JSW Steel’s debt to weigh on its stock as demand remains tepid2 min read . Updated: 27 Jul 2020, 06:51 PM IST
- With an average decline in steel prices of about ₹6,700 per ton quarter-on-quarter, the company’s cost-control efforts were negated
- JSW has actually done well to reduce its cost per ton by about ₹3,400 crore during this quarter
Softer steel demand in the domestic market has marred the cost-cutting efforts of JSW Steel Ltd in the first quarter. But that does not seem to be deterring investors looking forward to a pickup in steel demand in the coming quarters. On Monday, the stock inched higher by about 1% while it clocked about 8.5% gains in the past month.
Still, the first quarter’s revenue contraction of about 40% is quite sharp and marginally higher than most analysts estimates. With an average decline in steel prices of about ₹6,700 per ton quarter-on-quarter, the company’s cost-control efforts were negated. JSW has actually done well to reduce its cost per ton by about ₹3,400 crore during this quarter.
One of the reasons for the decline has been lower realisations. While the company raised exports to about 57% of revenues during the quarter as against 13% in Q4, realisations on exports have been muted. With domestic sales weak, JSW Steel’s overall slack in volume growth is not a surprise. Sales volumes dipped 25% y-o-y for its standalone operations.
The decline in revenues has meant that operating leverage has been hit. In fact, the firm’s Ebitda per ton has halved year on year and also dragged down profitability.
JSW's debt continues to mount and is a big worry, note analysts. The company’s net debt increased by about ₹1290 crore in Q1 as it paid an upfront fee for mines in Odisha. Besides, debt is likely to further increase due to the acquisition of Bhushan Power and Steel Ltd.
“The stock’s performance is likely to be constrained in the near term by concerns on leverage owing to high current net debt/EBITDA; debt repayment worth ₹7500 crore due in FY21E, and high capex intensity; and 4) overhang of BSPL acquisition. In a weak operating environment, we see leverage as a key risk for the stock," said analysts at Edelweiss Securities in a note.
Capital expenditures also remain high in a weak operating environment, which could impact cash flows.
Nevertheless, demand in the coming quarters remains the key. One good thing is that domestic prices have inched up in the Q2, and maybe signalling a revival. But JSW Steel may need to see a decent increase in steel prices to tide over the current slowdown. But as domestic construction and auto sector demand are still in the slow lane, a sizeable increase in prices may be some time away.