Dolvi now has a capacity of 10 million tonnes per annum (mtpa) and JSW Steel is in the process of expanding it further.
Moreover, the plant’s second phase has a lower conversion cost. “JSW Steel commissioned the 5mtpa phase II in Q3FY22, which has ₹4,500 per tonne lower conversion cost versus phase I, and impressively ramped up production to rated capacity within one year. This drives our 4-5% volume upgrade for FY2024-25E," said analysts at Kotak Institutional Equities in a report on 16 December.
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JSW Steel aims to reach total domestic capacity of 37mtpa by FY25 from 27mtpa in FY22. “All expansions in the current stage are brownfield in nature with shorter gestation and lower capex, resulting in higher internal rate of return (+20%)," added the Kotak report. However, demand needs to pick up adequately for volumes from additional capacities to be absorbed. This has been a key concern for JSW Steel’s investors.
In the September quarter (Q2FY23), on a consolidated basis, the company swung to a loss due to a sharp drop in steel realizations and utilization of higher priced inventory. The net debt to Ebitda (earnings before interest, taxes, depreciation and amortization) ratio rose sequentially to 2.7 times at September-end from 2.03 times in June-end and 1.4 times in March-end. With capital expenditure plans in place, it remains to be seen if the company can achieve significant deleveraging hereon.
The reopening of China is vital for global demand to see an uptick. This in turn would have a positive bearing on domestic prices. Meanwhile, shares of JSW Steel have recovered by 43% from their 52-week lows of ₹520.05 apiece. This is primarily driven by factors such as stable steel prices and removal of export duty on the metal.
However, analysts point out that the valuations are expensive, which is why Kotak has a ‘sell’ rating on the stock. According to Bloomberg, the JSW Steel stock trades at 7.5 times EV/Ebitda based on FY24 estimated earnings. EV is enterprise value. While volume growth for JSW Steel is on track, this and possible cost benefits are already priced in, point out analysts at IIFL Securities. Given this, sharp upsides appear capped.
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