 "JSW Steel gives a steely performance")
JSW Steel’s December quarter performance was good and ahead of expectation by a huge margin. Consolidated net sales at Rs 13,383 crore were higher than Bloomberg estimates of Rs 12,558 crore, while Ebitda at Rs 2,409 crore also beat estimates of Rs 2,330 crore. While net profit at Rs 466 crore came in below expectations of Rs 583 crore, it was largely due to adjustments on account of merger with JSW Ispat. Thus, the stock closed 1.6 per cent up at Rs 930 on Tuesday.
This performance is remarkable looking at the fact that JSW’s operations are not backward integrated in terms of basic raw material like coal and iron ore. While it is dependent on imported coal to meet its energy requirements, the company has been grappling with iron ore availability issues in Karnataka for quite a while due to mining curbs. However, the company’s ability to export a substantial portion of its steel output has acted as a natural hedge as well as boosted its overall revenues and profitability. Analysts remain positive on the company’s outlook. However, given the average target price of Rs 912 (of analysts who have a recommendation since January 2014), the near-term upside is capped.
In the quarter ended December, JSW’s exports touched one-million-tonne (mt) mark, which was 60 per cent of India’s overall steel exports and accounted for 32.4 per cent of the company’s steel sales of 3.08 mt (up 42 per cent year-on-year). Vinod Nowal, deputy managing director of JSW Steel, said they are looking at increasing exports, especially the value-added products to developed markets to boost profitability.
With company’s sales volumes for the first nine months of FY14 at 9.03 mt, it is also likely to beat its sales guidance of 11.55 mt for the year.
JSW’s standalone performance was better than consolidated numbers considering that JSW Ispat (merged with JSW effective June 1, 2013) is yet to turn around. Bhavesh Chauhan at Angel Broking says standalone sales at Rs 11,731 crore and net profit at Rs 652 crore beat his sales and profit estimates of Rs 11,358 crore and Rs 618 crore, respectively.
However, the work on turning around JSW Ispat’s operations is on and its Dolvi unit (currently operating at 87-88 per cent utilisation) will become more profitable after the pallet and coke oven plants are commissioned.
JSW’s largest unit at Vijaynagar in Karnataka, however, is running at 83 per cent capacity utilisation. The iron ore availability situation in Karnataka still remains challenging. While the overall availability in the state has improved to 18 mt, steel industries’ requirement in the state is close to 30 mt. JSW, to meet its requirement, still depends on supplies from outside the state to the extent of 20-25 per cent. Landed blended coal costs for JSW are about $160-165 a tonne and likely to remain at similar levels during the March quarter, too, believes the management.
The company remains upbeat on steel demand scenario, especially from emerging markets. While Rao said that with Chinese steel production declining, exports from emerging markets should pick up during FY15. By then inflation would also be under control, interest rate cycle will reverse and clearances of many projects by government will have a positive bearing on India’s steel demand, says Rao. JSW Steel, on Monday, also increased prices by up to Rs 1,200 a tonne, or up to two per cent, across the board for February, its second increase in a month, which should support profitability.
Goldman Sachs’ December report, too, reiterates similar views. They observe that with pollution control measures in China reducing gross capacity by eight per cent by CY17 (from CY13) they expect China’s net exports to peak in CY13 at 52 mt, then decline by 11 mt by CY15. This should benefit Indian companies as Indian hot-rolled coil (HRC) prices (which trade on import parity) are likely to rise as import pressure reduces. In the Indian steel space, they prefer JSW Steel as its major capex phase is behind and is set to generate free cash flows in FY15.
However, some others remain cautious. Chauhan at Angel Broking observes that with slower than expected ramp up of iron ore mining in Karnataka, we believe increasing steel production meaningfully during FY15 would remain a challenge. Moreover, valuations are expensive at five times FY15 enterprise value/Ebitda.
This performance is remarkable looking at the fact that JSW’s operations are not backward integrated in terms of basic raw material like coal and iron ore. While it is dependent on imported coal to meet its energy requirements, the company has been grappling with iron ore availability issues in Karnataka for quite a while due to mining curbs. However, the company’s ability to export a substantial portion of its steel output has acted as a natural hedge as well as boosted its overall revenues and profitability. Analysts remain positive on the company’s outlook. However, given the average target price of Rs 912 (of analysts who have a recommendation since January 2014), the near-term upside is capped.
In the quarter ended December, JSW’s exports touched one-million-tonne (mt) mark, which was 60 per cent of India’s overall steel exports and accounted for 32.4 per cent of the company’s steel sales of 3.08 mt (up 42 per cent year-on-year). Vinod Nowal, deputy managing director of JSW Steel, said they are looking at increasing exports, especially the value-added products to developed markets to boost profitability.
With company’s sales volumes for the first nine months of FY14 at 9.03 mt, it is also likely to beat its sales guidance of 11.55 mt for the year.
JSW’s standalone performance was better than consolidated numbers considering that JSW Ispat (merged with JSW effective June 1, 2013) is yet to turn around. Bhavesh Chauhan at Angel Broking says standalone sales at Rs 11,731 crore and net profit at Rs 652 crore beat his sales and profit estimates of Rs 11,358 crore and Rs 618 crore, respectively.
However, the work on turning around JSW Ispat’s operations is on and its Dolvi unit (currently operating at 87-88 per cent utilisation) will become more profitable after the pallet and coke oven plants are commissioned.
JSW’s largest unit at Vijaynagar in Karnataka, however, is running at 83 per cent capacity utilisation. The iron ore availability situation in Karnataka still remains challenging. While the overall availability in the state has improved to 18 mt, steel industries’ requirement in the state is close to 30 mt. JSW, to meet its requirement, still depends on supplies from outside the state to the extent of 20-25 per cent. Landed blended coal costs for JSW are about $160-165 a tonne and likely to remain at similar levels during the March quarter, too, believes the management.
The company remains upbeat on steel demand scenario, especially from emerging markets. While Rao said that with Chinese steel production declining, exports from emerging markets should pick up during FY15. By then inflation would also be under control, interest rate cycle will reverse and clearances of many projects by government will have a positive bearing on India’s steel demand, says Rao. JSW Steel, on Monday, also increased prices by up to Rs 1,200 a tonne, or up to two per cent, across the board for February, its second increase in a month, which should support profitability.
Goldman Sachs’ December report, too, reiterates similar views. They observe that with pollution control measures in China reducing gross capacity by eight per cent by CY17 (from CY13) they expect China’s net exports to peak in CY13 at 52 mt, then decline by 11 mt by CY15. This should benefit Indian companies as Indian hot-rolled coil (HRC) prices (which trade on import parity) are likely to rise as import pressure reduces. In the Indian steel space, they prefer JSW Steel as its major capex phase is behind and is set to generate free cash flows in FY15.
However, some others remain cautious. Chauhan at Angel Broking observes that with slower than expected ramp up of iron ore mining in Karnataka, we believe increasing steel production meaningfully during FY15 would remain a challenge. Moreover, valuations are expensive at five times FY15 enterprise value/Ebitda.