Made of steel: JSPL's earnings may head north on rising production

The June quarter witnessed subdued steel demand and realisations for the sector, and concerns over the monsoon season impacting construction activity and consequently volumes, in the September quarter, now prevail.

Therefore, the 16 per cent growth in sales volume reported by Jindal Steel and Power (JSPL) for the June quarter — amid concerns over near-term demand and profitability — provides confidence. 

JSPL, however, seems to be an exception, and continues to benefit from its expanded capacities at Angul (Odisha), which are contributing to production and sales growth. Analysts feel the management’s guidance of 6.5 million tonnes (mt) of domestic production during FY20 seems achievable, and the operating leverage may drive profit growth.

The company’s June quarter volume growth is seen much ahead of estimated growth for larger peers such as Tata Steel and JSW Steel. 

Analysts at Kotak Institutional Equities estimate 0-1 per cent year-on-year volume growth for JSW Steel and Tata Steel’s India business for the June quarter, given capacity constraints.

Further, the blast furnace at JSPL’s Angul plant clocked its highest-ever single-day hot metal production of 10,845 tonnes on July 2. The firm highlighted this was the highest ever output by any blast furnace in India.

While all this bodes well for the company’s prospects, all eyes are on profit growth. The Street remains cautious, given realisations have remained subdued while costs have been on the rise for steel players. Analysts say attempts to hike prices in June failed on account of weak demand. 

On the pricing front, iron ore prices continued their northward journey even as coal prices softened a bit.

For JSPL, nevertheless, analysts feel that the rising volumes will drive earnings during these challenging times. The operational leverage is likely to play out despite higher raw material costs. 

Analysts at Edelweiss say that after the ramp-up of its blast furnace, operating cost may reduce by Rs 1,000 per tonne, while Ebitda/tonne (standalone) estimates during Q1 are likely to be met. 

Analysts at a foreign brokerage also say JSPL is on track to deliver cost savings as well as to repay Rs 4,000-5,000 crore of debt from cash flows in FY20. Not surprising then, that JSPL remains among the  top picks of ICICI Securities and IDFC Capital in the metals space.