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Easing iron-ore supplies lift JSW Steel's prospects

Good operational performance in June quarter was eclipsed by forex losses. But the easing input availability should give it a boost, even as the near-term steel outlook is subdued

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has continued to grapple with availability problems for some time, as the continues. However, given that in the June quarter, too, was the only route for procuring iron ore (not a very cost-effective option), JSW’s performance was remarkable. Though its profits were impacted by the foreign exchange translational losses of Rs 592 crore, operational performance showed marked improvement. Not only was production higher, but profitability was also better.

Production and profitability can improve further, as some iron ore mines in Karnataka are likely to start production, with the Supreme Court nod in place. Also, though steel demand might remain subdued for the next two to three months, this is expected to improve from the December quarter.

For the stock, whose performance has been impacted largely due to the ore availability issues, the easing of supplies would be a positive trigger. With the medium-term outlook better, some analysts have turned positive on the stock, with a target price of Rs 750-800, indicating a good upside from the current levels of Rs 668.

In Rs crore Q1’ FY13 FY13E FY14E
Net sales 9,910 38,957 39,261
% change y-o-y 33.2 12.7 0.8
Ebitda 1,909 6,729 7,060
Ebitda (%) 19.3 17.6 17.9
Net profit 50 1,275 1,759
% change y-o-y -89.8 137.2 37.9
EPS (Rs) 1.9 57.1 78.8
PE (x)

11.7 8.5
E: Estimates                 Consolidated financials                 Source: Emkay Research

Improved volumes, realisations
JSW produced 2.14 million tonnes (mt) of crude steel during the June quarter, 27 per cent higher over a year; sales at 2.11 mt were up 23 per cent. The product mix improved, with the sales volume of semi-finished steel (having low profitability) declining 61 per cent year-on-year. On the other hand, flat and long product sales increased 30-31 per cent. Realisations, thus, improved to Rs 42,853 a tonne, up four per cent sequentially, as well as on a year-on-year basis. This helped JSW post Ebitda (earnings before interest, taxes, depreciation and amortisation) margins of 19.6 per cent, visibly better than the March quarter’s 17.3 per cent. The Ebitda per tonne, at $154, was better than the March quarter’s $144.

Ore issues easing
JSW aims to produce 8.5 mt of steel during FY13 and is targeting sales of nine mt, which is achievable. While procuring iron ore from e-auction is an ongoing process, the supply side is improving. After the Central Empowered Committee’s recommendations to the Supreme Court, seven category-A mines are to start production, with four expected to start operations in the next 15 days, followed by the remaining three. For category-B mines, the decision is likely by mid-August. Even assuming some delay in the start of category-B mines, analysts believe the start from category A will provide sufficient relief to JSW. Analysts at Motilal Oswal Securities (without taking into consideration the start of category-A and B mines) observe that given the “delivery of purchased iron ore in e-auction, (production) and outstanding inventories at mines, it may be able to support (JSW’s) production until March 2013”.

JSW SteelNear-term concerns
However, steel demand remains volatile. The rupee’s depreciation has helped Indian manufacturers see better realisations; the challenge is posed by imports. Trade agreements with some nations, such as Japan, Korea, Russia and Ukraine, is leading to higher imports due to the lower duty on steel from these countries. Around two mt from these countries came into India during the June quarter. The matter has been taken up by domestic manufacturers with the government.

Analysts at Motilal Oswal Securities believe Indian producers will have to resort to more aggressive pricing to prevent imports, as the domestic market is more lucrative as compared to exports. This poses a challenge, as lower construction activity in the September quarter leads to lower steel demand for long products (used in construction), while flat products (used in automobiles and consumer durables) are also not seeing very encouraging demand. Thus, the September quarter will remain challenging in terms of demand and pricing. Thereafter, steel demand might improve, with increase in construction activities and the festival season.

Subsidiaries: Mixed show
JSW’s Chile-based mines shipped 0.34 mt of iron ore. Thus, profits for these mines came at $5.3 million against a loss of $0.85 mn in the March quarter.

The US plate/pipe mill reported an Ebitda of $6.4 mn, up 74 per cent year-on-year. Utilisation levels for plates stood at 39 per cent against 44 per cent during the March quarter, while that for pipes was flat at 16 per cent.

JSW Ispat reported improvement in Ebitda on a sequential basis (Rs 449 crore in the June quarter versus Rs 291 crore in the March one). On the net level though, it reported a loss of Rs 149.6 crore.

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