JSW Steel's growth projections may go awry as realisations are expected to be lower this year.
JSW Steel’s share prices have more than doubled in the last three months due to the recovery in steel prices, volume growth and cost savings on account of lower iron ore and coking coal prices.
However, the future seems to be tense and analysts believe most of the positives have already been factored in by the market. Besides, analysts expect the current financial year to be a challenging one for the company due to lower steel prices, a highly-leveraged balance sheet and poor performance in the US.
Optimistic sales growth projections
JSW Steel has projected a 78 per cent growth in sales volumes at 6.1 million tonne for FY10 despite the overall poor outlook for the industry.
The reason for this optimism is that the company expects its new capacities to go on stream this year. JSW has recently added 2.8 million tonne new crude steel capacity, taking its total capacity to 7.8 million tonnes.
However, analysts are not convinced. “I don’t know whether this kind of volume growth is achievable when the industry itself is not growing,” says Pallav Agarwal, analyst with ICICI Securities.
Analysts say that the industry is expected to grow only at about 4-5 per cent this year, in which case the company will have to double its market share to achieve the sales growth targets.
“I think the company can at best achieve a volume growth of 5.8-5.9 million tonne, given the higher demand from the infrastructure and construction sector,” says Preeti Dubey who tracks metals at BNP Paribas Securities.
Though this volume growth is impressive, analysts believe it will not translate into revenue and profit growth to that extent as realisations would be lower. Thanks to high steel prices during FY09, the company reported average realisations of about Rs 37,117 per tonne. But this would come down to around Rs 26,000 per tonne in FY 10, given that steel prices have reduced by about 50-60 per cent over the last one year.
Margins gain
There could be some good news on account of expansion of margins, and analysts expect operating margins to improve to 24-25 per cent in FY 10 as compared to 20 per cent in FY09. This is partially because of significant cost savings through production efficiencies and reduction in prices.
In FY09, the contraction in steel prices eroded the operating margins, especially of those companies which were less integrated. JSW had to meet half its iron ore requirements and 100 per cent of its coal requirements from purchases in the open market. The high iron ore and coking coal prices resulted in a 49 per cent increase in its blended cost to Rs 31,239 per tonne in FY09.
| MARGIN TROUBLE | |||||
| in Rs Crore | 4Q09 | % ch q-o-q | % ch y-o-y | FY09 | FY10E |
| Revenues | 3,622 | 9.1 | -15.6 | 16,104 | 17,500 |
| EBIDTA | 333.00 | -34.10 | -68.60 | 3253.00 | 4490.00 |
| Op. margin* (%) | 9.20 | -602.90 | -1553.90 | 20.20 | 24.00 |
| PAT | -39.90 | NA | NA | 274.9** | 1150.00 |
| EPS (Rs) | -3.80 | NA | NA | 12.88** | 58.00 |
| PE (x) |
NA | ||||
**FY09 net profit and EPS is after exceptional item of Rs 794.78 crore
E: Analyst Estimates
| REALISATIONS TAKE A HIT | ||||
| Million tonne | Q4FY09 | % ch y-o-y | FY09 | % ch |
| Crude steel production | 0.966 | -2.70 | 3.72 | 2.80 |
| Total saleable steel | 1.06 | 5.10 | 3.42 | 0.60 |
| Realisation (per tonne) | 27,881 | -15.40 | 37,117 | 20.20 |
| Blended cost (Rs per tonne) | 26,608 | 10.80 | 31,239 | 48.60 |
| Adjusted EBITDA (Rs cr) | 357.52 | -62.40 | 2,941.70 | -13.20 |
This was unsustainable in a scenario where steel prices have dropped to Rs 26,000-27,000 per tonne. Thankfully, JSW has woken up to the problem and has contracted coking coal at $120-150 per tonne compared to $305 last year. The savings in cost should be higher as iron ore prices have come down by 20-30 per cent this year.
Concerns remain
The cost savings mean the company will be able to recover some of its gains at the EBITDA level.
However, the impact of its heavy loss-making US operations, higher interest cost and depreciation could push its net profit growth under pressure. Analysts are expecting the net profit to remain flat at about Rs 1,150-1,250 crore in FY10 as compared to Rs 1,068 crore (pre-exceptional items) in FY09.
During Q4FY09, JSW Steel reported a consolidated net loss of Rs 39.9 crore as against a net profit of Rs 365.8 crore in Q4FY08. This was primarily attributed to its US operations where it has suffered losses for two consecutive quarters. The US plates and pipe mills are currently operating at just 10-15 per cent of capacity due to significantly lower demand in that market.
“We are expecting the losses to mount in FY10 as capacity utilisation is expected to remain low while the fixed cost component such as interest cost etc will remain high,” Dubey says.
Analysts also say the consolidated debt (including the working capital) at about Rs 16,000 crore (up 35 per cent compared to FY08) and debt to equity of over 2 times could create more pressure on the company’s net profit. They feel interest costs will go up by over 35 per cent in FY 10 compared to Rs 1,155.62 crore in FY09.
Outlook
Given the flat growth in net profit, analysts expect the EPS at about Rs 58 in FY10. Based on the FY10 EPS, the stock is currently trading at PE multiples of 7.2 times, which is considered to be on the higher side.
