JSW Steel: Too early to rejoice

Last Updated: Mon, Jan 28, 2013 20:11 hrs


While JSW Steel braved its way through the challenging Dece-mber quarter, lower steel demand and realisations did impact its standalone performance. Margins on sequential basis suffered and bottom line bore the brunt of exceptional items that included foreign exchange losses. While the stock has moved up in the hope of future iron-ore supplies increasing, availability of this key raw material still continues to be a challenge. Hence, analysts are a tad cautious on the company’s near-term outlook.


Lower realisations hurt
As international steel remained subdued, JSW’s export turnover (Rs 1,465 crore) declined 31 per cent sequentially. Domestic turnover though marginally grew 1.6 per cent sequentially. With crude steel sales at 2.17 million tonnes (mt) remaining flat on sequential basis (up 14 per cent year-on-year), the top line declined 6.3 per cent sequentially (up 5.3 per cent year-on-year).

The key reason for the fall in revenues was subdued steel prices, which remains a major challenge for the industry as a whole. Although international prices have shown some positive signs in the past few days, the impact of the same is still to be seen in the domestic market.

In Rs crore Q3FY13 9MFY13
Net sales 8,274.9 26,138.8
% chg y-o-y 5.3 15.9
Ebitda 1,313.6 4,114.7
Ebitda (%) 15.8 15.7
Net profit 136.7 1,228.0
% chg y-o-y -18.7 40.6
Standalone results
Source: Capitaline plus

The December quarter also saw huge volatility in the prices of coal and iron ore. The per tonne iron ore prices swung from $114 to lows of $89 but since then have rebounded to $155 in January 2013. For JSW, the challenge was much bigger given its dependence on auctioned iron ore and considering the mining ban in Karnataka. The lower grades of iron ore available did impact JSW’s productivity, but benefit also accrued due to lower coal costs of $202 a tonne in the December quarter (lower than $213 in the September 2012 quarter). Thus, overall cost of raw material consumed fell 16 per cent sequentially. However, lower steel realisation (Rs 38,133 per tonne, down 6.3 per cent sequentially) impacted margins by 135 basis points to 15.8 per cent in the December quarter (15.9 per cent in the December 2011 quarter).

For the current quarter, the company pegs its hard coking coal costs at $160-165 a tonne and iron ore prices at $120-130 a tonne. However, for JSW’s profitability to improve, domestic steel demand and prices need to strengthen, which though seems to be sometime away.


During the December quarter, JSW produced 2.094 mt of crude steel, which was eight per cent year-on-year. Sequentially though, production was much lower than the 3.582 mt recorded in the September quarter. But, given the year-to-date output of 6.41 mt, it will require to produce 2.1 mt in the March quarter to meet its guidance of 8.5 mt for FY13. The company has 200,000 mt iron ore inventory and one mt of iron ore supplies are yet to be received. With six Category-A mines to start production in February and auctions from NMDC, the company should be able to cruise to its FY13 production target.


For FY14, there are hopes of four more Category-A mines and 12 Category-B mines, which are awaiting approval, starting mining operations. The stock is seeing positive traction in anticipation of the same. The company is also harping on NMDC ramping up production to 9-10 mtpa from current levels of 5.5 mtpa, in Karnataka. Analysts though, remain sceptical about NMDC being able to ramp up that much of production by the start of FY14 in the absence of which they feel JSW Steel will have to procure iron-ore from other states thereby pushing up costs. In this backdrop, analysts like Giriraj Daga at Nirmal Bang have not revised their earnings estimates and maintain their cautious outlook on the company’s near-term performance.

At the macro level, all eyes are set on the Reserve Bank of India’s policy meeting with hopes of interest rate cut that could give some boost to demand from the construction, automobile, consumer durables and other sectors. The company also remains optimistic on the same. However, benefits of the rate cut will take time to accrue, believe analysts.

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