Mumbai: High raw material prices and low demand from key end-users in the auto segment will continue to impact steelmakers like JSW Steel.
A Bloomberg poll of 9 analysts expects JSW Steel to report a consolidated revenue of ₹17686.5 crore for the October-December quarter, while a poll of 5 analysts estimated net profit of ₹421.4 crore for the period under review. The company will announce its Q3 earnings later today.
According to brokerages, the domestic demand growth is expected to revive only in 4QFY20 and raw material prices will to continue to fall in line with fall in steel prices in 2HFY20. Steel sector volumes are expected to remain tepid in FY20 on back of demand slowdown in key end-user segments, impacting the capacity utilisations and margins.
India Ratings, in its December report, projected JSW Steel’s consolidated sales volumes to decline to about 15.5 million tonnes (mt) in FY20 (FY19: 16.1mt; FY18: 15.6mt) and per tonne EBITDA to ₹8,300 in FY20 (FY19: 11,700, FY18: 9,483).
Antique Broking, in its recent report, forecast flat steel spreads sequentially in 3QFY20. A decline in steel prices in October 2019 and reset of half yearly automotive contracts at lower levels would impact the quarter, it added.
Steel realizations bottomed out at the end of October with price hikes of ₹750/tonne and ₹1,000/ tonne taken in November and December 2019 respectively.
Recovery in domestic steel demand in 4QFY20 would enable the company to undertake further price hikes with current domestic steel prices at a discount to landed import parity Chinese prices. On the cost front, lower coking coal cost benefit of $25-30 per tonne is expected to flow through in 3Q partially offsetting the negative impact of subdued steel realizations, according to the brokerage.
The company's foreign subsidiaries in the US and Italy incurred losses in 2QFY20 including inventory losses to the extent of $17 million.
“With a recovery in steel prices no further inventory losses are expected; however operational losses are expected to continue till the utilization levels ramp up from current 20-25% to 50-60% levels," the brokerage said.
Steel volume growth in FY21/22 would be aided by the 5 million tonne per annum Dolvi expansion and current spreads would improve driven by improved realizations and lower coking coal costs. Overseas acquisitions would remain a drag on profitability till the operations are ramped up.