Project pipeline and demand to drive JSW Steel growth; stock gains

Backward integration, brownfield expansions and buys will improve topline, margins

JSW Steel (JSW), one of India’s largest steel makers, scaled fresh all-time high of Rs 408.65 last week. The recent rise is driven by the company’s inclusion in the Nifty50 index, boosting Street sentiment and pushing fund managers to add the stock to their portfolios.
 
Since the start of 2017, the stock has risen almost 2.5 times. Despite the gains, analysts believe that there are multiple triggers that will keep the stock prices elevated. The company has exhibited regular improvement in operating profit helped by rising steel realisations, better cost efficiencies, and capacity expansions (volumes).
 
Analysts remain positive on JSW Steel’s earnings prospects. The steel demand outlook, for one, remains strong led by the government’s infrastructure push and focus on housing.
 
JSW Steel’s performance, too, remains strong. The June quarter (Q1), for instance, saw per tonne profitability of Rs 12,590 for domestic operations, which was a 10-year high. Analysts expect this momentum to sustain given they see an improvement in operating efficiencies, aided by the conveyor belt at JSW Steel’s Vijayanagar steel plant and iron ore sourcing from captive mines.
 
The conveyor, expected to be commissioned in the December 2018 quarter, and to be fully ramped up to 20-22 MTPA by FY20, should save Rs 300-400 a tonne in logistics costs, analysts have estimated.

The project pipeline, too, is good and should drive growth. Over the long term, analysts at Edelweiss have said they are upbeat on the 8-10 million tonnes per annum (MTPA) overseas crude steel capacity (including planned backward integration), given the price and location of the plants.
 
The doubling of the Dolvi plant capacity (from 5 MTPA to 10.7 MTPA), and the expansion at Vijaynagar (Blast Furnace-3 by 1.5 MTPA), are expected to be completed by March 2020.
 
While these capacities will drive volumes from FY21, JSW Steel is also expected to turn around the performance of the recently-acquired Monnet Ispat and Energy over the next 12-18 months. Analysts at IIFL said current acquisitions (including Italian and US capacities) would boost volume growth till brownfield expansions are completed.  
 
For FY19, JSW has maintained its production and sales guidance of 16.75 MT and 16 MT, respectively implying a year-on-year growth of 2-3 per cent.
 
However, analysts at Motilal Oswal Securities have said they see a very strong growth outlook.