Steel major JSW Steel has put up a strong performance over the last one year, despite the tepid growth in Indian steel demand and shortage of domestic iron ore. Increased sales of higher-margin, value-added products and tapping the export markets boosted realisations. Falling global prices of coking coal, a key raw material, too helped.
The improvement in operational performance has seen the JSW Steel stock more than double over the last year. But there may be further upside to the stock.
Expanding value-added products portfolio should keep realisations healthy. Weakness in global raw material prices too puts it on a sweet spot.
Despite its run-up, at ₹1,309, the stock trades at a reasonable 1.3 times its estimated book value for 2014-15 — in line with its five-year average of 1.4 times.
Why buy Reasonable valuation Growing value-added portfolio Weakness in global raw material prices |
Adding more value JSW Steel, which has a steel-making capacity of 14.3 million tonnes per annum (mtpa) including that from its largest 10-mtpa plant at Vijayanagar, Karnataka, has managed to deliver healthy growth in recent times.
This is thanks to its specialised steel products portfolio, which has good demand both within the country (import substitution) and in export markets.
Helped by higher sales of value-added products, JSW Steel’s sales volumes grew 10 per cent in 2013-14, and 15 per cent in June 2014 quarter. These products now account for 29 per cent of the company’s sales, up from 25 per cent in the June 2013 quarter.
With the commissioning of the first phase of the 2.3-mtpa cold-rolling mill at the Vijayanagar plant last year, JSW Steel commenced supplies of high-grade automotive steel products such as outer body panels. This has helped it to capture a share of the lucrative auto-grade steel market, which is met by imports.
The company’s subsidiary, JSW Steel Coated Products, operates three facilities at Vasind, Tarapur and Kalmeshwar in Maharashtra, that produce value-added goods, such as galvanised products (1.72 mtpa) and colour coated products (0.67 mtpa).
JSW Steel’s capacity will get a further boost once it commissions the second phase of the cold-rolling mill by the end of this fiscal.
The company is also developing a cold-rolled, non-grain-oriented steel plant, products from which can substitute the import demand for electrical steel.
Following the Supreme Court ban on mining in some States, including Karnataka, in July 2011 (revoked partially later), the company faced a shortage of high-grade iron ore, forcing it to source the ore for its Vijayanagar plant from outside Karnataka.
Cost relief While this increased the cost of iron ore, the fall in global coking coal prices has provided the company some cost cushion.
JSW Steel has also decided to import about six million tonnes of iron ore during 2014-15, to ward off the domestic shortage.
That iron ore prices are expected to stay depressed on excess global supplies, provides some comfort. That said, in the long run, adequate availability of domestic iron ore remains crucial.
Use of captive coke and iron ore pellets produced at the company’s recently commissioned plants at the Dolvi unit, too, have helped on the cost front. The recent acquisition of Welspun Maxsteel is also expected to bring down production cost. The Welspun Maxsteel plant will use the surplus pellets produced by JSW Steel’s subsidiary Amba River Coke to make sponge iron which, in turn, will be used by the Dolvi plant that is being expanded. The recent Supreme Court order declaring coal block allocations between 1993 and 2010 illegal is unlikely to impact JSW Steel in the near-term.
Two of its coal blocks — Rohne in Jharkhand and Gourangdih ABC in West Bengal — find a mention in the order.
JSW Steel intends to use the coal from these not-yet operational mines for its planned greenfield projects in Jharkhand and West Bengal. The Jharkhand project is at a very early stage and the company is pursuing various regulatory approvals for it. The West Bengal project has been put on hold until an assured iron ore supply is secured.
Good show In the recent June 2014 quarter, JSW Steel reported net profit of ₹657 crore as against a loss of ₹382 crore a year ago. At the operating level too, it posted 39 per cent growth compared to June 2013. With a consolidated debt-equity ratio of 1.4 times as on March 2014, JSW Steel is moderately leveraged. But its interest coverage ratio of about two times in 2013-14 is not very high.