JSW Steel: Weak Q1 still ahead of expectations

GST-led destocking and steel price correction weighed on performance, but better product mix helped

JSW Steel’s June quarter (Q1) performance may have been impacted by destocking prior to implementation of the goods and services tax (GST) and rising raw material costs, but it was still ahead of Street expectations. With this, the stock closed 0.7 per cent higher at Rs 223 on Tuesday. 

In Q1, sales volume at 3.51 million tonnes (mt) could grow just five per cent year-on-year (y-o-y) as across the industry, players resorted to destocking, especially long products, and cautious approach on inventories by customers impacted domestic volumes. The company, however, remained focused on enhancing product mix, which helped sales of value-added and special products grow 12 per cent y-o-y. The company’s facilities having proximity to ports provide it flexibility to adjust the mix of exports and domestic volumes, according to the pricing environment. JSW’s exports also increased 26 per cent y-o-y. On realisations, the quarter was expected to be soft sequentially, as both domestic and international prices have corrected recently. But, as JSW managed to increase the contribution of the coated product mix from 28 to 32 per cent, blended realisations were stable. This helped the company’s Ebitda (earnings before interest, taxes, depreciation and amortisation) come in at Rs 2,617 crore beating consensus estimates of Rs 2,431 crore.

Rising cost of inputs such as coal and iron ore led to a 55 per cent y-o-y jump in raw material costs, while power and fuel costs also surged 24 per cent. Thus, reported Ebitda was lower than Rs 3,269 crore in the year-ago quarter and Rs 3,165 crore in the March quarter. While costs didn’t rise much on a sequential basis, declining sales was the pain point. With this, net profit at Rs 624 crore also declined 44 per cent y-o-y and 39 per cent sequentially, but was still better than Rs 613 crore indicated by Bloomberg, led by better operating performance. 

Consolidated sales at Rs 15,757 crore were up 23.7 per cent y-o-y (down 10 per cent sequentially) and was higher than estimates of Rs 14,109 crore.

Moving forward, with international steel prices up by about $50 tonne, domestic prices are also picking up after correcting in the June quarter. On the cost front, with NMDC reducing iron ore prices by about Rs 200 a tonne from July, benefits should accrue. Coal prices, which had surged crossing $300 a tonne levels by the end of the March quarter, have come down significantly in June, which again is positive. With increasing public sector spending, steel sector demand is to grow five per cent y-o-y, benefitting players such as JSW, which is on course with regard to capacity expansion. In all, while prospects look healthy, stock valuations are also reasonable.

Credit Suisse on Tuesday gave an outperform rating to JSW Steel, saying the stock trades at enterprise value (EV) of $810-890/tonne (within the $800-1,000/tonne replacement cost benchmark). On an EV/Ebitda basis, at 6.8x FY18 Ebitda, they believe JSW’s valuations are reasonable and would re-rate as domestic prices improve.