Title: Results Tracker: Will external risks weigh on JSW Steel's strong fundamentals?
Sluggish demand has dampened performance in Q1, but cost-efficiencies can cushion earnings
Amid domestic weak demand from user industries such as automotive sector, construction and infrastructure, and unfavourable global factors, JSW Steel’s June quarter performance was sombre. The company’s net profits fell by about 57 per cent Y-o-Y to ?1,008 crore in the latest June quarter.
The stock has fallen by about 10 per cent in the past week, post the results. Lingering concerns over domestic demand and rising raw material cost, are likely to keep the stock under pressure in the coming quarters. Add to this, Trump’s imposition of new tariffs on China impacting commodity prices, can dampen realisations, affecting profitability of all steel companies, including JSW Steel.
That said, JSW Steel is among the better-placed in the sector to weather the volatile environment. Focus on cost-saving measures and value-added products aiding margins, acquisition of iron ore mines mitigating rising ore costs and expansion plans, should hold it in good stead in the long run.
Hit from all sides
JSW Steel standalone recorded sales volumes of 3.75 million tonnes in the June quarter, down by 2 per cent from a year ago. To mitigate the sluggish domestic demand, the company shifted its focus to the overseas market; share of export sales increased to 17 per cent in the June quarter from 12 per cent last year.
The company stated that delay in payments made by the government to contractors, also led to weaker demand (fresh), impacting the company.
Weak realisations, too, dampened revenue, which fell by 8 per cent to ?17,499 crore in the first quarter of FY20. The realisation per tonne in India has fallen to ?46,664 from about ?49,500 a year ago.
In addition, weak demand, especially from the automotive industry (which is high-margin business for JSW Steel), and rise in iron ore prices (key raw material) by more than 50 per cent Y-o-Y, have led to a drop in operating profit margins from around 25 per cent a year ago to 21 per cent in the quarter.
Meanwhile, the contribution from the company’s subsidiaries is also not impressive. While the Indian subsidiaries have shown decent performance, overseas ones such as Ohio in the Mingo Junction and the European operations, were impacted by unfavourable global factors; overseas subsidiaries reported operational loss of ?265 crore for the quarter.
Seasonally, the first half of the year is generally weak for the steel sector; hence, the company’s weak performance is expected to continue in the second quarter of the fiscal too. Growing concerns on domestic economic growth and increasing volatility in the global factors can add to the pressure. However, the company’s long-term prospects are sound.
At the sector level, opportunity for Indian players due to lower exports from China and Indian government spend on infrastructure such as Railways and affordable housing, remain healthy.
For JSW Steel, in particular, cost-savings measures can help cushion earnings. The company started using the conveyor belt to move iron ore; this has led to savings of ?155 per tonne on about 10,000-15,000 tonnes of ore transported each day. The company plans to increase transportation of ore on conveyor belt to 30,000 tonnes per day in the next three to four months.
JSW Steel is now sourcing nearly 5 millon tonnes of its total iron ore requirement of 55 mt from its captive iron ore mines; this insulates the company from the rising ore costs. The company is active in participating in the new iron ore mine auctions and recently obtained few mines that could increase captive sourcing of ore to 7-8 mt in the current fiscal.
The company is also on track in completing the capacity expansion at Dolvi plant at Maharashtra, to 10 mtpa from the current 5 mtpa; this is expected to be completed by March 2020. The expansion at Vijayanagar plant in Karnataka by about 1 mt, is to be completed soon.
On the inorganic front, the company’s plan to acquire Bhushan Power and Steel is in the final stages.