JSW Steel: Better placed than peers

Weak business environment, however, means limited triggers for the stock

It was heartening to see JSW Steel achieve its steel production and sales forecast of 8.5 million tonnes (mt) and nine mt, respectively, for FY13 despite all odds. The availability of iron ore has been the major challenge ever since the mining bans were imposed, which has curbed steel output of many players. Though the Supreme Court has given a nod to start mining from Category A and B mines, it will take a few months for iron ore availability to improve. In this backdrop, the company’s confidence of increasing steel production by 10 per cent in FY14 is positive.

The subdued steel demand and prices also remain a challenge for the industry. Though some positive signs have been seen in the US demand, and it might be heartening, it will have to be seen whether substantial improvement comes through or not. While the outlook for the steel sector as a whole is not encouraging, JSW is better placed than peers. The company had completed major capacity expansions some time earlier and its Karnataka capacities at slightly over 10 mt per annum has stabilised, unlike peers such as SAIL, which is yet to see its planned capacity expansion get completed. Tata Steel is also well placed as far as new capacities are concerned in the domestic arena, but its European operations, major contributors to its revenues, are feeling heat due to weak demand and margin pressure. Such problems are largely absent for JSW Steel.

JSW, though, needs to turnaround the acquired JSW Ispat. Sheshagiri Rao, joint MD of the company, says all expansions at Ispat will be completed by December and the company will be able to stand on its own. Rao sees Ispat becoming profitable by then, which suggests that on consolidated level, it will not be a drag from 2014. The merger of the JSW Steel and JSW Ispat is likely to be completed soon. Positively, JSW Steel’s consolidated net debt-equity ratio at 1.11 at the end of FY13 was better that 1.15 at the end of FY12.

  Meanwhile, the company’s standalone performance during the March 2013 quarter has been better on sequential basis. While the steel realisations have been weak on a year-on-year basis during the March quarter (down 7.5 per cent), it has been stable on a sequential basis. Thus, the top line declined 2.8 per cent year-on-year in March 2013 quarter, but grew 11.8 per cent sequentially led by higher output. The declining raw material costs pushed up Ebitda margins to 18.4 per cent, compared to 17.4 per cent in the March 2012 quarter and 11.9 per cent in the December 2012 quarter. The bottom line bore the brunt of higher tax provisions (as the surcharge has doubled to 10 per cent) and also 11.7 per cent increase in depreciation expenses. An analyst at Angel Broking said adjusted net profit (excluding exceptional items) decreased 19.8 per cent year-on-year to Rs 443 crore, which is much better than the brokerage’s expectation of Rs 271 crore.

While the company had been using lower grade iron ore (procured through e-auctions) during FY13, as the grades of available ore improve with category A and B mines starting production, JSW’s profitability should also improve. Management feels that combined production from A and B mines as well as NMDC should touch 20 mt in six months. JSW usually is able to procure two-thirds of Karnataka state’s output. For fulfiling its balance requirement, it will have to procure iron ore from outside the state. The ramp-up in production should therefore, boost output in the state to 30 mt levels in a year’s time, from about 10 mt currently.

Though the company’s operational performance is improving despite the challenges, the near-term upsides are limited given the weak industry outlook. Also, Bloomberg consensus target price for the stock at Rs 706 suggests there are limited gains from the current levels of Rs 688.10. Hence, investors with a long-term perspective could consider on corrections.