JSW Steel: volatile raw material prices cloud outlook

By Selene 0

JSW Steel Ltd’s shares dropped by 7.4% on Thursday, a day after its results were announced. It was not alone as most metal shares fell, with the S&P BSE Metal index declining by 2.8%. But its shares fell by much more.

One reason could be the guidance for steel output growth in fiscal year 2018 (FY18). In FY17, steel volumes rose by 22% to 14.8 million tonnes and in FY18, this is expected to increase by 4.9% to 15.5 million tonnes. That’s relatively slower but a 4.9% growth on a much larger base can contribute to good profit growth. An ideal situation would be one where realizations rise ahead of costs. On that front, some worry lines emerged in this quarter.

JSW Steel’s stand-alone revenue rose by 65% over a year ago, while its Ebitda (earnings before interest, tax, depreciation and amortization) rose by 55.3%. Sequentially, sales increased by a healthy 18.2% but Ebitda rose by a lower 8.7%. What caused it? A sharp increase in material costs, due to rising iron ore and coking coal prices. Even then, its margins are healthy at 19%. But the outlook is uncertain, as raw material prices remain volatile and steel prices are not showing strength. Domestic demand remains weak, the firm said. Investor expectations for profit growth need to take cognizance of that.

The company could have used cash flows from its existing business, now that its expansion is complete, to pay down debt. In the March quarter, interest costs took away a third of Ebitda. In FY17, it earned about Rs8,000 crore of free cash flow and had debt of approximately Rs43,000 crore. Lowering debt means lower interest costs and higher profits.

But JSW Steel has outlined a four-year Rs26,800 crore capital expenditure plan. That’s planning for future growth but internal accruals will fund that plan, so debt may stay at these levels. For now, investors have to wait for raw material pricing to turn stable or for steel prices to increase enough to cover higher costs.

First Published: Fri, May 19 2017. 07 43 AM IST

Source: Livemint.com