UJJVAL JAUHARI
JSW Steel’s better-than-expected performance in a seasonally weak quarter, amid cost pressures, lifted Street sentiment. On a day when markets were down 1 per cent, JSW’s stock closed 0.4 per cent higher. What’s more, the outlook remains healthy.
Even though construction activities remained soft during the September quarter (Q2) impacted by monsoon, the company’s steel sales grew 1 per cent year-on-year (YoY) and 3 per cent sequentially to 3.96 million tonnes (MT).
Despite softness in prices of long steel, which is used in construction (down about 5 per cent sequentially), and prices of flat products (used for manufacturing white goods and automobiles) being stable, gross sales at ~208.9 billion (up 23.5 per cent YoY) beat analysts’ estimates of ~203.9 billion, thanks to a weak rupee and better realisations. Beating the Street’s concerns over rising input prices (such as coal, iron ore, crude oil), consolidated operating profit jumped 62 per cent YoY to ~49.06 billion. This drove net profit growth of 150 per cent to ~20.87 billion, ahead of Bloomberg consensus estimates of ~20.25 billion. In fact, in three of the past four quarters, JSW has clocked over 100 per cent increase in profits.
Given its plans to expand and acquire steel assets, as well as backward integration initiatives to boost operating performance, prospects for the company remain firm.
For instance, the operational efficiencies aided by the conveyor belt at its key Vijaynagar plant, and iron ore sourcing from captive mines, should drive profitability ahead. Similarly, doubling of the Dolvi plant’s capacity to 10.7 MT per annum, expansion at Vijaynagar (third blast furnace by 1.5 MT) by March 2020, turnaround of the acquired Monnet Ispat and recent international acquisitions (in US and Italy) should also add to earnings.
The healthy steel demand and realisation outlook strengthens confidence. Long product prices have already bounced from subdued August levels, while flat products prices, which were hiked by ~500-1,000 a tonne in September, are seen trending higher. The rupee depreciation and government’s measures are helping control cheap imports into India. Notably, finished steel consumption grew 6.8 per cent in Q2, and the World Steel Association has also upped India’s steel demand growth estimate for CY2018 from 5.5 per cent to 7.5 per cent, on strong demand.
As a result, JSW figures among the top picks of brokerages. While Motilal Oswal Securities has a target price ~447, Edelweiss recently raised its target to ~433, considering the earnings opportunities.