Positive on JSW Steel as prices firm up, imports abate: JPMorgan

JP Morgan has re-iterated its ‘Overweight’ rating on JSW Steel with a price target of Rs 1,500 in a note to investors citing possibility of marked improvement in FY17 EBITDA/tonne for large domestic players due to upward momentum in domestic steel prices and declining pressure from imports.
“As such, JSW is well poised to see an improvement in earnings. JSW will also benefit from a ramp-up in domestic production,” the note says.
The Morgan note follows an exchange filing by JSW requesting shareholder approval for a potential equity issuance of Rs 4,000 crore and/or non-convertible bond issuance of USD 200 crore, among others. In the filing, JSW has said the funds will be utilised for capacity expansion to 40 million tonnes (MT) by 2025 from 18 MT, with additional investments in iron ore and coal.
Morgan believes such issuances are routine and highlight the company’s long-term vision on capacity enhancement. However, such proposals are standard and under new corporate laws companies normally take the approvals in the Annual General Meeting (AGM) which are valid for a year. “The above proposals do not mean that any equity issuance is around the corner,” the note says.
The note goes on to highlight that the 4 leveraged metal companies in India, Tata, JSW, Hindalco and Vedanta are on the path of de-leveraging, but the down-cycle in commodities means that operational cash generation is a very slow option.
Also, the down-cycle throws up interesting merger and acquisition (M&A) options while reducing capacity expansion costs sharply. Companies lead equity to fund these requirements while keeping leverage under check.
While investors are worried about the removal of minimum import price (MIP) in August, and the impact on domestic steel prices, JP Morgan believes the fragile recovery in the steel industry and the stress in banking system make case for some sort of import protection post August as well.


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