JSW Steel: Robust earnings on improved efficiency

Ebitda per tonne jumps to Rs 8,545 in Q1; company expects further benefit in Q2 and Q3

Even as steel demand continues to remain tepid in India and iron ore in short supply, steel producer JSW Steel has reported a sharp jump in earnings before interest, tax, depreciation and amortisation (Ebitda) per tonne of steel produced. In the first quarter, JSW Steel reported an Ebitda per tonne of Rs 8,545, against Rs 8,053 in the previous quarter, and Rs 6,859 in the year-ago period. The firm's exports surged 121 per cent year-on-year (y-o-y), while high-margin automobile sales grew 37 per cent. Driven by higher volumes, the standalone business' operating income rose 41 per cent, y-o-y, to Rs 2,461 crore.

JSW Steel has been reporting a steady increase in Ebitda per tonne since the first quarter of FY14, as benefits are flowing in from measures taken to cut costs and improve margins. Analysts believe the sharp delta in earnings is due to lower coking coal prices and improvement in output from ISPAT.

In 2012, the firm decided to set up a coke oven and a pellet plant. Both these measures have substantially lowered fuel costs and improved the profitability. Goutam Chakraborty, analyst at Emkay Global, says: "JSW Steel's Ebitda/tonne has been improving due to improved efficiencies and higher proportion of value-added products, despite higher iron ore prices. The coke oven battery has started contributing in reducing costs. The firm has set up a pellet unit also, which would help save costs further."Sheshagiri Rao, joint managing director and group chief financial officer at JSW Steel, says: "The full benefit of the coke battery and pellet plants will be felt in the second and third quarters, as 47 per cent of coke capacity and 76 per cent of pellet could be used in the first quarter."

The company is also diversifying into value-added products and intends to dedicate 33 per cent of its 14.3-million tonne capacity towards value-added products. The share of value-added steel has already gone up to 29 per cent in Q1 of FY15 from 25 per cent in the year-ago period. Rao says the company is looking at another four per cent increase in this share will give the top line and bottom line a boost. The company has sold 2.88 million tonnes of steel during the quarter and analysts believe it will meet its volume FY15's volume guidance of 12-million tonne.

The company has also started importing high-grade iron ore , as it is cheaper than domestic ore. Given the sweet spot the company is in, analysts believe upgrades are likely.