JSW Steel reports squeeze in margins

The un-precedented rise in input cost viz. iron ore by 68% and coke 66% has exerted tremendous pressure on the EBIDTA margins of the Company. However, in absolute terms, the Company has shown increase in EBIDTA, cash profit and net profit mainly on account of volume growth and efficiency in operations.

Operational Performance

The significant volume growth during Q4 and financial year ended March 2008 is due to:

The stabilization of brown field expansion from 2.5 MTPA to 3.8 MTPA.

The stabilization of modernized Hot Strip mill from 2 MTPA to 2.5 MTPA.

Commissioning of 1 MTPA of CRM complex enhancing the product mix.

Capacity addition coming from acquisition of SISCOL (1 MTPA long product capacity) pursuant to a Scheme of Amalgamation.

The cost reduction initiatives resulted in to lower power consumption by 4.5%, lower fuel consumption in Corex by 1.2%, lower fluxes consumption by 21% and higher LD gas recovery by 67%. In spite such cost reduction and efficiencies along with an increase of 8% in blended realization, the margins dropped substantially due to surging input costs namely, Coke, Iron ore, Coking coal, Ferro alloys and transportation cost.

Financial Performance

The net sales for the year ended 31.3.2008 stood at Rs.11,420 crores showing a growth of 33% over previous year. The increase in net sales is accounted by a growth of 27% in the volume of saleable steel and higher blended sales realization of 8%. The Company could not maintain its margins in spite of impressive growth in volume and higher realization as the cost of production has in fact gone up by 16%. This led to a drop of 2.66% in the EBIDTA margin which stood at 30.93% for the year ended March 2008. The Company has a net foreign exchange gain of Rs.104.89 crores for the year ended March 2008 after netting out the foreign exchange losses of Rs.92.99 crores in Q4 FY 2007-08 arising mainly on account of translation of outstanding foreign currency liabilities.

As the Company has advanced the commissioning of its brown field expansion from 3.8 MTPA to 6.8 MTPA by almost 6 months ahead of schedule (scheduled date of commissioning 31ST march 2009), the Company has drawn additional loans to meet the accelerated capex programme. This resulted into a higher debt gearing of 0.93 as against 0.75 as on 31.3.2007. The weighted average cost of debt was at 7.34%.

The Company has reported a consolidated turn over, EBIDTA and net profit of Rs.13,665.56 crores, Rs.3,739.59 crores & Rs.1,640.04 crores respectively after incorporating the financials of subsidiaries, joint ventures and associates. The net profit for the consolidated Company is lower at Rs.1,640 crores compared to Rs.1,728 crores in the stand alone Company mainly due to netting off un realized profits attributable to inventory related to inter Company sales. The consolidated debt gearing was at 1.49 considering the loans raised by the Company for acquiring Mining rights in Chile and Plate and pipe mill in USA.

Value Accretive initiatives

A) Volume:

Brown field expansion from 3.8 MTPA to 6.8 MTPA to be completed by September 2008 (6 months ahead of schedule).

Commissioning further capacity expansion to 10 MTPA from 6.8 MTPA by March 2010 (once again 6 months ahead of schedule).

B) Product Mix Enrichment :

Commissioning of 2nd colour coating line with 0.1 MTPA by September 2008.

Conversion of two Galvalnising lines at Tarapur to Galvalume in fiscal 2008-09.

Setting up new Blooming mill at Salem works in fiscal 2008-09 increasing the capacity of rolled products from 0.45 MTPA to 0.9 MTPA.

Modernization of HSM - I from 2.5 MTPA to 3.2 MTPA in FY 2008-09.

Commissioning of new Hot strip mill with 3.5 MTPA capacity (Phase