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JSW Steel Ltd reported a decent September quarter performance helped by favourable realizations. The company’s biggest bugbear was rising input costs and the impact was visible on its operating performance.

Steel prices have remained on an upswing over the past year, given a secular rise in global commodity prices because of supply disruptions. Average steel prices rose by 1-3.5% ( 900-2,300/tonne) sequentially for Q2FY22, analysts at Centrum Broking Ltd pointed out. Price increases were higher for flats than for longs, they said, as long products witnessed softer demand from construction activities during the reported quarter because of the monsoon.

The climb in steel prices meant that JSW Steel’s realizations got boosted. The company reported its highest ever quarterly revenue from operations at 28,000 crore, an increase of 8% sequentially. An improved product mix also contributed to revenue growth, the company said.

Robust momentum
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Robust momentum

That said, standalone steel production was flat because of maintenance shutdowns during the quarter. Thus, saleable steel sales at 3.79 million tonnes were lower than the year-ago period. Sales increased 5% sequentially. This impact on domestic sales was offset by a push towards exports. Exports grew 22% sequentially and the company reported strong value-added and special products (VASP) volume, with the share of VASP standing at 60% compared to 51% in Q2FY21. Despite the support from exports, standalone Ebitda slipped 8.6% sequentially to 8,673 crore. Ebitda is earnings before interest, tax, depreciation and amortization. Ebitda was up 108% from a year ago.

The real pain was seen in Ebitda margin, which slipped to 31% from 36.56% in the previous quarter. The Ebitda margin was lower sequentially primarily because of elevated raw material prices of iron ore, coking coal and other key inputs such as power, natural gas and ferro alloys, said the company.

The rising input costs, especially that of coking coal, should be a worry. Some relief from the recent fall in iron ore prices should help the company. Nevertheless, with international coal prices at record highs, costs are expected to move up further. Another problem is rising gas prices and the gas-based steel plant at Dolvi, Maharashtra, may see some cost increases. The upshot is that JSW Steel’s margins would be under considerable pressure in the coming quarters.

On the whole, however, the outlook on profitability looks upbeat as steel prices have continued to rise.

Rating agency Crisil Ltd’s recent data shows that after a brief cooling period during July-September, domestic steel prices have resumed their upward journey in October. The major steelmakers have increased the price of flat steel by 1,500-3,000 per tonne. Long steel prices also have risen by 3,000 per tonne in the first week of October, led by higher coal prices and healthy demand.

There is scope for further increase in steel prices as domestic prices are still at a discount to landed global steel prices, analysts said. Domestic flat steel is priced at 10,000- 12,000 per tonne, lower than global landed price, Crisil pointed out. There is room to raise domestic prices and a correction this quarter appears unlikely as prices are expected to hold, the rating agency said.

All this would support volume growth for JSW Steel. Integrated operations have started at the Dolvi facility this month following a 5 million tonne per annum (mtpa) brownfield expansion. This has taken the company’s overall capacity to 23 mtpa. Further, the company has said that the 5-mtpa brownfield expansion at its Vijayanagar facility in Karnataka is progressing well, with civil work underway at the site.

The downstream expansion projects at Vijayanagar, Vasind (Maharashtra) and Tarapur (Maharashtra) facilities are in advanced stages of implementation. These will add 7.5 mtpa to the company’s capacities by FY24.

Meanwhile, the company is aiming to achieve a light balance sheet by paring debt. The debt to Ebitda at 1.58 times on 30 September 2021 was much better than 4.73 times on 30 September 2020. Shares of JSW Steel have gained a mere 5.5% in the past six months and the company’s strong Q2 operating performance may help its valuations.

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