JSW Steel’s (JSTL) Q4FY16 consolidated EBITDA jumped 8% YoY to INR18.3bn on higher standalone volumes (up 7% YoY) of 3.28mt and lower operating cost. However, domestic realisation dipped 19% YoY (though marginally high QoQ) to INR29,072/t. Management’s FY17 volume guidance stands at 15mt. Factoring this, we revise up our EBITDA estimates for FY17 and FY18 10% and 18%, respectively. However, we remain sceptical due to the bleak global demand outlook and limited upside in domestic realisation from current level. We believe current stock price factors in the upside in the stock. Maintain ‘REDUCE’ with revised TP of INR932 (INR817 earlier, based on 6x FY18E EV/EBITDA).

Higher volume, benign raw material cost boost EBITDA

Q4FY16 performance was boosted by standalone sales volumes that grew 7% YoY to 3.28mt. Further, decline in realisation (down 19% YoY) was more than offset by lower raw material cost (down 23% YoY). As a result, consolidated EBITDA rose 8% YoY to INR18.3bn. Ergo, reported standalone EBITDA/ tonne was stable at INR5,404 in Q4FY16 compared to INR5,469 in Q4FY15 (Q3FY16: INR3,443). International operations in the US, however, reported EBITDA loss of USD10.2mn compared to a slight profit of USD0.13mn in Q4FY15.

Upside in domestic realisation capped

We believe the upside in domestic flats steel realisation is limited from current level. Further, the company is expanding into longs which typically face pressure from secondary producers. Compared to 21% increase in HR coil prices, rebar prices have risen only 10% from February 5, 2016, level.

Outlook and valuations: Upside capped; maintain ‘REDUCE’

We retain our negative sector view factoring global capacity surplus (steel and iron ore) and visible slowdown in China. Considering volume benefits of JSTL’s capacity ramp up (24% YoY) and improved price environment, we revise up FY17E and FY18E EBITDA 13% and 18%, respectively. With RoE estimated to remain at 14.3% in FY18 despite ~18.0% CAGR in revenue and high net debt/EBITDA ratio of 6.33x, we continue to value JSTL at 6x FY18E EV/EBITDA. We maintain ‘REDUCE/SP’ with revised target price of INR932. At CMP, the stock trades at ~6.7x FY18E EBITDA.