JSW Steel Ltd reported weaker-than-expected results for the March quarter, with a pre-tax loss of Rs230.4 crore compared with a profit of Rs528 crore in the year-ago period. The loss was lower compared with the December quarter (Rs365.3 crore), but then the October-December period had been marred by production shutdowns and a sharp drop in sales.
Things were much better in the January-March period, with sales volumes increasing by 49% compared with the December quarter. While sales realizations expectedly fell by 20% quarter-on-quarter, the cost of production on a per tonne basis fell by only 15%, leading to further drop in profitability. The firm said in an analysts’ conference that it used up its high cost inventory in the March quarter and this impacted results.
Also See Great Expectations (Graphic)
An analyst with a foreign brokerage says that while it’s likely that high cost inventory of raw materials would have hit profitability, it may also be that the company hasn’t been able to cut its cost of production as anticipated. The company has now said that with prices of raw materials falling sharply, it expects cost of production to fall to $300/tonne. With average realization expected to be around $500/tonne this fiscal, that would translate into a neat profit. What’s more, volumes are expected to rise by 78% to 6.1 million tonnes, and profit could jump manifold based on the above calculations. But the analyst says that a $300/tonne cost of production entails conversion cost of less than $100/tonne, which may be difficult to achieve.
JSW’s shares, meanwhile, have risen by 163% from their lows in early March, indicating that the markets are factoring a sharp turnaround in the company’s fortunes. The fact that the steel cycle seems to be picking up could help valuations further. But one mustn’t forget that the company’s debt stands at about $3 billion, about two times the value of its equity, and the company has already breached some of its dent covenants. The company may be able to successfully renegotiate some of the terms of its debt, but this may entail a further rise in interest costs. Another concern is the company’s US operations, which continue to run at extremely low capacity utilization levels. The US subsidiary reported a pre-tax loss of $96.7 million (including an inventory write-down of $58.4 million) last quarter, with production at its pipe mill falling drastically.
The company’s enterprise value now stands at $4.6 billion, and assuming an EV/Ebidta valuation multiple of five times FY10 earnings, the markets already seem to be factoring in an Ebitda of at least $900 million or about $150/tonne.
Graphic by Sandeep Bhatnagar / Mint
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