JSW Steel & Jindal Steel: No longer a steal

JSW Steel and Jindal Steel could see pressure on profits.

Jindal Steel & Power and JSW Steel are expected to be worst affected by the industry's decision to roll back prices of steel products.

That's because long products are believed to have contributed nearly 10 - 11 per cent of JSW's net turnover of Rs 7,230 crore in the first nine months of FY 08.

Besides, about 18 per cent came from galvanised products. For Jindal Steel & Power, nearly 46 - 48 per cent of its net sales of steel, is understood to have been contributed by long products.

At the request of the government, steelmakers have agreed to cut prices of high- margin long products "�used by the construction industry"�by Rs 2,000 per tonne. For roofing material, like galvanised corrugated sheets, prices are being dropped by Rs 500 to Rs 1,000 a tonne.

Not surprisingly, both stocks yielded ground on Friday: JSW Steel fell 2.3 per cent to Rs 754 and has now lost 43 per cent since the start of the calendar year, compared to a 24.5 per cent fall in the Sensex. Jindal Steel and Power fell 3.8 per cent to Rs 1,870.

JSW Steel, which sold 21.4 lakh tonnes of steel in the nine months to December 2007, has been grappling with higher input costs. Now that prices have been cut, analysts believe the stock could underperform: at Rs 754, JSW Steel trades at just over 6 times FY09 estimated earnings.

Earnings for Jindal Steel and Power too could see a downgrade, say analysts, even though the company is able to meet a part of its iron ore requirements from captive sources.

At Rs 1870, the stock trades just under 10 times estimated forward earnings, which includes earnings from the power business.

Long product prices are now priced at Rs 40, 000 per tonne, while the prices of galvanised corrugated sheets are at Rs 48, 000 per tonne. Industry watchers say that while globally, prices of steel may climb, prices in India could stay flat if the government continues to intervene.

The impact for Tata Steel is expected to be small, since long products contribute an estimated 3 - 4 per cent of net sales.

In the first nine months of FY08 the firm sold 3.5 million tonnes of steel and revenues were Rs 13,957crore.

Also sales of galvanised products like corrugated sheets contribute only about 1.5 - 2 per cent of revenues.

However, should prices of long products remain subdued for a long time, Tata Steel's operating profit could take a hit. At Rs 667, the stock trades at just five times FY09 earnings.