JSW Steel: Forging ahead

Robust volume growth coupled with higher realisations helps boost Q4 profit.

Steel producers have been reeling under the pressure of high coking coal prices, after production in Australia’s mines was hit due to a cyclone in January.

With raw material prices rising, the market was not betting too much on earnings of steel producers without backward linkages. But JSW Steel has positively surprised the Street with its fourth quarter earnings.

Consolidated revenues grew 33 per cent year-on-year and 21 per cent sequentially to Rs 7,280 crore, as volumes jumped 9 per cent to 1.733 Mt. On the back of such strong demand, the company also managed to improve its realisations to Rs 41,000 a tonne.

This pushed up the fourth quarter earnings before interest, taxes, depreciation and amortisation (Ebitda) to Rs 1,660 crore, up 26 per cent y-o-y and 64 per cent sequentially.

Profit after tax was up 172 per cent sequentially to Rs 794 crore. Ebitda per tonne also improved sharply by $70 q-o-q to $210 against estimates of $175 a tonne. Compare this with SAIL’s Ebitda per tonne of Rs 7,000. This indicates operational efficiency of the company, says Bhavesh Chauhan, analyst at Angel Broking.

Since the company has managed to increase realisations in the fourth quarter and enjoyed the benefit of a low-cost coal inventory, analysts believe margins will come under pressure as high coal prices will start reflecting in the bottom line from this quarter. On the back of rising raw material pressures, analysts are expecting operating margins to come down from 23.5 per cent to 17 per cent in the first two quarters of this financial.

The company has been steadily increasing its capacity over the last few years. From 3.2 Mt in 2007, the company’s capacity has jumped to 11 mt. As India is a net importer of steel, this augurs well for the company, believe analysts.

According to Motilal Oswal, steel sales are likely to increase 40 per cent annually to 8.55 Mt as against the guided 9 Mt.

“We model margins of $152/tonne, as coking coal cost is expected to increase and there will be some pricing pressure due to supply growth in India. Iron ore cost is expected to decline marginally due to increase in export duty.” Given that the stock has fallen over the last few months analysts believe there is value in the stock.