JSW Ispat Special products (Monnet Ispat) - turnaround scenario

Please find below my thought process:

Steel sector dynamics -

1. Steel | 2016-2021 Data | 2022-2023 Forecast | Price | Quote | Chart | Historical

• We can use the above to track steel prices

2. My observation is any price above 4000 yuan per ton, which is roughly 41k INR per ton, Indian steel mills are profitable

• Below this, the mills struggle

3. 4k yuan per ton was Q4 average prices

• Right now we can see spot is at least 500 yuan more

4. So 10% more realization and mostly higher EDITDA at least 5% more margins (rough estimate given higher jaws)
5. So basically we can expect good results June quarter for all steel companies

• In fact better than March quarter

Monnet thesis -
As is known Monnet was taken over by JSW and Aoin via NCLT process

1. Steel products are many types- broadly intermediaries and finished steel. Steel mills buy iron ore and coal and first convert to steel pellets first. Then they process pellets to finished products.
2. In case of monnet they have a 2.4 million ton plant

• And all they were doing so fat is producing pellets
• That’s low margin business

3. Pellets sell for 25000 Rs per ton approx. So margin is 1000 Rs per ton approx.

• So 2.4 mtpa implies 240 Cr EBITDA per annum, if they do just pellets

4. I see they are 100% utilized producing pellets
5. Now from 2020 Jan quarter they started converting pellets to end products - billets and TMT bars

• Realization is 45000 Rs per ton
• Margin is 10000 Rs per ton

6. For Jan quarter they did 135kt of these end product’s

• Implies 135 Cr EBITDA + pellet EBITDA of some 50 Cr
• That’s why we are seeing 200 Cr EBITDA

7. Now last year they did very less of these end products
8. Next Year guidance has been released

• They said they can do 630kt end products
• That’s 650 Cr EBITDA p.a.
• Plus some 200 Cr from selling rest as pellet

9. If we see capacity is 2.4mtpa

• 630kt is roughly 1/3rd only, Rest is pellets.

10. So for FY22 , if prices sustain, we can see 800 Cr EBITDA

• Less interest and amortization of 500 Cr
• That’s 300 Cr pre tax profit
• And post tax some 250 Cr. . That implies forward PE of 8x roughly
• Which is fair. .

11. What’s interesting is when they ramp up end product sales - 2.4mtpa at 10000 Rs, Implies 2400 Cr EBITDA

• Assume margin dips to 5000 Rs. . (That’s super bear case)
• EBITDA = 1200-2400 cr
• That implies forward PE of 1x

12. But for long term… and assume prices hold and assume they don’t take more debt or expand etc

Risks to the above -

1. They are steadily ramping up - operational issues in ramping up will be very costly for minority investors
2. Price wise… this is a manipulated stock… Lower circuits and upper circuits imply rampant trading and speculation
3. Steel.prices should sustain these high levels.
4. On supply side
   -. The issue is companies will.come up with expansion plans
   -. Jsw steel said they are going to become 38mt pa very soon

• That’s massive…

Opportunities-

1. For any new mill to be put up it takes 2-3 years

• Even jsw steel takes time

2. So price looks safe for 1-2 years

• Unless China takes a U turn and starts manufacturing steel at cheap prices like before
• N they set up plants very quickly too
• Will impact prices

Please offer your critical view of the above.

Disclosure: invested 33% of my overall portfolio. Average buy price is 38 Rs hence I am already sitting on a good profit. Please don’t buy just based on above. Please do your own analysis.

All the above figures are approximate numbers to derive a back of the envelope calculation only

29 posts - 10 participants

Read full topic