JSW Steel: Strong operational performance lifts future prospects

Rising volumes, higher realisations, better product and geography mix to drive earnings

JSW Steel's (JSW) better-than-expected performance for the September quarter (Q2) instils confidence in its prospects. The steel major not only posted 9.6 per cent year-on-year (63.5 per cent sequentially) growth in the consolidated revenue to Rs 19,264 crore, led by improving volumes and realisations, but its operational performance also beat estimates. An improving business outlook is keeping many analysts positive on the stock, but the Street will keep an eye on debt levels.

While sales volumes of its Indian operations grew 14 per cent year-on-year to 4.12 million tonne (MT) (47 per cent sequentially) in Q2, rising domestic demand meant reduced exports. The share of exports was 28 per cent of overall sales, compared to 57 per cent in Q1FY21. Exports typically command lower margins and hence, lower exports benefitted operating performance. Further positive accrued from rising volumes of value-added and special steel (51 per cent of total sales), propelled by an increase in sales to the auto and coated products segments, which were up 33 per cent and 29 per cent year-on-year, respectively.

Thus, consolidated Ebitda (earnings before interest, tax, depreciation, and amortisation) grew 88 per cent year-on-year to Rs 4,253 crore. Ebitda per tonne for domestic operations at Rs 10,136 beat estimates. Motilal Oswal Securities (MOSL) had pegged it at Rs 8,754.

Analysts say the operational beat was led by the rebound in realisations, lower production cost (down by 5 per cent sequentially) given operating leverage, and lower coal prices — partially offset by higher iron ore prices. The adjusted net profit at Rs 1,492 crore, too, was much better than Rs 81 crore a year ago.

The road ahead

JSW will continue benefiting from rising steel demand and prices. After hikes, hot-rolled coil prices in October are at the highest level since December 2018. The revision in contractual steel prices for the auto sector from October should further boost profitability and so should JSW's geography mix.

Analysts also expect better realisations to mitigate rising prices of inputs, such as iron ore. Meanwhile, JSW is working on increasing captive iron ore supplies. In Karnataka, it commenced production from two of the three newly acquired mines from September 25, 2020. It had also acquired some mining blocks in the February auctions held by the Odisha government. JSW said that dispatches from captive mines in Q2 constituted 27 per cent of iron ore requirements.

Analysts at MOSL expect margins to remain strong led by higher steel prices, commissioning of cost-saving projects and better product mix, and have raised FY21 and FY22 Ebitda estimates by 25 per cent and 5 per cent, respectively. This should also keep debt in check in the interim.

JSW’s consolidated net debt-equity was 1.43x at the end of Q2, down from 1.54x in the June quarter. The company also expects to achieve its annual guidance of 15 MT of saleable steel and expansions are on track. Sharekhan expects volume growth from expanded Dolvi plant to drive 27 per cent annual growth in earnings during FY20-FY23.

Meanwhile, all eyes are on the progress over the acquisition of Bhushan Power and Steel's (BPSL) assets and Asian Colour Coated Ispat (ACCIL). 

The BPSL matter is listed for hearing on November 3 and JSW will need pay Rs 19,700 crore for this acquisition. Also, JSW’s resolution plan for ACCIL was accepted by the NCLT in October and a written order from the NCLT is awaited. 

Though inorganic growth plans bode well and will enhance capacities at a time when the steel cycle is turning positive, it will add to the debt, which is why some analysts are cautious. 

Those at Emkay Global have also raised their FY21 Ebitda estimate by 29 per cent, but say that high leverage with impending BPSL acquisition remains a concern.

Shares of JSW Steel fell 4 per cent on Monday. The results were announced on Friday, after market hours. The correction can be attributed to the stock's strong 24 per cent rally in the past month (until Friday). Corrections may provide a good entry, say analysts.