JSW Steel Q2: Subdued volumes and weak realisations dampen profitability

BL Research Bureau

Given the subdued economic activity, the earnings of JSW Steel for the quarter ended September 2019 was expected to be weak. Revenue for the company fell by about 18 per cent to ₹17,572 crore, while net profit fell 73 per cent to about ₹560 crore (even after adjusting the tax reversal made on account of recent corporate tax rate cut) when compared to the same period a year ago.

Moderate sales volumes, lower realisations, lag in the transmission of reduced costs exerted pressure on the profitability of the company.

Going ahead, the operating performance of the company depends on the implementation of proposed investment initiatives by the Government, possibly lower imports from FTA (Free Trade Agreement) countries, and stability in the steel prices which hinges on the resolution of Brexit imbroglio and trade issues between the US and China.

Low volumes and realisations

According to ICRA India, domestic consumption of steel in July and August, at about 16.98 million tonnes, was muted. The consumption in the corresponding months of 2018 was 16.39 mt.

This is reflected in the sales volumes recorded for the September quarter by the steel companies. JSW Steel is not an exception. The group’s sales volumes at 3.56 million tonnes in the September quarter fell by about 3 per cent sequentially, and by 9 per cent compared to Q2 of FY19.

This is despite the company trying to counter the slowdown in the domestic demand with the increase in exports by almost 68 per cent to 1.09 million tonnes, which accounted for about 31 per cent of the consolidated steel sales.

The reason for the slowdown in the domestic demand for steel and lower steel prices was attributed to the muted investment spend, credit squeeze and a slowdown in the automotive sector.

Though exports compensated the loss of sales from the domestic market to an extent, it couldn’t help the company much on the realisations front. Steel prices across the globe have been falling due to uncertainties in global trade.

The net sales realisation of the company, which was about ₹43,000 per tonne in the second quarter of FY20, was down by about 13 per cent Y-o-Y and about 8 per cent on a sequential basis. The fall in the share of value-added products – commanding higher margins – in the overall sales, to about 46 per cent from 55 per cent in a year-ago period, have also likely weakened the net blended realisations of the company in the September quarter.

Weaker margins

A look at the trend of iron ore and coking prices show that they have softened in the September quarter. According to ICRA India, the import cost of iron ore came down from above $100 level in Q1 this fiscal to $80-$90 per tonne towards the end of the second quarter, though it is higher than the cost in the year-ago period. The average import cost of coking coal, however, dropped from about $180 per tonne in Q2 FY19 to $160 per tonne in Q2 FY20.

The management of JSW Steel stated that it would benefit from the reduced costs of raw materials only in the ensuing quarters due to the lag effect.

While JSW Steel managed to cut down its other operating costs in the quarter, weak realisations and higher raw material costs impacted the operational profitability of the company adversely. For the September quarter of this fiscal, JSW Steel recorded operating profit of ₹2,731 crore, down by 44 per cent compared to a year ago.

This also led to the drop in EBITDA margins to about 16 per cent in the latest September quarter from about 22 per cent a year ago.

Going ahead

After a robust FY19 fiscal, the company has started the current fiscal on a subdued note. The management expects the second half of FY20 to track the first-half performance. It is hopeful of meeting 97 per cent of the production and sales volumes’ guidance – 16.95 million tonnes and 16 million tonnes respectively - fixed for FY20.

Going ahead, if the investment proposals of the Government in the pipelines and solar appliances segments are implemented, and if the credit flow is improved, demand could improve for steel companies.

Besides, if steel prices stabilise –the company believes that the commodity’s price has bottomed out – and benefits of the lower cost of coking coal and iron ore flow in, there could be some respite on the margin front, aiding earnings.

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