JSW Steel Reports Decent Numbers for March Quarter 2012

JSW Steel, which has been in the spotlight for an investigation about its alleged involvement in illegal iron ore mining in Karnataka by the Supreme Court, came out with its March quarter numbers on Monday. The company has reported decent performance for the quarter. The net sales of the company grew by 35 per cent to Rs 9,511 crore. This was mainly on account of the increase in the sales volume  during the quarter. The sales volume of the company increased by 33 per cent to 2.31 million tonnes due to an increase in capacity during the year. It would be inappropriate to compare the YoY numbers as the company expanded its steel producing capacity in April 2011.

The realisation during the quarter has jumped by 1.3 per cent on YoY basis  to Rs 41,173 on the back of an increase in the steel prices during the quarter. Further if we look at the QoQ performance, the company has done well both in terms of topline and bottomline. The net profit has jumped by 347 per cent on a QoQ basis to Rs 752 crore. This was largely due to forex gain of Rs 199 crore as against a forex loss of Rs 500 crore in the December 2011 quarter.

Moreover, the operating profit too has shown decent growth of 31 per cent on a QoQ basis to Rs 1,651 crore. A fall in the coking coal prices from USD 285 to USD 220 helped the company to report a better operating performance. The EBITDA margin improved by 140 bps to 17.3 per cent due to lower raw material cost which was up by just 11 per cent. The Australian coking coal FOB prices came down from USD 275 per tonne in December 2011 to USD 235 in March 2012.

The capacity utilisation of its Vijaynagar plant went up from 73 per cent in the previous quarter to 76 per cent in March quarter 2012 which was below its target of 80 per cent. The lower utilisation was mainly on account of the iron ore shortage and logistic issues in Karnataka. However, , due to the speedier flow of iron ore from the inventory storage to the plant, the utilisation went up to 88 per cent, in January 2012 which helped the company to report a jump in production numbers for the March quarter.

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 slipped down to 7.8 million tonnes and 7.5 million tonnes respectively. As mentioned earlier, considering the iron ore and logistic issues, the company will not be able to achieve the revised production targets for FY12 which stood at 7.43 MTPA as against the expectation of 7.8 MTPA. The iron ore issue continues to persist in Karnataka as the Supreme Court is yet to give its final clearance for mining in the A and B category mines. If that does not happen immediately, JSW Steel will have to face a severe iron ore shortage problem that could drag the capacity utilisation level to 30 per cent in the coming quarter.

In the present scenario, the company has stated that the demand in India has improved during the quarter. The apparent steel consumption in India grew by 6.8 per cent in FY12 despite very low demand in 1HFY12. The consumption of flat products was more than that of long products during the year. However, we believe that the demand will not be sustained in the coming quarter due to the monsoon wherein the construction and infrastructure activity will be at its lowest. The slowdown in industrial activity and the poor investment climate will remain obstructions on the path to accelerated growth in steel consumption in FY13. Also, globally the steel scenario is not looking good. The World Steel Organization has forecasted 3.6 per cent growth in demand for CY12 as against that of 5.5 per cent reported in CY2011.

For the March quarter the world steel production grew by just 0.1 per cent on a YoY basis to 376.7 million tonnes. Overall the world demand scenario is still low and even China, the largest producer and consumer of steel, is facing a slowdown problem. Chinese premier Wen Jiabao has lowered the country’s GDP growth target for FY12 to 7.5 per cent. This has been the lowest target set in the last seven years. However, the slowdown in China and the recessionary trend across Europe will keep the raw material prices stable.

On the outlook for FY13 the company seems to be bit optimistic about an early lift of the ban on the iron ore mines in Karnataka. It has set a steel production growth target of 14 per cent on a YoY basis at 8.50 MTPA with sales volume target of 9 MTPA on a YoY basis at 15 per cent growth. If the Supreme Court does not lift the ban immediately in the coming month, the company may have to bring down the utilisation levels in the coming quarter and may not be able to achieve its targets for FY13.