JSW Steel: Strong quarter

A surge in realisations and higher volumes boosted the company’s profitability.

Higher realisations from steel and robust volumes in the domestic business were among the key factors that helped JSW Steel report a strong consolidated performance in the March 2010 quarter, which was also ahead of the Street’s expectations. While sales volumes surged 43 per cent to 1.52 million tonnes, realisations rose 12 per cent year-on-year (y-o-y) to about Rs 32,000 a tonne. After many quarters of losses, JSW’s US-based steel pipe and plate mill also turned around, reporting an operating profit of $2.3 million. Higher capacity utilisation was among factors responsible for the improved performance of its US subsidiary.

At the operating level, JSW’s cost per tonne fell almost 10 per cent y-o-y, resulting in robust profitability. The company ended the March 2010 quarter with a 55 per cent jump in consolidated net sales at Rs 5,844 crore, while operating profit margins surged to 24.15 per cent as compared to 6.5 per cent in the March 2009 quarter. At the net level, consolidated profit stood at Rs 612 crore, as against a loss of nearly Rs 40 crore during the year-ago period.

Going ahead, JSW expects sales volume growth of 18 per cent in 2010-11. Analysts expect its operating profit margins to improve further, helped by the commissioning of its 3.5-million-tonne-per-annum (mtpa) hot strip mill in April 2010, which will help produce value-added products from semi-steel, as well as firm realisations. Likewise, higher capacity utilisation at its US plant is also seen aiding margin expansion of its subsidiary.

JSW soon expects to close the acquisition of US-based coking coal mines (estimated reserves of 123 mtpa) at an estimated cost of $100 million. While one mine is already operational, the company hopes to ramp up production to one mtpa in the first year and to three mtpa in three years. This should help improve coke availability, while cushioning margins to some extent.

JSW is also expanding its steel capacity to 10 mtpa from the current 7.8 mtpa, which should help sustain volume growth in future. The company is also making a preferential equity issue of Rs 2,100 crore to promoters, which coupled with internal accruals of over Rs 2,000 crore, should take care of its medium-term funding needs.

Led by improving global economic outlook, as well as higher volumes and better margins for JSW, analysts are bullish on the company’s prospects. However, at Rs 1,143, JSW’s stock is trading at 11 times its estimated 2010-11 earnings per share, which is not cheap.