JSW Steel: Better placed in weak environment

But low realisations, weak global steel prices will keep near-term gains in check

At a time when all domestic metal players are under pressure, JSW Steel continues to show resilience on the bourses. The stock hit a 52-week high of Rs 1,126 on January 27 before results, and has outperformed its peers and Sensex in the last three-, six-, and 12-month periods. Though December quarter numbers did not impress the Street and the stock now trades at Rs 1,050, the results were hit by plant shutdowns.

While the outlook for the sector remains bleak, JSW has done better than peers, aided by low commodity prices. Dependence on external iron ore and coal allows the firm to benefit from low input prices as compared to integrated peers. Also, except the December quarter, JSW's volumes have grown at a strong pace. The planned capacity expansions, which curtailed volumes in the December quarter, will continue driving volume growth (but at a slower pace given the cut in forecast by management) with further gains coming from value-added products.

Lower global steel prices are weighing on its global operations. Though it accounts for a very small share, it still means a drag on consolidated numbers. JSW took an impairment of Rs 5,597 crore in the December quarter on its investment, loans, and advances to foreign units. Of this, Rs 3,440 crore pertains to US plate-and-pipe mill that continues to incur losses soon after JSW purchased it in FY08 at an enterprise value of $810 million, due to the deteriorating global scenario. Analysts at Reliance Securities say neither of its foreign units is expected to be profitable, given the global scenario, high cost structure, and strategic/technological disadvantage.

Realisations in India will remain under check due to weak global prices. The government has also recently imposed minimum import price on steel imports for six months that can benefit JSW having strong presence in trade segment. But soft realisations can still hit future earnings and imports can still continue posing threats. Analysts at Prabhudas Lilladher, after results, had revised Ebitda/EPS estimates downward for FY17 by 13 per cent and 31 per cent due to lower realisations. They say JSW delivered an impressive show on the cost front, despite low scale on account of shutdowns undertaken for expansion, and had 'accumulate' rating on JSW as they believe it is better placed than peers. Analysts at Elara Capital, who have also cut FY16 and FY17 Ebitda estimates six to nine per cent, believe JSW should deliver better performance in Q4FY16, driven by higher volumes and lower raw material costs, partly offset by lower steel prices.