JSW Steel strong show in seasonally weak times

Cost pressure will stay but volume growth expected to remain strong

With strong growth of 22 per cent in crude steel production and 20 per cent in sales by JSW Steel for the quarter ending September, the stage was set for a robust financial performance. Sales at Rs 14,180 crore grew 19.8 per cent over a year and 11.4 per cent sequentially, beating the Bloomberg consensus estimate of Rs 12,771 crore by a good margin.

“The quarter was marked by ramping up and stabilisation of facilities at the Dolvi and Vijayanagar plants, which led to higher crude steel production,” said Seshagiri Rao, joint managing director.

Further benefits from the effort on value-added products and exports provided a boost in a seasonally soft quarter wherein demand was benign and realisations declined from the earlier quarter.

Of the revenue, 26 per cent came from exports. The company focused on raising the sales of value-added and special products, which grew 20 per cent; branded steel product sales grew 11 per cent, year-on-year. Operating profit at Rs 2,959 crore also grew well from Rs 1,793 crore a year before, though marginally lower than the Rs 2,989 crore estimated by analysts polled by Bloomberg.

Given the year-ago quarter’s low base, wherein net profit stood at Rs 56.3 crore, higher volumes and better prices (over a year) saw net profit jump multifold to Rs 726 crore. With other income falling and tax expenses rising faster than Street expectations, and higher depreciation, this was lower than the Bloomberg consensus estimate of Rs 852 crore. For instance, Motilal Oswal Securities analysts had estimated other income of Rs 81 crore and tax expenses of Rs 380 crore; these were Rs 30 crore and Rs 470 crore, respectively. So, the miss was largely due to non-operational issues.

The stock closed two per cent lower at Rs 1,636 on Thursday; the results were declared after market hours. The company also announced a stock split, wherein shareholders will get 10 shares of Re 1 each for every share of Rs 10 held currently.

The stock, after a high of Rs 1,863 last month, has cooled with softer realisations from the June quarter and rising coal prices. Nevertheless, JSW remains the preferred pick of analysts in the ferrous space, even as cost pressures are likely to remain, since the company relies on imported coal and external iron ore, prices of which are rising. After the June quarter results, the management had said raw material prices looked stiff.

Comfort for the Street comes from the strong profitability, among the highest in the industry. For the September quarter, per-tonne operating earnings (consolidated) were 31 per cent higher over a year; sequentially, down 21 per cent.

Thus, improving steel demand and realisation hold the key to a profitability boost. The company's newer capacities are more cost-efficient. Though steel demand in the first half did not pick up as anticipated, experts anticipate an improvement during the second half.

Analysts at HSBC, in early October, had said their revised growth estimate still implied steel demand would continue to grow strongly at 7.5 per cent (as seen in September) for the second half of FY17.

The company is also working on securing captive iron ore mines. It was declared a 'preferred bidder' for five mines recently auctioned in Karnataka. With estimated resources at 111 million tonnes, the company plans to make two mines operational by March and the other three in the following year.

“Once our mines become operational, our Vijayanagar plant will stop relying on imported ore and will source the entire iron ore quantity from Karnataka itself,” said Rao.

All these are positives. Analysts at Motilal Oswal, who maintain JSW Steel as their top pick in the ferrous spacem had said JSW was likely to benefit from counter-cyclical low-cost capacity expansion. The company is set to accelerate volumes at a compounded annual rate of 17 per cent (to 15.8 million tonnes yearly) over FY16-18.