JSW Steel - Q2FY12 analysis & stock recommendation
Srujani Panda / 25 Oct 2011
JSW Steel Q2FY12 Results Update
JSW Steel came out with its Q2 FY12 numbers on Friday, 21st October, 2011, and surprised investors with its decent performance on the volumes despite a slowing demand. The net sales of the company stood at Rs 7625.06 crore, higher by 33% from its previous year’s corresponding quarter due to higher sales volume, which was up by 19%. However, on the operating side, the EBITDA margins declined by 250 bps to 17.5% due to higher iron ore prices, which were up by Rs 800 per tonne to an average of Rs 3500 per tonne.
The company’s bottomline took a major hit, declining by 71.5% to Rs 127 crore. This was mainly because of production cuts due to iron ore shortage as well as higher forex translation (unrealised) losses of Rs 512 crore due to adverse movement of the rupee against the dollar.
JSW Steel’s capacity utilisation went down to 30% in the last week of September 2011 and on account of iron ore shortage, stood at 50-60% for the quarter, which is still below its FY12 target of 80%. The limited availability of iron ore resulted in production losses of 4.5 lakh tonnes of steel, which would have contributed to the total production that was up by 11% to 1.738 million tonnes during the reporting quarter, over 1.571 million tonnes a year ago. Moreover, due to higher iron ore prices, the total cost of production went up by Rs 1500 per tonne, impacting the company’s margins.
At the beginning of the year, the company estimated a total production of 8.75 million tonnes and a sales volume of 9 million tonnes for FY12, which now has been reduced to 7.8 and 7.5 respectively, down by 14%, considering the iron ore shortage in Karnataka.
With respect to the present scenario, the company said that the demand in India has remained stable. During the September 2011 quarter, the demand witnessed some impact because of temporary issues in the country. Further, the company has increased its steel prices by 3-4%, and expects it to remain flat during the December 2011 quarter.
JSW Steel has said that it will continue to witness higher sales on the back of its marketing strategy of targeting sectors like oil and gas and the pipeline industry in the coming quarters. On the other hand, the uncertainty and issues with respect to the availability of iron ore in the region after the 6th e-auction have not yet been fully addressed, and concerns are still looming for the steelmaker. From the allotments in the 6 e-auctions for iron ore, JSW Steel secured a total of 2.08 million tonnes. However, the iron ore received on site is only around 18% of the total material procured, as the delivery is taking considerably longer due to procedural delays and logistical constraints.
Higher iron ore prices are also a major concern that has hit the margins. In Q2 FY12, iron ore has been procured at Rs 3500 per tonne, as compared to Rs 2800 per tonne before the ban, and this will continue to remain firm until there is any major respite on mining activities from the Supreme Court.
Keeping in mind the uncertain scenario for iron ore procurement, procedural delays, logistical issues and higher prices, we, at DSIJ, recommend that investors stay away from the scrip.
JSW Steel came out with its Q2 FY12 numbers on Friday, 21st October, 2011, and surprised investors with its decent performance on the volumes despite a slowing demand. The net sales of the company stood at Rs 7625.06 crore, higher by 33% from its previous year’s corresponding quarter due to higher sales volume, which was up by 19%. However, on the operating side, the EBITDA margins declined by 250 bps to 17.5% due to higher iron ore prices, which were up by Rs 800 per tonne to an average of Rs 3500 per tonne.
The company’s bottomline took a major hit, declining by 71.5% to Rs 127 crore. This was mainly because of production cuts due to iron ore shortage as well as higher forex translation (unrealised) losses of Rs 512 crore due to adverse movement of the rupee against the dollar.
JSW Steel’s capacity utilisation went down to 30% in the last week of September 2011 and on account of iron ore shortage, stood at 50-60% for the quarter, which is still below its FY12 target of 80%. The limited availability of iron ore resulted in production losses of 4.5 lakh tonnes of steel, which would have contributed to the total production that was up by 11% to 1.738 million tonnes during the reporting quarter, over 1.571 million tonnes a year ago. Moreover, due to higher iron ore prices, the total cost of production went up by Rs 1500 per tonne, impacting the company’s margins.
At the beginning of the year, the company estimated a total production of 8.75 million tonnes and a sales volume of 9 million tonnes for FY12, which now has been reduced to 7.8 and 7.5 respectively, down by 14%, considering the iron ore shortage in Karnataka.
With respect to the present scenario, the company said that the demand in India has remained stable. During the September 2011 quarter, the demand witnessed some impact because of temporary issues in the country. Further, the company has increased its steel prices by 3-4%, and expects it to remain flat during the December 2011 quarter.
JSW Steel has said that it will continue to witness higher sales on the back of its marketing strategy of targeting sectors like oil and gas and the pipeline industry in the coming quarters. On the other hand, the uncertainty and issues with respect to the availability of iron ore in the region after the 6th e-auction have not yet been fully addressed, and concerns are still looming for the steelmaker. From the allotments in the 6 e-auctions for iron ore, JSW Steel secured a total of 2.08 million tonnes. However, the iron ore received on site is only around 18% of the total material procured, as the delivery is taking considerably longer due to procedural delays and logistical constraints.
Higher iron ore prices are also a major concern that has hit the margins. In Q2 FY12, iron ore has been procured at Rs 3500 per tonne, as compared to Rs 2800 per tonne before the ban, and this will continue to remain firm until there is any major respite on mining activities from the Supreme Court.
Keeping in mind the uncertain scenario for iron ore procurement, procedural delays, logistical issues and higher prices, we, at DSIJ, recommend that investors stay away from the scrip.
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