Buy JSW Steel shares: Rs 15,750 cr JFE JV sets stage for 17% upside, says JM Financial

JSW Steel has formed a 50:50 joint venture (JV) with JFE Steel for Bhushan Power & Steel Ltd (BPSL), valuing the asset at Rs 31,500 crore. The steel business is being transferred to this JV via a slump sale for Rs 24,483 crore. As part of the transaction, JFE Steel will invest Rs 15,750 crore in two tranches to acquire its 50 per cent stake.

At last check on Thursday, the JSW steel stock was trading 0.48 per cent higher at Rs 1153 on BSE. The counter has gained nearly 27 per cent this year so far. The company commands a market cap of Rs 2.82 lakh crore.

Brokerage firm JM Financial has maintained a bullish stance on the steel major, projecting a potential upside of 17 per cent from current levels driven by the deleveraging benefits and growth optionality arising from its recent joint venture announcement.

This strategic reset is expected to result in a massive consolidated deleveraging of approximately Rs 37,000 crore, primarily because Rs 5,000 crore of BPSL’s net debt will be deconsolidated from JSW Steel’s books. The transaction unlocks capital while allowing JSW to retain ownership in a high-quality asset that has scaled from a distressed 2.75 mtpa in 2017 to 4.5 mtpa currently. The new entity has the headroom to expand capacity toward 10 mtpa, JM Financial said.

JM Financial has maintained a ‘Buy’ rating on the stock with a target price of Rs 1,350 per share. The brokerage believes the deal "delivers a major deleveraging boost and strengthens its long-term growth runway."

According to the brokerage note, the transaction "boosts JSW Steel's liquidity and enhances balance sheet capacity for organic and inorganic growth, supporting its long-term capex roadmap toward 50 mtpa by FY31."

Addressing concerns regarding the management of the new entity, the brokerage highlighted that "Management has emphasised that the JV will remain independent rather than merge with JSW Steel, ensuring governance clarity." JM Financial further noted that for JSW Steel, "the monetisation crystallises value from BPSL's turnaround," while the infusion of technology from JFE "provides the basis for product upgradation and future capacity expansion."

According to the data from Trendlyne, the counter is witnessing high volatility with a high 1-year Beta. The momentum indicators suggest the stock is currently in a neutral zone, with the RSI at 45.6 (mid-range) and the MFI at 39.2 (mid-range).

In terms of moving averages, the stock is currently trading mixed; the price is below its 50-day Simple Moving Average (SMA) of 1,160.10, indicating short-term pressure, but remains comfortably above its long-term 200-day SMA of 1,057.90.