Strong Q2, healthy prospects: Stock may be pricing in near-term positives

JSW Steel’s results for the July-September quarter (Q2) of FY24 was a significant Street beat. Consolidated net sales grew about 7 per cent year-on-year (Y-o-Y) and about 5 per cent quarter-on-quarter (Q-o-Q) to Rs 43,800 crore. Earnings before interest, tax, depreciation, and amortisation (Ebitda) rose by 350 per cent Y-o-Y and about 12 per cent Q-o-Q to Rs 7,900 crore. Adjusted profit after tax (PAT) was at Rs 3,060 crore versus a loss of Rs 1,300 crore in Q2FY23 and PAT of Rs 2,300 crore in Q1FY24.

The completion of ongoing capex may increase steelmaking capacity to 37 million tonnes (mt) by FY25. Beyond that, JSW Steel aims to reach 50 mt capacity by FY31. The merger of JSW Ispat Special Products (JISPL) was completed on July 31 and JISPL was consolidated with JSW Steel’s financials from August 2023. The company opted for the new tax regime which led to a non-cash charge of Rs 890 crore for FY23 (treated as exceptional) and it also reported exceptional gains of Rs 590 crore on the merger of JISPL and Creixent Special Steels Ltd (CSSL).

Consolidated realisation fell about 3 per cent Y-o-Y and about 5 per cent Q-o-Q to Rs 69,139 per tonne. This was offset by strong volume growth and lower operating costs. Consolidated sales volume grew 10 per cent Y-o-Y and about 11 per cent Q-o-Q to 6.3 mt, leading to an inventory reduction of 0.3 mt due to a strong domestic demand, and an improved product mix. The Q2FY24 capacity utilisation for Indian operations stood at 89 per cent versus 92 per cent in Q1FY24. Operating cost fell about 17 per cent Y-o-Y and about 6 per cent Q-o-Q to Rs 57,883 per tonne, primarily due to lower coking coal costs. So, Ebitda per tonne improved by about 308 per cent Y-o-Y and about 1 per cent Q-o-Q to Rs 12,438 per tonne.

The management seems confident of a healthy domestic demand, and good utilisation to push volumes, while completion of capex should drive long-term volume growth. If coking coal and iron ore prices rise as expected, that would negatively impact margins but steel prices are expected to trend up to partly offset this. The company is expected to deliver 16 per cent compound annual growth rate in volume during FY23-26.

The guidance also includes the following estimates. JSW Steel will incur a capex of Rs 52,000 crore till FY26 to reach 37 mt capacity, but this is mostly to be funded by internal accruals. The consolidated capex for Q2FY24 stood at Rs 3,820 crore and the guidance for consolidated FY24 capex is at Rs 20,000 crore.

The company’s brownfield expansion at Vijayanagar is expected to be completed by the end of FY24. The benefits shall start flowing from Q4FY24. The averaged coking coal cost in Q2FY24 fell by $54 per tonne and is expected to rise by $30 in Q3FY24, while captive iron ore mining annual capacity is likely to increase to 16 mt from the current 7 mt in Karnataka by FY26. The FY24 production & sales guidance is at 26.34 mt and 25 mt, respectively.

There is an opportunity to gain market share in FY25, as peers do not have much spare capacity. Incremental capacity is largely brownfield, which will mean higher return on equity. Significant cash flows from higher volumes will rein in debt.

The stock lost ground in a weak market on Monday. According to Bloomberg, seven each of 23 analysts polled after results have a ‘buy/add/accumulate’ and ‘sell/reduce/underperform’ ratings; the rest have ‘neutral/hold’. Their average target price is Rs 783 a share, indicating about 5 per cent upside from the current level.