JSW Steel – Iron Ore Crunch Dents Q3FY13 Performance

JSW Steel announced its Dec 2012 quarter results on Jan 28, 2013 and the results have been quite lukewarm. While the company’s topline witnessed a marginal improvement of 5% to Rs 8292.45 crore on a YoY basis, the bottomline has declined significantly to Rs 136.73 crore as compared to Rs 168.24 crore in the Dec 2011 quarter. This was despite the decline witnessed in the coking coal prices and raw material prices.

The decline in raw material prices is clear from the raw material costs as a percentage of sales, which stood at 64.40% in Dec 2012 as against 67.40% in Dec 2011 and 69.80% in Sept 2012. However the higher power and fuel costs and lower inventory resulted in lower EBITDA margins, which stood at 16.52% as against 18.07% in Sept 2012.

If we dig further into the figures provided by the company, on the sales volume front, there has hardly been any improvement on a sequential basis, with total saleable units of 2.17 million tonne (2.17 million tonne in Sept 2012). However, there was increase of 14% on a YoY basis. On the realisations front too, the performance was not good. For the Dec 2012 quarter, the realisations stood at Rs 38214.10/tonne as against Rs 40879.70/tonne in Sept 2012 and Rs 41455/tonne in Dec 2011.

Another noteworthy factor about the results is that there are a good number of exceptional adjustments made for the quarter. On account of a depreciating rupee, the net foreign exchange loss of Rs 267.41 crore (profit of Rs 422.38 crore in Sept 2012 quarter & loss of Rs 500.11 crore) has been included in the exceptional items. Further, it has also made an adjustment of Rs 60 crore for the diminution in the investment it has made in US subsidiaries.

However, even after adjusting for the same, the profitability has not improved. Even after adjusting for the exceptional income, the profit for Dec 2012 stood at Rs 418.14 crore against Rs 701.49 crore in Sept 2012 and Rs 527.12 crore in Dec 2011. This clearly indicates JSW’s poor operational performance.

The company’s Group CFO Seshagiri Rao has stated the following factors with respect to the results. According to the company, the productivity in Oct-Dec 2012 was hit by 20% on low iron ore supply. He also added that JSW Steel continues to face challenges on iron ore supply, with iron ore inventory standing low at 200,000 tonne as on Dec 31, 2012. However, it has sufficient cash balance of Rs 1800 crore as on Dec 31, 2012.

The results have been below the street’s estimates. As the company is still facing issues with regard to iron ore availability, avoiding the scrip at the current levels seems to be the prudent strategy.