Analysts Still Bullish On JSW Steel Despite High Leverage

Most analysts remained bullish on JSW Steel Ltd. even as the company’s quarterly profit plunged, overseas subsidiaries continued to suffer losses and debt spiked amid disruptions caused by the coronavirus pandemic.

Consolidated net profit of the steelmaker dropped 85% year-on-year to Rs 231 crore in the January-March period, according to an exchange filing. That’s mainly because of impairment provisions for overseas investments.

Its debt-to-Ebitda ratio rose to 4.5 times as of March from 3.71 times at the end of December. It’s also higher than the guided 3.75 times.

While the steelmaker cut its capital expenditure plans, analysts remain cautious over its big-ticket acquisition of Bhushan Power & Steel Ltd. and late turnaround of international units.

But that didn’t deter analysts from maintaining bullish investment recommendations for the stock. That, they said, is mainly because of better risk-reward ratio compared to valuations as well as they expect the company’s net debt to peak off by financial year ending March 2022.

Of the 32 analysts tracking the counter, 20 have a ‘buy’ rating, while six each suggest a ‘sell’ and ‘hold’. The average of 12-month price targets tracked by Bloomberg implies an upside of 20.5%.

Shares of JSW Steel jumped as much as 6.8% in Tuesday’s trade to Rs 177.55 apiece, becoming the top gainer on the NSE Nifty 50 Index. In comparison, the benchmark gained nearly 1%.

Here’s what the brokerages have to say about JSW Steel’s Q4 Results:

Phillip Capital

• Maintains ‘buy’ with a target price of Rs 180 apiece, an upside of 8%.
• Better placed than peers considering a sharp fall in iron ore and coking coal prices.
• Iron ore integration is a silver lining.
• Cautious on delays in turnaround of subsidiaries, along with potential of a sharp jump in debt.
• Bhushan Power acquisition overhang is capping upside potential.

Kotak Institutional Securities

• Maintains ‘add’ rating and revised fair value down to Rs 180 from Rs 225 a share.
• Believes leverage concerns are priced in.
• Net debt is estimated to touch Rs 59,000 crore in FY2021.
• Strong liquidity will allow JSW Steel to complete its incomplete projects.
• It will place the company well for strong earnings in FY2022.

Motilal Oswal

• Maintains ‘buy’ with a target price of Rs 199 a share, an upside of 20%.
• JSW Steel’s net debt is expected to rise over FY20–22.
• Expects net debt to peak in 2021-22 at Rs 65,600 crore, with net debt to Ebitda at 3.8 times.
• Expects lower coking coal and domestic iron ore prices to cushion the fall in margins.

Investec

• Maintains ‘hold’ but cuts target price to Rs 171 from Rs 178 apiece.
• Headline net debt of Rs 54,300 crore seems concerning.
• But debt consists of advance payment and supply agreement.
• Adjusted net debt to Ebitda stands limited at 4 times.
• Given appeals at the Supreme Court on Bhushan Power, JSW Steel will make good of any delays, factoring time value.
• Bhushan Power’s debt and consequent balance sheet bloat remains an overhang.

Ambit Capital

• Maintains ‘buy’ with a target price of Rs 300 a share.
• Current price-to-book of about 1 time presents an attractive risk-reward.
• The company has sufficient liquidity.
• The management dipped into credit facilities during the quarter ended March to shore up liquidity.
• Debt refinancing can take place by first quarter of financial year 2020-21.
• Capex reduction of Rs 9,300 crore to still burn out free cash.
• Cash and cash equivalents of Rs 12,000 crore on balance sheet provides cushion.