JSW Steel Q1 Review: Analysts Retain Bullish Stance Despite Debt Concern
An employee cuts a sample from a roll of coiled steel inside a rolling steel mill. (Photographer: Chris Ratcliffe/Bloomberg)

JSW Steel Q1 Review: Analysts Retain Bullish Stance Despite Debt Concern

Most analysts retained their bullish investment recommendations on JSW Steel Ltd. even as the steelmaker reported its first loss in more than six years and debt spiked amid the disruptions caused by the coronavirus pandemic.

JSW Steel reported a net loss of Rs 561 crore in the April-June period—the first since the second quarter of 2013-14—against a net profit of Rs 1,028 crore a year ago. Its revenue declined 41% to Rs 11,782 crore.

The company’s net debt-to-Ebitda stood at 5.7 times as of June 2020 compared with 4.5 times at the end of March and 2.72 times a year ago.

But that didn’t deter analysts from maintaining their bullish rating on the stock. That may be because of the company’s improving operational metrics and expansion plans.

Of the 31 analysts tracking the stock, 16 have a ‘Buy’ rating, eight suggest a ‘Hold’ and seven recommend a ‘Sell’. The average of Bloomberg consensus price targets implies an upside of 3.1%

Shares of JSW Steel dropped as much as 0.83% in early trade on Monday compared with largerly unchanged performance of the benchmark Nifty 50 Index.

Also read: JSW Steel Q1 Results: First Loss In Six Years As Lockdown Stalled Operations

Here’s what brokerages have to say about JSW Steel’s first-quarter results:

UBS

  • Maintains ‘Buy’ rating; target price unchanged at Rs 250 apiece

  • Decline in volume and realisation in a challenging quarter

  • Operational metrics gradually improving

  • Reports net loss for the quarter but maintains positive cash flow from operations

  • Decreases FY21 earnings estimates by 12%

  • EPS downgraded due to drag from overseas business, sales volume adjustments for FY21

Investec

  • Retains ‘Hold’ rating; with a target price of Rs 193 a share

  • Better-than-expected operational performance on cost measures and lower overseas losses

  • Expects JSW Steel’s iron ore cost curve to inch down gradually as auctioned mine output increases

  • Balance sheet overhang persists on back of Insolvency and Bankruptcy Code assets

HSBC Securities

  • Reiterates ‘Reduce’ with a target price of Rs 150 apiece

  • Few near-term positives emerge; but already priced in

  • Outlook not encouraging on expectation of a sharp contraction in domestic demand

  • Higher-than-expected steel prices and demand are upside risks to reduce rating

  • Balance sheet continues to deteriorate; valuations look stretched

  • Stock looks expensive at 7.4 times its estimated FY22 EV/Ebitda and 20 times price-to-earnings

Motilal Oswal Securities

  • Maintains ‘Buy’ rating; target price at Rs 242 apiece

  • Lower volumes and realisations led to Ebitda decline

  • Expected price hikes to improve margins

  • Weak domestic demand impacts profitability

  • Company expected to deliver above-industry volume growth in FY22, driven by expansion

  • Any turnaround in its loss-making overseas operations could provide a further upside

Edelweiss Securities

  • Maintains ‘Reduce’; target price at Rs 166 apiece

  • Performance surpasses expectation

  • Escalating leverage and potential overhang of Bhushan Power & Steel Ltd.’s acquisition pose risks

  • Valuation at 7.7 times its estimated FY22 Ebitda is at the top-end of the past 10 years’ historic trading range

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