2QFY18 Result Update November 01, 2017 Market Cap. (Rs bn) 635 Free Float (%) 59 Shares O/S (mn) 2,417 In-line Performance; Margins to Remain Strong (JSTL) has delivered an in-line performance in 2QFY18 with its standalone sales volume increasing by 2% YoY and 11.7% QoQ to 3.92mnT vs. our estimate of 3.95 mnt. Notably, JSTL recorded the highest 2Q sales volume. However, NSR fell by 3.2% QoQ to Rs38,153/tonne vs. our estimate of Rs40,879/tonne, which the Management attributed to lower realisation in coated business led by pressure from cheaper imports. EBITDA surged by 33.2% QoQ (+7.7% YoY) to Rs29.3bn vs. our estimate of Rs29.6bn, while EBITDA/tonne grew by a healthy 19.2% QoQ (+5.5% YoY) to Rs7,467 vs. our estimate Rs7,500. EBITDA margin expanded by 369bps QoQ (-264bps YoY) to 19.6% owing to lower overall operational cost especially on raw material front. Adjusted PAT surged by 26% YoY (+102% QoQ) to Rs8.45bn vs. our estimate of Rs7.43bn, largely due to higher-than-estimated other income and lower depreciation cost. Looking ahead, we expect JSTL s EBITDA/tonne to improve owing to higher steel prices and stable input cost. Hence, we maintain our recommendation on the stock with a revised SOTPbased Target Price of Rs282 (from Rs221 earlier). Share price (%) 1 mth 3 mth 12 mth Absolute performance 4.0 17.4 58.7 Relative to Nifty (1.6) 14.8 39.0 Shareholding Pattern (%) Jun'17 Sep'17 Promoter 41.6 41.6 Public 58.4 58.4 1 Year Stock Price Performance 325 275 EBITDA/tonne Posts a Smart Recovery JSTL has delivered a healthy performance despite a sequential dip in realisation. Though the coking coal prices fell by ~US$15/tonne QoQ during the quarter, the same is expected to increase by ~US$5-10/tonne in 3QFY18E. It must be noted that the same increased to ~US$300/tonne in Apr 17 after averaging at US$220/tonne in 4QFY17, US$170/tonne in 3QFY17 and ~US$105/ tonne in 2QFY17. Further, though the prices fell to US$146/tonne in Jun 17, it again rose in Jul 17. Meanwhile, the iron ore prices another key raw material fell by ~Rs200/tonne QoQ in 2QFY18. Hence, the per tonne raw material cost declined by 7% QoQ to Rs22,395/tonne. Thus all costs declined in the range of 2.9-17.3% QoQ due to operational leverage. 225 175 125 75 Nov-16 Dec-16 Dec-16 Jan-17 Mar-17 Mar-17 Apr-17 May-17 Jun-17 Note: * CMP as on November 01, 2017 Jul-17 Aug-17 Sep-17 Oct-17 Outlook & Valuation We expect JSTL s margins to inch-up, going forward as steel prices continue to remain firm in global steel markets driven by a surprise demand spurt in China. Moreover, the steel demand in domestic markets is also expected to be strong, which would drive the domestic steel prices further. Despite these positives, the valuations seem to be prohibitive especially following the sharp run-up in the stock price. However, we believe that JSTL continues to be the best bet in domestic steel space due to efficient operations and lean cost structure. We now value JSTL at 7x EBITDA (from 6x earlier) to factor in the positive changing environment. Thus, we maintain our recommendation on the stock with a revised SOTP-based Target Price of Rs282 (from Rs221 earlier). Key Financials (Rs mn) FY16 FY17 FY18E FY19E Sales 518,094 583,715 662,706 691,117 EBITDA 75,763 116,924 143,262 150,055 Net profit (1,694) 24,058 41,246 48,965 EPS (Rs) (0.6) 10.1 17.2 20.4 DPS (Rs) 1.5 2.3 2.5 2.8 P/E (x) (447.6) 26.1 15.3 12.9 P/B (x) 2.9 2.6 2.2 1.9 EV/EBITDA (x) 13.2 8.4 6.6 6.0 ROE (%) (0.6) 9.9 14.6 14.9 Dividend yield (%) 0.6 0.9 1.0 1.0 Research Analyst: Kunal Motishaw Contact: (022) 33201328 Email: kunal.motishaw@relianceada.com 1
Risks to the View ff Upside Risk: Substantial decline in input cost and lower steel imports. f f Downside Risk: Significant deterioration in domestic steel demand and rise in steel imports from the current level. Exhibit 1: Financial Performance Particulars (Rs mn) 2QFY18 2QFY17 YoY (%) 1QFY18 QoQ (%) 1HFY18 1HFY17 YoY (%) Net Revenues 149,560 122,375 22.2 138,370 8.1 287,930 231,560 24.3 Other Income 490 525 (6.7) 480 2.1 970 960 1.0 Total Income 150,050 122,900 22.1 138,850 8.1 288,900 232,520 24.2 Total Expenses 120,290 95,200 26.4 116,390 3.4 236,680 173,780 36.2 EBITDA 29,270 27,175 7.7 21,980 33.2 51,250 57,780 (11.3) Interest 9,190 9,155 0.4 9,070 1.3 18,260 17,790 2.6 Depreciation 7,720 7,881 (2.0) 7,320 5.5 15,040 14,930 0.7 Tax 4,400 3,949 11.4 1,880 134.0 6,280 8,480 Adjusted PAT 8,450 6,716 25.8 4,190 101.7 12,640 17,540 (27.9) Adjusted EPS (Rs) 3.5 2.8 1.7 5.2 7.3 (27.9) Reported PAT 8,450 7,144 18.3 4,190 101.7 12,640 17,540 Ratios (%) EBITDA Margins (%) 19.6 22.2 15.9 17.8 25.0 Profit Margins (%) 5.6 5.5 3.0 4.4 7.6 Tax rate % 34.2 37.0 31.0 33.2 32.6 2
Exhibit 2: Cost analysis (Rs/tonne) 2QFY18 2QFY17 YoY (%) 1QFY18 QoQ (%) Raw materials 22,395 16,867 32.8 24,060 (6.9) Staff Cost 765 776 (1.3) 926 (17.3) Power & Fuel 3,033 2,556 18.7 3,125 (2.9) Others 4,492 4,593 (2.2) 5,048 (11.0) Total Cost / tonne 30,686 24,792 23.8 33,160 (7.5) Realization / tonne 38,153 31,869 19.7 39,422 (3.2) EBITDA/tonne 7,467 7,077 5.5 6,262 19.2 EBITDA/tonne (US$) 115 107 7.1 93.5 22.9 Sales volume (mn tonnes) 3.92 3.84 2.1 3.51 11.7 EBIT/tonne (Rs) 5,497 5,025 9.4 4,177 31.6 Exhibit 3: Realization, EBITDA and Sales Trend 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 2QFY10 4QFY10 2QFY11 4QFY11 2QFY12 4QFY12 2QFY13 4QFY13 2QFY14 4QFY14 2QFY15 4QFY15 2QFY16 4QFY16 2QFY17 4QFY17 2QFY18 Realization / tonne (Rs) EBITDA/tonne (Rs) Sales volume (mn tonnes) RHS 3
Income Statement Y/E March (Rs mn) FY15 FY16 FY17 FY18E FY19E Net sales 529,715 518,094 583,715 662,706 691,117 Change (%) 3.4 (2.2) 12.7 13.5 4.3 Total Expenses 435,692 442,331 466,791 519,444 541,062 EBITDA 94,023 75,763 116,924 143,262 150,055 % of Net Sales 17.7 14.6 20.0 21.6 21.7 Depn. & Amortization 34,345 41,910 44,937 47,518 49,764 EBIT 59,678 33,853 71,988 95,744 100,291 Net Interest 34,930 41,273 41,768 38,814 32,252 Other income 1,114 3,719 4,631 5,588 5,556 PBT before EO 25,862 (3,701) 34,850 62,518 73,595 EO income (471) 0 0 0 0 PBT after EO 25,391 (3,701) 34,850 62,518 73,595 Tax 8,194 (2,006) 10,792 21,273 24,630 Rate (%) 32.3 54.21 31.0 34.0 33.5 Reported PAT 17,197 (1,694) 24,058 41,246 48,965 Balance Sheet Y/E March (Rs mn) FY15 FY16 FY17E FY18E FY19E Share Capital 2,417 2,417 2,417 2,417 2,417 Reserves 222,765 219,680 242,134 281,703 328,920 Net Worth 225,183 222,097 244,551 284,120 331,337 Minority Interest 1,670 1,670 1,670 1,670 1,670 Total Loans 393,735 380,235 385,700 363,566 312,566 Deferred Tax Liability 21,234 21,234 21,234 21,234 21,234 Capital Employed 641,822 625,237 653,156 670,591 666,808 Gross Block 729,750 735,750 788,970 826,470 878,437 Less: Accum. Deprn. 184,674 226,584 271,520 319,038 368,802 Net Fixed Assets 545,076 509,166 517,449 507,432 509,635 Capital WIP 32,423 70,423 60,423 70,423 70,423 Investments 6,648 6,648 6,648 6,648 6,648 Associates 5,968 5,968 5,968 5,968 5,968 Liquid Investments 680 680 680 680 680 Goodwill on Consolidation 15,619 15,619 15,619 15,619 15,619 Curr. Assets 252,312 238,303 279,269 327,419 330,725 Inventory 90,132 88,713 93,160 101,199 104,488 Account Receivables 26,889 24,992 27,554 27,689 29,025 Cash and Bank Balance 24,286 16,431 33,802 49,241 41,248 Others 111,005 108,166 124,752 149,290 155,965 Curr. Liability & Prov. 210,255 214,922 226,253 256,950 266,242 Account Payables 204,522 209,004 220,022 248,429 255,992 Provisions & Others 5,734 5,917 6,231 8,521 10,250 Net Current Assets 42,057 23,381 53,017 70,469 64,482 Appl. of Funds 641,822 625,237 653,156 670,591 666,808 4
Cash Flow Statement Y/E March (Rs mn) FY15 FY16 FY17E FY18E FY19E Pre-tax Profit 25,391 (3,701) 34,850 62,518 73,595 Depreciation 34,345 41,910 44,937 47,518 49,764 (Inc)/Dec in Wkg. Cap. (13,392) 10,821 (12,265) (2,014) (2,007) Tax Paid (8,194) 2,006 (10,792) (21,273) (24,630) Other operating activities CF from Op.Activity 38,150 51,036 56,730 86,750 96,723 (Inc)/Dec in FA + CWIP (70,000) (44,000) (43,220) (47,500) (51,967) (Pur)/Sale of Invest. (21) 0 0 0 0 Others 3,870 (684) (683) (685) (685) CF fr. Inv. Activity (66,151) (44,684) (43,903) (48,185) (52,652) Chg in minorities and associates 21 0 0 0 0 Debt raised/(repaid) 46,286 (13,500) 5,465 (22,134) (51,000) Dividend (incl. tax) (650) (707) (921) (992) (1,063) (Inc)/Dec in Cash 17,656 (7,854) 17,371 15,438 (7,993) Add: Opening Balance 6,630 24,286 16,431 33,802 49,241 Closing Balance 24,286 16,431 33,802 49,241 41,248 Key Ratios Y/E March (Rs mn) FY15 FY16 FY17E FY18E FY19E Valuation (x) P/E 34.0 (442.3) 25.8 15.1 12.7 Cash P/E 12.2 15.6 9.1 7.1 6.4 P/BV 2.8 2.8 2.6 2.2 1.9 EV/Sales 1.9 1.9 1.7 1.4 1.3 EV/EBITDA 10.6 13.1 8.4 6.6 6.0 EV/ton 90,527 90,014 88,931 85,516 81,606 Return Ratios (%) EBITDA Margins (%) 17.7 14.6 20.0 21.6 21.7 Net Profit Margins (%) 3.5 (0.3) 4.2 6.3 7.1 RoE 8.2 (0.6) 9.9 14.6 14.9 RoCE 9.3 5.4 11.0 14.3 15.0 RoIC 7.2 3.0 9.3 11.9 12.5 Leverage Ratio (x) Current Ratio 1.2 1.1 1.2 1.3 1.2 Interest Cover Ratio 1.7 0.8 1.7 2.5 3.1 Debt/Equity 1.6 1.6 1.4 1.1 0.8 5
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