×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

JSW Steel: sales may grow sharply in FY12

JSW Steel: sales may grow sharply in FY12
Comment E-mail Print Share
First Published: Wed, May 18 2011. 10 52 PM IST
Updated: Wed, May 18 2011. 10 52 PM IST
JSW Steel Ltd’s strategic focus is shifting to natural resources—coking coal and iron ore. The company’s steel capacity will increase to about 16-17 million tonnes after its projects are completed. It will gain economies of scale and a higher share of the domestic market by replacing imports. But that still does not resolve the problem of volatile raw material prices.
Investors are concerned about the impact of higher iron ore and coking coal prices on JSW Steel’s profit in the coming quarters. The company has attempted to insulate itself by selling more steel—more of it in the value-added form—and by controlling costs. In the March quarter, sales rose by about 20% sequentially, while raw material costs rose 12%.
Also see | Product Mix (PDF)
As a result, its operating profit margin improved by nearly 6 percentage points. However, margins fell 1.3 percentage points year-on-year (y-o-y) due to higher raw material costs. In fiscal 2011 (FY11), average iron ore prices were up by 65% and coking coal prices rose by 47%.
Profit grew at a healthy pace due to higher volumes; operating profit grew 26% y-o-y and 63% sequentially. In FY12, the company expects to sell 48% more steel due to higher capacity and marketing of recently acquired Ispat Industries Ltd’s production. Sales growth in value terms in FY12 will be high.
But steel prices have turned soft post-March. That puts a question mark on sequential growth in price realizations. Since raw material prices have also turned weak, steel prices may remain flat for some time. Margins may come under pressure.
Raw material costs will be higher in the first half of FY12. Prices of coking coal and iron ore have eased from their March quarter peaks now, which will reflect in purchases of steel companies in the second half; pressure on margins from higher input costs should ease then.
A better product mix and JSW Steel’s ability to use cheaper inputs should mitigate the impact of higher costs.
Ispat’s improving performance, too, should add to JSW Steel’s profit. A macro risk is the impact of rising interest rates. Slower economic growth could affect demand for steel, while working capital finance will now become more expensive.
In the near term, the impact of higher material costs on margins will affect valuations, while an improvement in steel prices will be a positive. In the longer run, success in acquiring coal or iron ore assets to cover its requirements will be a big positive, as it will get insulated from price volatility.
Graphic by Yogesh Kumar/Mint
We welcome your comments at marktomarket@livemint.com
Comment E-mail Print Share
First Published: Wed, May 18 2011. 10 52 PM IST