JSW Steel Q3 result update and analysis

JSW Steel came out with its Q3 numbers on Friday and they show a decent performance in terms of volumes that rose by 20 per cent YoY. In the September quarter of 2011 the volumes were up by 19 per cent on a YoY basis. However, the volume scenario compared to the previous quarter remains the same as it grew only by 1 per cent whereas in the previous quarter the QoQ growth was by 10 per cent to 1.88 tonnes.
 
The net sales of the company stood at Rs 7,859.62 crore, higher by 35 per cent as compared to the previous year’s same quarter due to higher sales volume and flat realisation levels. The steel prices during the quarter remained flat as compared to Q2FY12. However, the operating performance of the company was a little disappointing. Its EBITDA on a QoQ basis declined by 3.36 per cent and grew by 25.2 per cent on a YoY basis to Rs 1,252 crore.

Meanwhile, the EBITDA margin continued to decline by 130 bps to 15.9 per cent due to higher coking coal cost and raw material cost which was by up by 46 per cent and 47 per cent respectively. Coking coal’s Australian FOB prices came down from USD 300 per tonne in September 2011 to USD 235 in December 2011. The gains, though, were negated by the higher rupee depreciation against the dollar.

The bottomline of the company took a hit, which declined by 56 per cent to Rs 168 crore mainly because of higher forex translation (unrealised) losses of Rs 500 crore due to the adverse movement of the rupee as against the dollar. The net profit would have been worst if the company had not received Rs 141 crore on account of reverse tax transactions which were acquired after winning a case on tax provision earlier raised by the company. This, according to the management, has been a one-off scenario that will not accrue going forward.
 
The capacity utilisation of the Vijaynagar plant went up from 60 per cent in the previous quarter to 73 per cent which is still below its FY12 target of 80 per cent due to iron ore shortages. In December the utilisation of the plant went up to 84 per cent due to a speedier flow of iron ore from inventory storage to the plant. This will be positive for the coming quarter as well.

The company, at the beginning of the year, estimated total production of 8.75 million tonnes and 9 million tonnes of sales volume for FY12 which now has been reduced to 7.8 and 7.5 respectively - down by 14 per cent due to the iron ore shortage in Karnataka. In nine months the company has produced 5.36 million tonnes of steel and to achieve the target of 7.8 million tonnes it has to produce an additional 2.14 million tonnes in the current quarter at a utilisation level of more than 80 per cent. On this issue the company seems to be very optimistic and has assured that it would achieve the target if it receives iron ore on time. We believe it will be quite challenging for the company to achieve its target production of FY12.

About the present scenario the company has stated that the demand in India has remained modest in the last six months due to weak global demand coupled with higher interest rate and high inflation which led to delay in consumption and new capex plans. The world steel production fell significantly from a peak of 130 million tonnes in May 2011 to 115 million tonnes in November 2011. And in India the demand for steel grew by a mere 1.8 per cent from April to October. The company has further stated that the month of December has witnessed a rebound in demand.

Also, as per the JPC data, the consumption in December 2011 and in the last three months (October to December) has grown by 8.8 per cent and 10 per cent on a YoY basis respectively. About the outlook, the company said that they are expecting the world economies to revive from the lows witnessed in calendar year 2011 on the back of various measures taken by these economies. This may help see decent volume growth in the coming quarter as well. However, uncertainty and issues with respect to availability of iron ore in the region after 18 e-auctions have not yet been fully addressed and concerns are still looming large for the steel maker.

Out of the 18 e-auctions held so far, JSW Steel secured a total of 7 million tonnes of iron ore from the allotment. However, iron ore received at site is only around 52 per cent of the total material procured at the site. According to a statement released by the company, the usable iron ore out of the balance stock piles for e–auction is expected to last only for the next 3-4 months and continuing the production of steel will be a challenge in case the iron ore mining ban continues in Karnataka.

Therefore, keeping in mind the uncertain scenario for iron ore procurement, the major hit on the bottomline due to forex transaction losses and the higher input costs, we recommend investors to stay away from the scrip.