Making structural changes to diversify from auto industry – JSW Steel

Update on Indian equity market:
Nifty remained muted on the weekly expiry day, ending 8 points lower at 11,300. Within NIFTY50, TATAMOTORS (+4.5%), LT (+4.4%) and HINDALCO (+4.2%) were the top gainers while SUNPHARMA (-2.1%), EICHERMOT (-2.1%) and BHARTIARTL (-2.0%) were the top losers. Among the sectoral indices, MEDIA (+1.4%), AUTO (+1.2%) and METAL (+1.1%) were the highest gainers whereas PSU BANKS (-1.0%), PHARMA (-0.9%) and BANK (-0.3%) were the laggards.
Excerpts of an interview with Mr. Seshagiri Rao, Joint Managing Director & CFO, JSW Steel (JSW) published in Economic Times dated 04th August 2020:
•Mr Rao said that in the normal scenario, the company was supplying about 2 million tonne to the Auto sector from the total annual capacity of 15 million tonne. During the pandemic lockdown, the number had dropped by as much as about 65%.
•The company is witnessing demand for steel picking up in tractors and two-wheelers. The demand from top-2 passenger car makers, Maruti and Hyundai has been improved in July over June. The demand for steel in the commercial vehicles segment however remained depressed.
•The company’s alloy steel plant at Salem produces about 1 lakh tonne out of which 70,000 tonne capacity is on rolling basis. There is one bloom mill completely dedicated to the auto sector, and there is a bar mill which can have multiple applications, and finds use in the sectors other than the auto also.
•In the lockdown, the bar mill production was not reduced, whereas the bloom mill production came down to 0 in the month of April, which is currently operating at 10,000- 15,000 tonne a month.
•The changes that company is making on the Auto side are not temporary, they are all structural. The growth in demand for steel from the Auto sector is not the same as the industry has witnessed in the past. He expects it to never be the same and therefore diversification has a strategic component with itself.
Consensus Estimate: (Source: market screener website)
•The closing price of JSW Steel was ₹ 259/- as of 13-Aug-2020. It traded at 38x/13x/ 9x the consensus EPS estimate of ₹ 6.8/ 20.5/ 27.8 for FY21E/ FY22E/ FY23E respectively.
•Consensus target price of ₹ 233/- implies a PE multiple of 8x on FY23E EPS of ₹ 27.8.
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