JSW Steel: Good show in a tough environment

Operations aided by lower raw material costs and change in geographic and product mix

In a quarter where blended steel realisations were 21 per cent lower year-on-year (y-o-y), JSW Steel still managed to beat the Street's expectations in terms of operating performance. Being a non-integrated player, plummeting basic raw material prices helped the company. Thus, JSW Steel benefitted from lower iron ore and coking coal prices, offsetting the decline in realisations.

Its consolidated Ebitda (earnings before interest, tax, depreciation and amortisation) at Rs 1,729 crore was ahead of Bloomberg consensus estimates of Rs 1,540 crore.

While, on the one hand, the company's consolidated expenses came down by almost 17.5 per cent, helped by 36 per cent decline in material costs, its saleable steel volumes too increased four per cent y-o-y to 3.19 million tonnes (mt). This is remarkable given the soft steel demand scenario and increased inflow of imported steel as international prices have dipped. The company has adapted well by changing its marketing mix. In the year-ago quarter, JSW was exporting 26 per cent of its output which now stands at 10 per cent. The focus is on domestic sales which increased 22 per cent y-o-y to 2.82 mt. This has been helped by increased retail penetration as retail sales increased 80 per cent y-o-y.

With a change in strategy, it has also been able to beat analysts' estimates on the realisation front. Rahul Dholam at Angel Broking says steel realisation per tonne was ahead of expectations (Rs 34,413 per tonne versus his expectation of Rs 32,467 per tonne).

While the company has been steering the ship well, the environment, however, remains challenging for steel companies. Steel realisations remain the key and experts don't see too much relief on that front. Even the recent imposition of 20 per cent safeguard duty has come as a limited relief from imports though it helped steel companies raise prices by Rs 500-700 a tonne in October.

Analysts at Motilal Oswal Securities say imports are still finding their way either as downstream products or disguised as higher grade products (on which the safeguard duty is not applicable).

Further, analysts at Jefferies say they expect multiple factors to weigh in on steel prices such as benign iron ore outlook - a key steel price driver, falling costs at Chinese steel mills, slowing Chinese steel demand and high exports from China and Russia. However, they maintain their positive stance on JSW Steel with a target price of Rs 1,116 (current price at Rs 905), as JSW is a low-cost converter and should gain from improving iron ore availability. Consensus target price as per analysts polled by Bloomberg, however, stands at Rs 968.