JSW Steel Ltd’s results indicate stability on the operational front, both over a year ago and sequentially. But its financial performance indicates the steel industry could be facing some headwinds. While steel prices have been stable sequentially, operating costs have risen, chiefly led by rising crude oil prices and rupee depreciation. That is putting a strain on profitability.

JSW Steel Ltd’s consolidated revenue rose by 25% from a year ago to 21,552 crore and increased by 5% sequentially. The year-on-year increase was driven chiefly by higher steel realizations. Ebitda margin rose by 5.2 percentage points over a year ago but investors will also note the 2.1 percentage point decline sequentially.

Input costs have risen. Rising crude oil prices have led to higher power and fuel costs. Rupee depreciation has made it worse. While steel prices were relatively stable, the increase in costs could not be recovered in full.

In JSW’s case, a few factors such as higher captive sourcing of iron ore and commissioning of its coke oven plant at Dolvi should help lower costs after a few quarters. Since its domestic plants are operating at full capacity, volume growth is constrained for now. Its major capacity expansion plans will take time to complete.

But it has acquisitions for help. The Monnet Ispat & Energy Ltd acquisition was done as a joint venture, with JSW owning a 23% effective stake. That limits the impact of the acquisition on JSW’s balance-sheet. But it also keeps its performance outside, with only the share of profits or losses recorded in JSW’s consolidated financials.

Recent overseas acquisitions should add to capacity. At this point, they are a strain and one reason for the sequential decline in margins. Net debt too has increased. Their performance should improve, as JSW begins to ramp up output but it could take some time.

JSW’s balance sheet position is relatively healthy. Net debt to equity is at 1.5 times and net debt to Ebitda is 2.4 times as of 30 September, but is higher compared to the preceding quarter. An acquisition of a stressed steel asset such as Bhushan Power & Steel Ltd is a risk to watch out for.

It has taken an enabling approval for a 5,000 crore rights issue, which will boost its net worth.

The logic for its capex and acquisitions hinges on continued growth in domestic demand, and revival in steel demand in markets such as US and Europe. Some easing of pressure on costs or a recovery in steel prices would be welcome. Progress on improving profitability of its international acquisitions and any new domestic acquisitions are key factors to watch for. Its shares are down by 13.5% since a month ago.

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