JSW Steel. JSW Steel: Going strong

The stock of JSW Steel has gained about 50 per cent over the last year. This is thanks to favourable market conditions for the steel industry from mid-2016 that have benefited major steel companies in the country. JSW Steel’s consolidated operating profit in FY-17 nearly tripled over that in FY-16. This was a sharp turnaround from the performance in FY-16 which saw profit drop about 53 per cent compared with FY 2015. Aided by volume growth, the company’s revenue performance in FY-2018 so far has been good.

Standalone revenue (India operations) grew about 18 per y-o-y in the first half of FY-18 to ₹30,052 crore, while revenue from the US subsidiary increased about 80 per cent y-o-y to about $113 million. In the December 2017 quarter, the company has recorded its highest ever quarterly crude steel production of 4.11 million tonne (mt), an increase of 6.5 per cent y-o-y.

With increasing demand in the domestic market and in China and high steel prices, the outlook for the sector looks positive over the next two to three years. JSW Steel is well poised to reap the benefits with expansion plans underway.

Despite the stock’s rally, it trades at reasonable valuations due to good earnings growth potential. At ₹290, the stock trades at about 13 times its FY-19 estimated earnings, somewhat higher than the about 11 times average of forward earnings over past three years. But this does not seem out of place given the company’s growth prospects. Sales volumes should continue rising with increased demand and capacity expansion.

Margins should also get a leg-up with the company’s focus on value-added and specialty products in the product mix, cost reduction measures and guidance to keep debt at reasonable levels. Investors with a two to three year perspective can buy the stock.

Expansion to meet demand

Since mid-2016, the steel sector in India has been benefitting from buoyant demand and healthy price realisations. This has been aided by increasing global demand including from China and the production cuts there. The favourable global demand-supply dynamic is expected to continue. Indian steel makers have also gained from the various measures to restrict cheap steel imports into the country such as anti-dumping duties and minimum import prices. Demand in India is expected to continue growing at a healthy pace with the government’s thrust on the infrastructure sector.

JSW Steel is among India’s largest integrated steel manufacturers with a capacity of 18 million tonnes per annum — 12 mtpa at Vijayanagar plant in Karnataka, 5 mtpa at Dolvi plant in Maharashtra and 1 mtpa at Salem in Tamil Nadu.

The planned capex over four years is about ₹26,800 crore including outlay for the Dolvi plant’s expansion — one of the key projects being undertaken by the company.

The company plans to increase the crude steel capacity at the Dolvi plant from 5 mtpa to 10 mtpa by March 2020. The capex allocated to this project is ₹15,000 crore. The remaining amount is for initiatives to improve the product mix and decrease the cost of production. JSW Steel has plans to expand capacity to 40 mtpa by 2030 with plants in mineral-rich States Odisha and Jharkhand.

The management plans to maintain net debt-to-equity at less than 1.75 times while the capex programmes are executed over the next two years. The company is also looking at acquiring assets of stressed companies such as Bhushan Steel and Monnet Ispat that are facing insolvency proceedings. Amidst the ongoing consolidation in the sector, the company’s strong balance sheet gives it leeway for expansion and growth over the next few years, while keeping leverage at manageable levels.

Product mix improvement

Over the past few years, JSW Steel has been increasing the mix of high-margin value-added and specialty products in its portfolio. These products accounted for about 60 per cent of the company’s sales volumes for the quarter year ended September 2017 compared with 53 per cent in the year-ago period. At the ongoing 5 mtpa expansion at Dolvi too, the company plans to have about 2.5 mt to make the value-added and specialty products.

Increasing share of exports in the revenue mix has also aided JSW Steel with realisations on exports being at a premium to domestic prices. From 12 per cent of the sales volumes in FY-16, exports accounted for 26 per cent of volumes in FY-17.

Input costs to decline

JSW Steel is set to get good relief on supply of iron ore, its main raw material. The Supreme Court’s judgment to increase the cap from 30 mtpa to 35 mtpa for the Category A and B mines in Karnataka has come as a relief to the company and will aid iron ore supply to its Vijayanagar plant. The company is also hopeful of reduction in the premium (₹600 per tonne) charged by the Karnataka’s NMDC (National Mineral Development Corporation) on supply of iron ore due to its non-availability. Higher supply of iron ore is expected by the end of FY-18.

The company is also taking various initiatives to reduce its cost of production. For instance, it is setting up a 20 km pipeline conveyor for transportation of iron ore to the integrated Vijayanagar plant from the mines. This pipeline conveyor that will replace truck transportation is to be commissioned next year and is expected to benefit the company to the tune of ₹300-500 per tonne.

Good financials

The change in fortunes in the steel sector is reflected in JSW Steel’s financial performance. From loss of about ₹481 crore in FY-16, the company registered net profit of ₹3,467 crore in FY-17. Even in FY-16, a difficult year for the steel industry, the company managed profit at the operating level.

The company has done well on the revenue front in the current fiscal. Aided by sales volumes growing about 4 per cent y-o-y to 7.4 mtpa in the first half of FY-18 and better realisations, the company’s consolidated revenue in the first half of the FY-18 grew 20 per cent y-o-y. But operating profit fell by about 8 per cent due to higher raw material prices and restrictions on sales realisations due to contracts that were locked in until September. Renegotiation of these contracts in the second half of FY-18 should aid profit growth. The weakness in performance was in the June 2017 quarter.

In the September 2017 quarter, the company’s revenue and net profit grew 17 per cent and 29 per cent respectively y-o-y. The second half of FY-18 is expected to be better than the first with renegotiated contracts and lesser pressure on the cost front.