(Naveen Kumar Saini/Mint )
(Naveen Kumar Saini/Mint )

A continuing slowdown in demand may increase pressure on JSW Steel

  • Coking coal prices were lower, but the company could not gain from this because of high iron ore prices
  • Steel sales dipped to 3.66 million tonnes (mt) in the June quarter, 3% lower than a year-ago

JSW Steel Ltd disappointed with its first-quarter earnings, missing expectations, thanks to sharply lower sales.

Steel sales dipped to 3.66 million tonnes (mt) in the June quarter, 3% lower than a year-ago. In the immediately preceding quarter of March 2019, steel sales stood at 4.31 mt.

Earlier this year, the management guided to a sales volume of 16 mt for the full year FY20. This translates to about 4 mt of sales per quarter. On that front, the first quarter’s sales volume disappointed, falling short of the target by about 0.34 mt.

In the post-result conference call, the management indicated that a widespread global downturn kept steel demand and prices weak. Additionally, a credit squeeze led to a sharper slowdown in the domestic market.

That squeezed steel demand domestically impacted realizations. The company’s revenues declined 0.7% year-on-year in the first quarter to 19,812 crore. That may not seem like much, but compared to the immediately preceding quarter, revenues slipped by 11% in the June quarter.

Sales wise, flats account for a larger share of volumes. Growth here moderated by about 2.2% year-on-year in the June quarter, while sales of long products increased to 0.93 mt year-on-year.

To an extent, rising exports buoyed revenue growth. Exports increased by about 34% year-on-year, accounting for about 17% of total sales. This was higher than the 12% exports clocked in the same quarter a year ago.

However, JSW Steel could not derive much gain from its captive iron ore plants. Due to a sharp rise in iron ore prices, raw material costs went up by about 57% in the June quarter as compared to 53% a year ago.

Coking coal prices were lower, but the company could not gain from this because of high iron ore prices.

As a result, Ebitda margins contracted to 18.75% in the June quarter. In the year-ago quarter, Ebitda margins were substantially higher at 25.6%. Ebitda is earnings before interest, taxes, depreciation and amortization.

The company’s expansion plans are on course. Any faster progress here could help improve operating leverage and overall performance. But on the balance-sheet front, rising debt levels are worrying. JSW Steel’s net debt-to-Ebitda ratio increased to 2.72 times as against 2.43 times in Q4 FY19.

A turnaround in the steel cycle seems unlikely in the near future. Demand conditions continue to remain weak. As such, the company’s volume target of 16 mt could still remain elusive in the coming three quarters. For now, it seems like the JSW Steel stock hardly offers any positives for investors.

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