JSW Steel navigates softer commodity prices well in Q4

The erosion of earnings can compel the firm to take up more debt, a key factor investors should watch out for

JSW Steel Ltd’s shares have withstood the turbulence in commodity prices much better than other metal producers. While the Nifty Metal Index has fallen 16.8% in the past year, JSW Steel shares have declined 9%. The company’s March quarter results should reinforce this trend.

Despite input cost pressures and soft product prices, JSW Steel expanded its consolidated revenues 10% sequentially. Operating profit fell 1.4%. But the quantum of drop is lower than Street estimates. This was possible through higher volumes, which at 4.3 million tonnes (mt) exceeded estimates.

Sales volumes of the stand-alone entity were 4.29 mt, higher than the 3.68 mt in the December quarter, and the 4 mt estimated by the Street. Higher volumes drove up stand-alone revenues by 7%. So, even as profitability has taken a notable hit (down two percentage points), the fall in operating profit was confined to 2% sequentially.

Earnings may not be growing, but it is important to note that JSW Steel has mitigated the impact of soft product prices. The company is busy expanding capacity, and plans to invest about 34,300 crore over the next two years through a mix of debt and internal accruals.

The erosion of earnings due to soft product prices can compel the company to take up more debt and grow volumes, a key factor investors should watch out for. The ongoing investments are already pushing up the company’s leverage. Net debt to Ebitda of the consolidated entity rose from 2.32 times at the end of the December quarter to 2.43 times in the March quarter. Though it is lower than the 2.57 times at the end of FY18, the ratio can deteriorate, impacting the credit metrics, if earnings from existing operations shrink. Ebitda stands for earnings before interest, taxes, depreciation and amortization.

The outlook on raw material, especially iron ore and coking coal, is benign. Elevated production in Odisha is keeping iron ore prices in check. Coking coal prices are stable and analysts do not see major changes due to subdued global demand.

The outlook for steel demand, however, is not very positive. There is tough competition, especially from imports. While this is weighing on product prices, the recent deceleration in the automobile sector, from which JSW Steel derives a sizeable portion of its revenues, is adding to the concerns.

The company forecasts 1.5% growth in sales volumes in FY20. But achieving this target hinges on how fast the economy recovers.

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