JSW Steel: A tough year ahead

Weak realisations have hurt the firm’s bottom line; the high debt on the balance sheet is cause for concern.

JSW Steel is reportedly considering a sale of its plants in the US, perhaps at a price lower than that at which the units were acquired—-these posted a loss of $61 million in the March 2009 quarter. The JSW management may be better off disposing of the plants because a Merrill Lynch report observes that real demand globally is still weak and that destocking continues in most regions. Customers appear to be picking up just the quantum that they need and while demand in China may be recovering, the inventories aren’t quite done with just yet. The clincher: excess capacities could last two more years putting paid to any hopes of a price recovery.

As for the home market, Merrill Lynch sees a surplus of 1.4 million tonnes as fresh capacities increase which could keep the domestic demand-supply under pressure even if an import safeguard levy is introduced. Reports suggest the government may be inclined to impose a safeguard duty of 10-25 per cent on the import of flat products —HR coils and sheets— from CIS, China and Japan.

Analysts reckon that if imposed, the premium that domestic prices enjoy to the current import parity could fall from 28 per cent to less than 10 per cent with prices coming off by about 8 per cent.

That cannot be good news for JSW Steel which has ended a difficult March 2009 quarter with a stand-alone loss of just under Rs 50 crore, thanks to the double whammy of a fall in realisations and an increase in costs.

What’s more worrying is the steel maker’s stretched balance sheet with the stand-alone debt at Rs 10,000 crore and the consolidated debt estimated at close to Rs 15,000 crore. Fortunately for it, lenders are understood to have relaxed the debt covenants —-3.25 times debt /EBITDA —-which was tested. The company could sell better volumes in the current year though analysts point out that the 78 per cent growth guidance given by the management seems unrealistic. Analysts are pencilling in a drop in earnings of around 20 per cent because of a fall in steel prices.