 5 million-tonne Dolvi plan expansion to add 1.5 MT capacity in FY22.

JPMorgan

  • Maintain 'neutral' rating; retains target price at Rs 730.

  • Company reports a strong beat vs consensus for both India and the overseas subsidiaries.

  • Key overseas subs (US and Europe) saw further improvement quarter over quarter.

  • Lower iron ore price benefit has not yet flowed through to Indian operations.

  • Expects coking coal costs to increase by $100 per tonne in the third quarter.

  • Expects steel price hikes in November and December and also lower iron ore costs in second half.

  • October steel prices have been increased by Rs 1,500 per tonne.

  • Margins for Indian steel companies have peaked.

  • See upside risk to estimates.

Nomura

  • Maintain 'neutral' rating, cut target price to Rs 727 from Rs 747.

  • Coking coal prices have witnessed a sharp increase.

  • Domestic iron prices are yet to witness likely major declines.

  • Turnaround in overseas operations and potential price hike in November.

  • In the long term, cost savings and capacity additions underpin profitable growth.

Jefferies

  • Retain 'buy' rating; cut target price to Rs 800 from Rs 785.

  • The company's second-quarter Ebitda was flat quarter on quarter (2.5x year-on-year) and in line with Jefferies estimates.

  • Standalone Ebitda per tonne fell 13% quarter-on-quarter but was still the second highest ever.

  • Property sector and power concerns have clouded China's steel demand outlook.

  • China’s production cuts and easing policy should support market balance and prices.

  • Higher coking coal prices will hurt in the second half.

  • See margins staying above past years.