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Jindal Steel and Power. Photo: Bloomberg
Jindal Steel and Power. Photo: Bloomberg

Lower costs drive Jindal Steel and Power Q4 growth, but outlook challenging

  • Steel offtake is expected to be a challenge in the coming quarters as the economy has just started reopening
  • Exports could prove to be a solace as domestic demand remains tepid

MUMBAI: Jindal Steel and Power Ltd saw a decent growth in its operating profit in the March quarter due to higher realisations. But the coming quarters could test its operating parameters as the two-month lockdown has slowed construction and manufacturing activity.

The Q4 figures did quite manage to impress the Street with the stock rising 13% on Tuesday, but it slipped 1% on Wednesday.

Volumes in the steel sector have shrunk due to the lockdown, and JSPL has not been an exception. Its domestic steel volumes declined 17% q-o-q as covid-19 disrupted sales. But JSPL seemed to have counter-balanced this through higher prices. In Q4, domestic steel prices were on the rise and JSPL’s realisations were about 9% higher in the quarter.

Besides, lower operating costs aided margin growth, driving Ebitda about 20% higher year-on-year. The company also reported a strong growth in Ebitda margins that expanded to 25% in Q4, against 18% for the year-ago period.

“Ebitda increased primarily due to higher realisations and the use of the Sarda mine’s inventory during March 2020, which was offset by lower operating leverage," said Motilal Oswal Financial Services in a note to clients. Ebitda is earnings before interest, tax, depreciation and amortisation.

Steel prices have eased about 3-4% in recent times, but a sharp drop seems unlikely as inventory levels have decreased. The rupee depreciation has helped keep domestic prices firm. Long steel product prices have also been stable, and a pickup in construction, as the lockdown eases, will bring some relief. Lower production in the domestic market in April should also keep inventories low, which will extend some support to prices.

The company has reduced its net debt in FY20 by about 3,200 crore, while improvement in cash flows could result in more reduction in the coming year.

However, steel offtake is expected to be a challenge in the coming quarters as the economy has just begun reopening. Exports could prove to be a solace as domestic demand remains tepid, but business activity in the overseas markets is also curtailed.

“JSP has guided 7-7.5 mn tons of domestic steel volumes implying a 20% y-o-y growth at mid-point. We estimate 5.5 mn tons (-8% y-o-y) of steel volumes in FY2021 factoring the demand destruction led by covid-19," said Kotak Institutional Equities in a note to clients.

The stock corrected about 32% in the past year, which also was a factor in the recent bounce bac. But the pace of the pickup in construction and domestic manufacturing must be watched, which will be key to its stock price in the coming quarters.

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