JSW Steel expects to be a 50 mn ton company by 2030: Seshagiri Rao Joint MD & Group CFO, JSW Steel

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JSW Steel expects to be a 50 mn ton company by 2030: Seshagiri Rao Joint MD & Group CFO, JSW Steel

Excerpts from an interview with Seshagiri Rao, Joint Managing Director & Group CEO, JSW Steel; dated 2^nd January 2020:

• For the steel industry to be understood, one has to see what is happening globally because it is a globally traded commodity. Almost one-third of the steel is traded globally.
  
• The trade dispute between China and the US was the starting point which led to an overall slowdown in the global economy and that has impacted the steel industry.
• The steel-consuming sectors like construction, infrastructure, real estate, manufacturing and auto have seen slowdown globally and that has an impact. Global developments contributed to a bigger slowdown in India.
• The slowdown in government expenditure and credit flow to the industry together had a very serious impact in the overall fall in demand and also fall in prices. At the same time, raw material prices have not fallen in the same proportion.
• The FTA countries like Japan, Korea, and Asian countries continue to export steel into India because it has zero percent duty. It has gone up from around 58% last year to 77%. All these factors led to a fall in steel prices in India.
• A bit of recovery was seen in Oct-19. So, the Dec-19 quarter ended EPS is going to be better which is heard from other steel companies. They have reduced inventories and their sales were better in the last quarter. This is the trend seen, which is expected to be better in the third quarter compared to the second quarter and 2HFY20 is expected to be better.
• Steel prices have started going up from November 2019. Otherwise, the domestic prices are at a discount to the landed cost of imports in India. But prices are picking up and that is positive news stemming from the revival in domestic demand.
• International prices used to be $430 and currently it is close to $520. Rupee depreciation has happened in India. So there is a scope for increase in domestic prices.
• The international prices have started going up and in line with that, local prices have started increasing. Now, everybody has come back to the market for restocking and that is also one of the reasons why the price increases are seen.
• JSW Steel increases the price every half year. So, whatever price fall has happened in the first half of the financial year, has been renegotiated for the second half. The prices in the second half for the auto sector were much lower than the current prices. This is one of the reasons why the price increase other than the auto sector will be better in the second half of this year over the last year because nobody is expecting global prices will fall below these levels so in line with that the local prices also will increase.
• As far as India is concerned, steel demand will be driven by mostly infrastructure construction and real estate. The national infrastructure pipeline which has been announced for an investment of Rs 102 lakh crore in that the roads, energy, and urbanization will contribute close to 60% of the total infrastructure build in India. Out of the 60%, they are mostly steel-consuming industries where steel demand is quite positive for this pipeline of national infrastructure which has been announced.
• The demand for steel in India is expected to look up from here on. JSW Steel is the only company which has been bringing in new capacity of 5 mn ton in FY21. And at the same time, downstream capacity expansion by 4 mn ton is coming up. This downstream capacity is in high value-added products. The expansions are very well-timed. The 18 mn ton capacity will go to 23 mn ton.
• JSW Steel is currently running at 15-16% of present installed capacity. Even if it is assumed that current market share is maintained in the overall installed capacity, if 300 million ton is India’s capacity by 2030, JSW steel will be in the range of 45 to 50 mn ton by 2030. Considering the pace of growth in India, if this 300 million ton is expected to be achieved even earlier than 2030, JSW Steel will also grow at the same pace.

Consensus Estimate: (Source: market screener)

• The closing price of JSW Steel was ₹ 272/- as of 3^rd January 2020. It traded at 14x/ 12x/ 10x the consensus EPS estimate for FY20E/ FY21E/ FY22E of ₹ 19/23/28 respectively.
• Consensus target price of ₹ 253/- implies a PE multiple of 9x on FY22E EPS of ₹ 28/-.