JSW Steel Production And Result Preview For June Quarter 2012.

JSW Steel, one of the largest steel producing companies in India, has released the production numbers for the June Quarter 2012. The production for the quarter stood at 2.14 million tonnes, up by 27 per cent on a YoY basis. The increase in production is on the back of expansion of its crude steel production capacity in FY11. However, the company was unable to increase its capacity utilization to 100% level and stood at 80 per cent for the quarter. This was mainly on account of the iron ore issues faced by the company in the Karnataka region.

As mentioned in our previous update also that company has definitely shown improvement in the production performance in CY12, and will continue to do so in the coming months too. The capacity utilization level increased from 67 per cent in February to 80 per cent in April and May of 2012. Considering the mining ban in the region, the output for 2012 till date has been better than 2011. Last year company had no other option but to bring down the production to 40 per cent utilization due to limited supply of Iron Ore. However, post the Supreme Court’s order of allowing e-allocation of iron ore, the company has been able to improve and sustain the production at its plant.

However, with the smooth flow of iron ore from the allocated stock piles, JSW Steel, to a certain extent, managed to overcome these issues in the immediate term. The company’s management has stated that after the recent order passed by the Supreme Court over mining of the A category mines it has received a major relief and will bring back the production to 100% utilization levels in the coming quarter. The Supreme Court has, in the meantime, laid down a procedure to get the required approval for mining in the 45 mines of ‘A’ category and has appointed authorities for preparing reclamation and rehabilitation (R&R) plans which now will take one to two months before mining operations can begin again. 

Result Preview:

As for the June 2012 Quarter Result we believe the company will post a decent growth in the topline mainly on account of the jump in the sales volume and better realization. The Jump in the sales volume will be on the back of the increase in the capacity from 7.8 mn tonnes to 11 mn tonnes in April 2011. Further almost all the steel players increased the steel prices of Flat and long steel both in the range of Rs 1000-2000 per tonne which will help JSW steel to post better realization. The hike was done considering the factors such as depreciated rupee and high freight and raw material cost that were affecting the margins of the companies.

However due to fall in the rupee value company will report huge forex losses on back of its exposure to foreign currency loans and unhedged positions that will significantly dent the bottomline of the company. It is to be noted that in the recent changes done in the accounting guidelines the part of the forex losses will be shown by way of interest cost and therefore we can see the interest cost higher for the quarter.

Further the company will see some pressure on the operating margins too due to high coking coal cost. Though coking coal prices in the international markets has fallen down from $285 levels to $200 levels as the benefit will be negated with falling rupee value. JSW steel procures 80% of the coking coal is imported from Australia and Indonesia. Therefore EBITDA margins of the company will also come under pressure.