BackJSW Steel lowers conversion cost
JSW Steel lowers conversion cost
PremiumIndia’s third largest steel manufacturing firm JSW Steel Ltd’s results for the quarter ended June didn’t have any major surprises, which is also reflected by the fact that the firm’s shares were flat on Monday after the results were announced.
Average sales realization fell by 4.4% on quarter-on-quarter (q-o-q) for the stand-alone business, which was ahead of analysts’ expectations. But raw material cost fell just 3% for every tonne of production q-o-q.
According to an analyst with a foreign brokerage, one would have expected material costs to be even lower considering that commodity prices have dropped sharply.
But the big positive is that JSW managed to reduce its conversion cost—overheads such as employee costs, power and fuel and other expenditure—by as high as 16% on a per-tonne basis.
The company had told analysts during its previous results announcement that production cost could fall to as low as $300 (Rs14,520) a tonne, thanks to the fall in commodity prices. This, according to an analyst, entailed a sharp curtailment in conversion cost to about $100 a tonne.
The performance in the June quarter, where the conversion cost fell by more than $20 a tonne to roughly $118 a tonne, is significant in that regard.
Still, owing to the higher-than-anticipated material cost, operating profit was lower than street estimates. But since material costs aren’t something within the company’s control, while conversion costs are, the results are positive.
JSW’s share price has risen by about 270% from its lows in March, compared with a 157% rise in Tata Steel Ltd’s shares and 137% rise in Steel Authority of India Ltd.
With the steel cycle turning positive earlier this year and showing definite signs of continued improvement, there has been a major re-rating of steel stocks.
JSW has benefited more because it stands to gain relatively more because of its high leverage.
Last quarter, for instance, even though sales improved by 18.9% and average sales realization fell, operating profit more than doubled q-o-q.
The street doesn’t seem particularly bothered about valuations as long as steel prices are showing signs of improvement.
Earlier this month, steel producers implemented price hikes and the trend is expected to continue in the medium-term, thanks to the gradual recovery in economic activity.
Write to us at marktomarket@livemint.com
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