Calculated Moves In Steel And Renewables Set Stage For Future Growth Despite Global Challenges

Key Takeaways

• Expansion plans and strategic acquisitions are expected to enhance market position and significantly boost revenues through increased production capabilities.
  
• Focus on renewable energy and value-added products aims to improve net margins and stabilize costs, enhancing earnings.
  
• Geopolitical tensions, increased imports, and rising costs threaten JSW Steel's revenues, margins, and debt management amid global export challenges.

Catalysts

Engages in the manufacture and sale of iron and steel products in India and internationally.

• The expansion plan to increase steelmaking capacity to 42 million tonnes by September '27 and further to 50 million tonnes by FY '31 could significantly boost revenues as the company increases its production capabilities.
  
• Investment in renewable energy for power needs is expected to cover 25% of JSW Steel's requirements, potentially improving net margins by reducing energy costs.
  
• The acquisition of thyssenkrupp Group Electrical Steel India Limited and related technology can enhance JSW Steel's market position in high-margin electrical steel products, likely improving future earnings.
  
• Strategic focus on value-added and special products is aimed at driving over 50% of sales from these segments, which could result in better net margins due to higher price realization.
  
• Securing long-term coking coal linkages and increasing captive iron ore production capacity should provide cost stability and margin improvement, positively influencing earnings.

JSW Steel Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming JSW Steel's revenue will grow by 12.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 10.3% in 3 years time.
• Analysts expect earnings to reach ₹250.6 billion (and earnings per share of ₹76.74) by about November 2027, up from ₹50.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹129.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.9x on those 2027 earnings, down from 48.3x today. This future PE is greater than the current PE for the IN Metals and Mining industry at 18.8x.
• Analysts expect the number of shares outstanding to grow by 10.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.58%, as per the Simply Wall St company report.

JSW Steel Future Earnings Per Share Growth

Risks

• Geopolitical tensions and weak economic performance in key regions like Europe, China, and Japan could exert pressure on global steel prices, potentially impacting JSW Steel's revenue and margins.
  
• Increased imports into India, particularly from China, could disrupt domestic market balances, affecting sales volumes and pricing power for JSW Steel, which may pressure earnings.
  
• The substantial increase in India's iron ore prices by NMDC could strain cost structures, especially if steel price hikes do not fully compensate, thereby impacting net margins and profit forecasts.
  
• JSW Steel's growing net debt, driven by CapEx and acquisition costs, raises concerns, particularly if operational cash flows fall short, possibly affecting the company's ability to manage financial expenses and maintain profitability.
  
• Export challenges due to weak global markets and elevated exports from China have already impacted sales volumes, indicating potential risks to sustaining growth in international revenues.

Valuation

• The analysts have a consensus price target of ₹987.16 for JSW Steel based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1255.0, and the most bearish reporting a price target of just ₹700.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹2437.2 billion, earnings will come to ₹250.6 billion, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 15.6%.
  
• Given the current share price of ₹990.05, the analyst's price target of ₹987.16 is 0.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.