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Business News/ Market / Mark-to-market/  JSW Steel: smokin’ hot metal
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JSW Steel: smokin’ hot metal

The step-up in volume was chiefly due to its output returning to more normal levels

JSW’s steel sales in volume terms rose by 7.2% from a year ago, in the March quarter, and 28.7% sequentially. Premium
JSW’s steel sales in volume terms rose by 7.2% from a year ago, in the March quarter, and 28.7% sequentially.

How fortunes have changed for Indian steel companies. The apocalyptic picture doing the rounds just a few quarters ago already seems a distant memory. JSW Steel Ltd’s results for the March quarter show why. The firm’s performance was expected to benefit from higher output, due to higher capacity, this quarter.

JSW’s steel sales in volume terms rose by 7.2% from a year ago, in the March quarter, and 28.7% sequentially. The step-up in volume was chiefly due to its output returning to more normal levels. Since the restart happened in phases, the full impact will be visible in the June quarter. Average realizations were still down by 5% sequentially, as the minimum import price was imposed only in February.

However, higher volume meant that sales rose by 21.5% sequentially, while expenses increased by 13.7% due to cheaper input costs and scale benefits. Ebitda (earnings before interest, taxes, depreciation and amortization) doubled during the quarter sequentially and rose by 8.5% over a year ago. Interest costs were down a bit.

The quarter’s depreciation charge was lower by 135 crore because of a revision in the life of some assets. That accounted for nearly half of its profit before tax and one-time items of 278.1 crore. But JSW had incurred a loss in the preceding quarter, so even a slender profit is a welcome sign for investors.

What of FY17? The company has projected steel sales of 15 million tonnes, a 24% increase from a year ago, chiefly because of higher capacity. The June quarter will see another sizeable increase in sales because of higher capacity and then growth will stabilize. This quarter will also see the full impact of higher steel prices.

In subsequent quarters, it will come down to how realizations and costs behave. Domestic prices have been rising on the back of a global increase in steel prices. That augurs well but iron ore prices have turned weak just as unexpectedly as they spiked. If that continues, steel prices may fall. But if the government keeps up its efforts to protect the Indian steel industry from imports, domestic realizations may not feel the pinch as much. While the worst may be behind the industry, uncertainty remains a thorn in its side.

One risk in JSW’s case is its interest in acquiring Tata Steel Ltd’s UK assets. These are initial days in the sale process but if JSW emerges as the front-runner, investors will fret over what that can do to its balance sheet. Already, net debt to equity in FY16 is at 1.8 times.

Since early February, JSW’s share is up by a third. That probably already factors in a fair bit of expectations about its future performance. A lot now depends on macro variables: to what extent India’s economy contributes to a boost in steel consumption, and whether global economic conditions support the increase in steel prices.

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Published: 19 May 2016, 12:24 AM IST
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