JSW STEEL (JSWSTE)

Current market Price: 217.30 Target Price: 288.65 Target Period: 12 Months

Sales Growth
The sales revenue for JSW Steel is expected to decrease to 10.99% in FY20 from 13.3% in
FY19, a dip of -2.31% Y-o-Y. The main factor underlying this forecast is the slowdown in auto
sector which comprises around 42% share of its revenue. The sales growth has been estimated
by multiple regression model. The independent variables considered for this regression are
GDP growth rate, steel demand and growth of steel industry for last five years. The revenue
from operation is considered as the dependent variable.

Indian GDP Steel Production Growth of steel

Year Sales Growth rate in India industry
2015 2.23% 8.00% 5.23% 5.10%
2016 -18.92% 8.10% 1.94% -1.30%
2017 39.29% 7.20% 12.70% 10.70%
2018 18.99% 7.10% 5.59% 5.60%
2019 13.30% 7.00% 3.72% 4.70%
2020 10.99% 7.20% 3.67% 4.70%

SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.99938625
R Square 0.998772877
Adjusted R
Square 0.995091509
Standard
Error 0.015033398
Observations 5

ANOVA
Significance
df SS MS F F
Regression 3 0.183947119 0.061315706 271.3047824 0.044592856
Residual 1 0.000226003 0.000226003
Total 4 0.184173122

As the significance value is less the 0.05, as shown in the regression summary above, the model
was deemed significant.
The coefficients for the independent variables are shown in table.
 Coefficients
Intercept 1.05795514
Indian GDP Growth
rate -15.45603588
Steel Production in
India 1.737490452
Growth of steel
industry 2.148306522

The equation used for forecasting sales growth is

Y = a + bx1 + cx2 + dx3
Where,
a = Intercept
b = GDP growth
c = Steel production demand
d = growth of steel industry

The sales volume is expected to grow during the second half of the year as government has
declared measures to curb the fall in auto industry. Some of them are doubling the tax
benefits for auto makers, discount in one time registration fee and updated regulation on BSIV
vehicles. Also growth in infrastructure industry is expected to be 7.5% in FY20, which is also a
major contributor in JSW’s revenue.

EBITDA Margin
EBITDA for FY20 is expected to increase by 44%, a decrease compared to 61% growth in
FY19. Although EBITDA margin is expected to improve to 20.9% in FY20 from 15.4% in FY 19
primarily due to decrease in raw material prices. Other expenses such as power and fuel
prices are expected to increase in the upcoming period, which will impact the freight prices.
Hence, an expected decrease in EBIDTA growth.

Key Financial Summary

Particulars (in Cr.) FY17 FY18 FY19 FY20E

Revenue from operations 56,913 66,234 76,727 85159

EBITDA 5,131 7,309 11,817 17,112

EBT 2,106 4,255 8,420 13,342
PAT 3,577 4,625 8,259 7,964
EPS 14.89 19.24 34.35 37.22
EV/EBIDTA(x) 3.90 6.40 5.50 7.30
ROE (%) 15.30 21.80 21.70 27.73
Valuation
The method used for valuation is DCF (Discounted Cash Flow) Model. The forecasting has been
done upon the sales growth calculated using regression. After the forecasting, Free Cash Flow
to the Firm has been calculated. The given table below describes its calculation flow.

Particulars in Cr.
Net CAPEX 5670 Net change in PPE
Depreciation and Amortization 3770
Net Working Capital 13503.594 Current assets - Current Liabilities

Repayment of Debt 1485 Borrowings, Current Liabilities

New borrowings 18044 Borrowing, Non - Current Liabilities

FCFF 36126.877

Following FCFF, beta has been calculated using JSW Steel’s competitors.

Metal and Mining

Companies Beta
Hindalco 1.24
Hind Zinc 0.63
JSW Steel 0.97
NMDC 0.64
Vedanta 1.15
Tata Steel 1.18
SAIL 1.83
Average business Beta 1.0914286

Industry Debt Equity Ratio 2.15

Tax Rate 34%

Unlevered Beta 0.4521545

Target Debt Equity Ratio 2.01

Relevered Beta 1.0498014

Weighted Average Cost of capital is calculated using the formula

WACC = Debt multiple (1 – tax rate) * Kd + Equity Multiple * Ke
Where,
Debt Multiple = Debt / (Debt + Equity)
Equity Multiple = Equity / (Debt + Equity)
Ke = cost of equity
Kd = cost of debt

The expected rate of market return is taken as NIFTY 100 returns for 5 years. The risk free
rate of return is taken as 10 year GSec. The spread calculated using 10 year GSec along
with 10.34% Secured NCD.

Particulars
Beta 1.04
Risk free rate of return 6.56% 10 year Gsec

Expected Market return 18.70% NIFTY 100 - 5 year return

Ke 19.19%

Particulars
10.34% Secured NSD 10.34%
Risk free rate of return 6.56% 10 year Gsec

Spread 3.78%

Kd 3.78%

Particulars
Tax Rate 34.24%

Debt / Equity 2.937228

Debt multiple 74.6
Equity multiple 25.4

Cost Of Equity 0.0487314

Cost of Debt 0.0185435

WACC 6.7275%

The growth of the company is calculated using the formula

Expected Growth rate of the company = Equity Reinvestment rate * ROE

Equity Reinvestment Rate = Free Cash Flow to the Firm / Profit after Tax
Value of Operating Assets = PAT * (1 – Equity Reinvestment Rate) * (1 + Expected
Growth Rate)
Cost Of capital – Expected Growth Rate

Particulars In Cr.
FCFF 36127
PAT 7964

Equity Reinvestment rate 4.54%

ROE 27.73%

Expected growth rate 1.258%

VALUE OF OPERATING
ASSETS
Numerator 8060.523
Denominator 0.055
Value of operating assets 147370.331

VALUE PER SHARE

Cash 5258 Cash and Cash Equivalents
Non- operating assets 2891.460 Loan receivables and other financial assets
Debt 79963.000 Total Liabilities
69773.871 Sum
Total shares 241.721 In Cr.
Value per share 288.654 BUY

Enterprise Value In Cr.

Market Capitalization 52526

Market value of debt 79963
Cash and Cash equivalents 5258

EV 127231
EBIDTA 17,112

EV/EBITDA (x) 7.43

The increase in production capacity from 16MMT to 24MMT, and also the iron ore volume
expected to increase after JSW Steel’s acquisition of 3 iron ore mines in Karnataka estimating
to be about 92.97MMT of raw material. The key risks to our target is high volatility in fuel
and raw material prices may impact gross margin. The second half of FY 20 expects the auto
growth to grow which may increase the sales level. We value the stock at Rs. 288.65 (7.43x
FY20E EV / EBITDA) and suggest BUY.

Financial Summary

Sales (in Cr.)

90,000 60.00%
80,000 50.00%
70,000 40.00%
60,000 30.00%
50,000 20.00%
40,000 10.00%
30,000 0.00%
20,000 -10.00%
10,000 -20.00%
0 -30.00%
2015 2016 2017 2018 2019 2020

Sales Y-o-Y Growth

EBITDA (in Cr.)

18,000 600.00%
16,000 500.00%
14,000 400.00%
12,000
300.00%
10,000
200.00%
8,000
100.00%
6,000
4,000 0.00%

2,000 -100.00%
0 -200.00%
2015 2016 2017 2018 2019 2020

EBITDA Y-o-Y Growth

 EBITDA Margin (%)
0.25 350.00%
300.00%
0.20 250.00%
200.00%
0.15
150.00%
100.00%
0.10
50.00%

0.05 0.00%
-50.00%
0.00 -100.00%
2015 2016 2017 2018 2019 2020

EBITDA Margin Y-o-Y Growth

Comparative Analysis among competitors

Metals and
Mining
Current Market Market
Company Price Capitalization EPS EV/EBIDTA
in Cr. FY19 FY20E FY19 FY20E
Coal India 184.7 137184 28.3 28.9 4.3 5.2
Hindalco 184.5 44317 24.7 22.1 5.2 5.3
Hind Zinc 216.05 94218 18.8 19 7.4 6.6
JSW Steel 217 56562 34.35 37.21 5.5 7.3
NMDC 83 34906 15.2 14.1 4.5 4.8
Vedanta 140.2 61907 18.1 21.3 4 3.6
Tata Steel 346.7 55518 78.6 55.9 5.3 5.6
Income Statement
Particulars FY17 % FY18 % FY19 % FY20E %
Revenue from
56,913 100.00% 66,234 100.00% 76,727 100.00%
operations 85159.2973 100.00%
Other income 255 0.45% 213 0.32% 519 0.68% 519 0.61%
Total income 57,168 100.45% 66,447 100.32% 77,246 100.68% 85678.2973 100.61%
Expenses
Cost of materials
28,400 49.90% 35,995 54.35% 39,589 51.60%
consumed 44240.25495 51.95%
Purchases of
945 1.66% 1,063 1.60% 498 0.65%
stock-in-trade 498 0.58%
Changes in
inventories of
finished goods -1,390 -2.44% 412 0.62% -188 -0.25%
and work-in-
progress 0 0.00%
Employee
1,168 2.05% 1,260 1.90% 1,400 1.82%
benefits expense 1643.574438 1.93%
Finance costs 3,643 6.40% 3,591 5.42% 3,708 4.83% 4726.341 5.55%
Excise duty
4,623 8.12% 1,259 1.90% -
expense -
Other expenses 11,623 20.42% 12,504 18.88% 17,025 22.19% 17457.65595 20.50%
52,037 91.43% 59,138 89.29% 65,429 85.28% 68565.82633 80.51%
EBITDA 5,131 9.02% 7,309 11.04% 11,817 15.40% 17,112 20.09%
Depreciation and
amortisation 3,025 5.32% 3,054 4.61% 3,397 4.43%
expense 3,770 4.43%
EBT 2,106 3.70% 4,255 6.42% 8,420 10.97% 13,342 15.67%
Tax expense /
(benefit)
Current tax -53 -0.09% 1,578 2.38% 2,348 3.06% 4168.18793 4.89%
Deferred tax 1,607 2.82% 872 1.32% 1,210 1.58% 1,210 1.42%
1,554 2.73% 2,450 3.70% 3,558 4.64% 5,378 6.32%
PAT 3,577 6.29% 4,625 6.98% 8,259 10.76% 7,964 9.35%