JSW Steel: Lower costs, prices should boost margins in second half of FY23

Given fair value estimates of Rs 530 to Rs 610, investors need to be cautious about the company

JSW Steel, the integrated steel major, reported moderate July-September quarter (Q2) results. But the market response was positive with the stock rising 3.6 per cent over two sessions (Monday and Tuesday), which suggests the Street was expecting worse. The stock is up another 3.6 per cent Thursday.

The company reported steel sales volumes of 5.01 million tonnes (MT) in standalone operations, at earnings before interest, taxes, depreciation, and amortisation (EBITDA) per tonne of Rs 3,477. The consolidated topline was Rs 41,778 crore, up 29 per cent year-on-year (YoY), and up 10 per cent quarter-on-quarter (QoQ). The standalone EBITDA for Q2 was Rs 1,742 crore. Consolidated EBITDA was at Rs 1,752 crore, due to poor performance by subsidiaries. 

Key subsidiaries (US, Europe, Coated and BPSL) reported aggregated EBITDA loss of Rs 370 crore (versus EBITDA profit of Rs 3,500 crore in Q2, 2021-22 and Rs 840 crore in Q1, 2022-23). 

The standalone bottomline was a net loss of Rs 91 crore with consolidated net loss of Rs 915 crore.

On a QoQ basis, coking coal costs are likely to decline in Q3 and future, and this will boost EBITDA per tonne. In addition, iron ore costs should drop. Hence, in the second half, EBITDA per tonne could more than double from the first half and it could jump again, in 2023-24.

Sequentially, coking coal cost declined by $40 per tonne compared to Q1 FY23, said the management. The coking coal cost in Q2 was at $381 per tonne compared to $421 per tonne in Q1. A further decline of about $80 per tonne is expected for Q3.

Steel sales volume (standalone) were driven by improved domestic demand. Consolidated volumes were at 5.63 MT (up 30 per cent QoQ), of which 90 per cent was contributed by domestic sales (5.07 MT) and 10 per cent contributed by exports (0.56 MT). Export volumes fell by 62 per cent YoY and 37 per cent QoQ due to imposition of export duty in May 2022.

The company posted exceptional gains of Rs 591 crore, including Rs 335 crore net gain on sale of 70 per cent stake in Santa Fe Mining in Chile and Rs 256 crore of compensation against a claim of expenditure on de-allocated coal mine. There were exceptional losses from mark-to-market (MTM) on forex and inventory revaluation.

An 5 MTPA brownfield expansion project at Vijayanagar is progressing, with civil works underway. The project is expected to be completed by the end of 2023-24. Two downstream projects, Continuous Annealing Line (CAL) at Vasind and Tinplate Line-2 at Tarapur, were commissioned during Q2. Expansion of capacity at Bhushan Power and Steel (BPSL) to 3.5 MTPA was completed during Q2. A Phase-II expansion from 3.5 MTPA to 5 MTPA will be completed by 2023-24. The expansion projects should lead to a CAGR of 13 per cent in volumes over FY22-FY 25. The capex was Rs 2,900 crore during the quarter.

The consolidated debt to equity ratio was at 1.04x, compared to 0.98x at Q1. Net debt to EBITDA was at 2.7x compared to 2.03x at Q1. Net debt was at Rs 65,719 crore, lower than net debt of Rs 67,221 crore at Q1. 

Given that prices seem to be stabilising and cost should drop, second-half margins should see strong recoveries.

While there’s consensus about margin recovery, there’s a wide range of variations in the recommendations, and targets. Some analysts have “sell” recommendations based on high valuations. Others have “hold” and “buy”. Fair Value estimates range from Rs 530 to Rs 610. This implies investors need to be cautious given that the current price is well above fair value at over Rs 650.