Operations back to pre-Covid levels – JSW SteelMaitreyee Vaishampayan
Update on the Indian Equity market:
Amid weak global cues from spiking Covid-19 cases worldwide and uncertainty over the US presidential election, Nifty 50 ended 1.3% lower at 11,730 on Wednesday. Among the stocks, BHARTIARTL (3.4%), UPL (+2.8%), and M&M (+1.2%) led the gainers while HDFC (-3.5%), INDUSINDBK (-3.2%), ICICIBANK (-3.2%) led the losers. None of the sectoral indices ended the day in the green. FINANCIAL SERVICES (-2.3%), PRIVATE BANK (-2.2%), FINANCIAL SERVICES 25/50 (-2.1%) led the losers.
Excerpts of an interview of Mr. Seshagiri Rao, Joint MD, and CFO, JSW Steel with Financial Express on 27th October 2020:
• JSW Steel reported strong numbers for the September quarter with improvement in revenues and margins. Volumes were significantly better, both on a YoY and MoM basis. There has been a strong recovery in business activity as compared to 1QFY21. Although there are certain seasonal factors that impact demand in 2Q the overall environment is upbeat and expects the second half to see strong growth momentum.
• There is a very good improvement with regards to offtake by the auto sector. The revival in the auto sector was unexpected and sales to the auto industry went up 33% YoY.
• Although the commercial sector is still lagging, tractors, two-wheelers, and passenger vehicles are doing reasonably well. The demand is not expected to weaken in 2HFY21, on account of the festive season and the government’s attention to give fiscal stimulus. Demand will definitely see an MoM improvement, though YoY improvement will still take some time.
• There is good traction in the coated steel products, appliances, packaging, solar and government-aided projects. Rural demand is resilient and good monsoon and government initiatives will improve demand further.
• Long product demand was impacted by the monsoon and remained low. Construction activity has gained pace now and both 3Q and 4Q are expected to see good demand. Packaging and color-coated areas saw good offtake, which is expected to continue the rest of the year.
• Operations are back to pre-Covid levels and achieved average capacity utilization of around 86% in the quarter, versus 85% in 2QFY20. There were some disruptions due to the unavailability of iron ore and due to the increase in exports, evacuation of iron ore from other mines remained a challenge. The company is hopeful of the situation normalizing in the next quarter.
• In the second quarter, the steel prices have gone up by 11% and international prices have gone up by 16%. There has been an improvement in sales realizations, though realizations in India are increasing at a slower pace compared to that globally.
• The costs during the quarter were lower on account of the natural gas price which has come down. The power cost is lower because thermal coal prices have come down. Iron ore prices have gone up due to supply constraints. They will be able to reduce the cost of transporting iron ore from the mine to the railway siding, to an extent. They are also working on reducing the mining costs and want to set up a slurry pipeline to bring iron ore from the mine to the port. Though that will take time, once construction is completed, logistics costs will reduce drastically.
• The share of value-added and special products has now increased substantially to 51% of sales volume. There is substantial demand for color-coated products is on the rise from steel-using industries. There are plans to expand capacities at the Vasind, Tarapur, and Kalmeshwar plants by the end of this financial year.
• Once the high margin business like Asian color coated started coming in, margins will also get a lift.
• The NCLT has given approval for the plan to acquire the Asian Colour Coated Company. They are awaiting the final order to see if there are any modifications.
• They expect the Bhushan Power and Steel resolution to be settled by December 2021.
Consensus Estimate: (Source: market screener website)
• The closing price of JSW Steel was ₹ 306/- as of 28-October-2020. It traded at 18x/ 12x/ 10x the consensus earnings estimate of ₹ 17.3/ 26.3/ 30.4 per share for FY21E/FY22E/FY23E respectively.
• The consensus target price of ₹ 303 implies a PE multiple of 10x on FY23E EPS of ₹ 30.4/-.
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