JSW Steel shares hit a new high after better-than-expected Q4 performance

Analysts up estimates as they see strong pricing outlook, softening input prices, higher share of value-added products and cost control to drive earnings

JSW Steel shares hit a new high on Thursday after the company reported better-than-expected March quarter (Q4) performance on Wednesday after market hours. Though the stock ended 1.3 per cent lower because of the weak markets and profit-booking in the counter following the recent rally, the company’s outlook remains strong.

Improving domestic steel realisations and demand continues to benefit steel players, many of whom are also gaining from capacity expansions. JSW Steel, which reported its highest-ever crude steel production and saleable volume at 4.31 million tonnes (mt) and 4.22 mt, up 5 and 7 per cent year-on-year (y-o-y), respectively, during Q4, also saw its Ebitda (earnings before interest, taxes, depreciation and amortisation) per tonne in standalone operations increase to Rs 11,950 from Rs 9,000 in Q3FY18. The latter was driven by a 17.1 per cent y-o-y and 12.6 per cent sequential increase in realisation, as well as better operating efficiencies. Even its subsidiaries did well and aided by the operational turnaround of its US-based plate and pipe mill and the coated products division (17 per cent y-o-y surge in Ebitda per tonne at Rs 4,298), JSW’s consolidated net profit at Rs 28.79 billion beat Bloomberg consensus expectations of Rs 18.34 billion.

Moving forward, the outlook for steel demand as well as pricing in the country remains strong. What’s more, since JSW outsources raw materials such as coal and iron ore, their softening prices should also drive profitability. Improving share of value-added products (sales up 14 per cent y-o-y in Q4) is another important driver.

After measures to improve profitability, JSW is also eyeing its next phase of growth to drive volumes. Its latest expansion plans are to increase its steel capacity from 18 mt to 24.7 mt (earlier plans of 23 mt). The capex increase by Rs 176 billion to Rs 444 billion includes plans to increase the share of value-added products, reduce costs and improve raw material integration by FY20-21. All these should keep earnings ticking in the long run.

For now, analysts at Motilal Oswal Securities have raised their consolidated Ebitda and profit estimates for FY19 and FY20 by 10 per cent and 27 per cent, respectively, on higher steel spreads. They say JSW Steel deserves a higher valuation multiple for its most efficient operations, capital expenditure, lower volatility in margins and aggressive growth. 

However, given the recent rally, investors could await corrections for a better entry point.