JSW Steel: Ahead of estimates in Q2 despite cost pressures; stock up 0.4%

Expansions, acquisitions and backward integration to drive future earnings

JSW Steel’s better than expected performance in seasonally weak quarter and amid cost pressures lifted street sentiment. On a day when markets were down by a per cent, JSW’s stock closed 0.4 per cent higher. What’s more, the outlook remains healthy.

Even though construction activities remained soft during the September 2018 quarter (Q2) impacted by monsoon, the company’s steel sales grew a per cent year-on-year and three per cent sequentially to 3.96 million tonne (MT). Despite some softness in prices of long steel, which is used in construction (down about 5 per cent sequentially) and flat products (used for manufacturing white goods and automobiles) prices being stable, gross sales at Rs 208.9 billion (up 23.5 per cent year-on-year) beat analysts’ estimates of Rs 203.9 billion, thanks to a weak rupee and better realisations.

Beating street’s concerns over rising input prices (such as coal, iron ore, crude oil), consolidated operating profit jumped 62 per cent year-on-year to Rs 49.06 billion. This drove net profit growth of 150 per cent to Rs 20.87 billion, ahead of Bloomberg consensus estimates of Rs 20.25 billion. In fact, in the past three of four quarters, JSW has clocked over 100 per cent increase in profits.

 

Given it’s plans to expand and acquire steel assets, as well as backward integration initiatives to boost operating performance, future prospects remain firm. For instance, the operational efficiencies aided by conveyor belt at its key Vijaynagar plant and iron ore sourcing from captive mines should drive profitability moving forward. Similarly, doubling of Dolvi plant capacity to 10.7 MT per annum, expansion at Vijaynagar (third blast furnace by 1.5 MT) by March 2020, turnaround of acquired Monnet Ispat and recent international acquisitions (US and Italy) should also add to earnings.

The healthy steel demand and realisation outlook provides further confidence. Long product prices have already bounced from subdued August levels, while flat products prices, which were hiked by Rs 500-1,000 a tonne in September, are seen trending higher. The rupee depreciation and government’s measures are helping control cheap imports into India. Notably, Q2 finished steel consumption grew by 6.8 per cent, and World Steel Association has also upped India's steel demand growth estimate for CY2018 to 7.5 per cent from 5.5 per cent on strong demand.

Not surprising then, JSW figures among top picks of brokerages. While Motilal Oswal Securities has a target price Rs 447, Edelweiss recently raise its target to Rs 433 considering the impending earnings opportunities.