JSW Steel’s Q2 recovery good but stock’s valuations pricey2 min read . Updated: 26 Oct 2020, 09:53 PM IST
Its steel volumes grew well at 14% y-o-y and good realizations in the quarter helped buoy the top line substantially
Steel companies were expected to rebound after the washed-out first quarter. JSW Steel Ltd did even better, because of better volume growth and higher realizations. However, its pricey valuations could still be a deterrent for investors. The stock slid about 4% after the results, indicating that investors want valuations to cool down further. The stock had rallied sharply in the past three months on the back of Chinese demand and an increase in steel prices.
JSW’s steel volumes grew well at 14% year-on-year (y-o-y), which is good given the circumstances. Realisations have been good in the quarter and helped buoy the top line substantially. Lower power and fuel costs further helped decrease costs during the quarter, in addition to the savings from covid-19 related cost cuts.
This led to an expansion of about 88% y-o-y in consolidated operating profits. The operating profit per tonne was also quite impressive at ₹10,323. However, the growth is also due to the pent-up demand post the opening of the economy.
The company has increased prices in October by about ₹2,000 per tonne, which means that the second half has started on a good note.
JSW’s guidance of 15 million tonnes is also good and implies a sales run-rate of about 4.1 million tonnes per quarter in the next two quarters. The company did well in Q2 to achieve sales of about 4.1 million tonnes, but replicating this over the next two quarters may be a tad difficult.
However, sales growth will look better next year. The expansion of about 5 million tonnes of steel production in Dolvi is expected to come into production in the fourth quarter. This will certainly expand revenues in the coming years.
The firm’s expansion spree has, however, also meant that debt levels are high, which remains a key concern. “JSW Steel is currently one of the most levered steel companies globally. We don’t expect JSW Steel to generate positive free cash flow until FY23," said analysts at Ambit Capital in a note to clients.
Another play that needs to be watched is global steel supplies and prices. As production in China is expected to increase, supplies could increase, keeping a check on price increases. Besides, the stock has raced up in the past few months, trading at nearly 6% above its pre-covid high. Its price-earnings multiple of 17-18 times FY21 earnings seems stiff.
“Post the sharp run-up in the past couple of months, we believe JSW’s valuation is now stretched," said analysts at Ambit.