Coal news and updates

JSW Steel: Shaking off the rust

While JSW Steel produced 3.13 million tonnes (mt) of steel in the quarter ended September on a standalone basis, 44 per cent more than a year ago, it managed to sell 2.98 mt, 37 per cent more than a year ago. More, the production and sales were more skewed towards the flat products (sales of 2.45 mt; up 37 per cent year-on-year) compared to long products (0.46 mt, up three per cent year-on-year). The flat products used by consumer durables, automobile and other sectors helped boost exports. Utilising the opportunity given by the rupee depreciation and looking at slowdown in domestic demand, JSW increased its exports to 0.84 mt (up 23 per cent year-on-year). First half exports were 1.12 mt. This should help it come close to its three-mt export target for FY14 compared to 1.9-mt exports in FY13.

With better volumes and product mix, and aided by higher realisations, the company reported that standalone revenues of Rs 11,308 crore grew 30 per cent year-on-year and were higher than Street estimates of Rs 11,087 crore. More, with cost efficiencies (as the Vijaynagar plant started Coke dry quenching facility, which removes moisture from coal leading to better fuel efficiency and flaring of gas from captive power plant being reduced to three per cent from 10 per cent), the company posted a 220-basis-point year-on-year increase in standalone earnings before interest, taxes, depreciation and amortisation (Ebitda) margins at 19.4 per cent (Ebitda a tonne, $118).
arnings before interest and taxes (EBIT) a tonne at $80 was much better than global peers — Korean companies saw EBIT a tonne of $36-$48, Japan’s $40 and the US’s $28. However, while rupee depreciation helped realisations, the translational losses of Rs 839 crore due to rupee depreciation pulled down profits to just Rs 101.25 crore versus Rs 822.26 crore a year ago.

On a consolidated basis, after the merger of JSW Ispat though, the translational losses were Rs 851 crore. Consequently, JSW reported a consolidated loss of Rs 115.55 crore, which, however, is lower sequentially. Since the JSW and Ispat merger took place in FY14, the consolidated results are not comparable year-on-year.

Seshagiri Rao, group chief financial officer and joint managing director, JSW Steel, said the translational losses will not be seen in subsequent quarters as the company had started hedging. The company depends on imported coal to meet its basic raw material requirement. It will now be hedge imports of raw material, as well as exports.

On a consolidated basis, the debt was Rs 30,435 crore (39 per cent in dollar terms and rest in rupee terms). Rao said JSW planned to take this ratio to 50:50 and reduce cost of debt by a per cent (currently at 8.24 per cent). This should help partly ease concerns on interest outgo, increased sharply on consolidation of JSW Ispat.

Positively, ore availability in Karnataka is improving, though at a slow pace. While the current 15 A and B category mines in the state produce 15 mt a year, the operations of the next 25 will add 25 mt. Total 40 mines, including NMDC’s, will produce 40 mt a year. JSW is also one of the bidders for Stemcore assets and is keenly looking at those to ensure captive supplies. Current requirement of JSW from Karnataka is 18 mt, of which it is sourcing 2.5 mt from outside the state.

On demand, while the World Steel Association has upgraded steel demand estimates from China to six per cent (means an additional 45 mt demand). However, Rao says while China will see slower growth next year (2014), demand from emerging and developed markets will increase 48 mt. China’s slowing down will also be favourable for ore and coal prices. JSW expects coal costs to stay stable at $140-150 (FOB basis) in the near term.

While fundamental prospects are improving, the Street has sensed it. The JSW Steel stock has run up 91 per cent from 52-week lows of Rs 452 in August to Rs 861, much ahead of consensus target price of Rs 736 (by analysts polled in October). Given this as well as some concerns, analysts believe the upside for the stock is limited.

Bhavesh Chauhan at Angel Broking says “With slower-than-expected scaling of ore mining in Karnataka, we believe increasing steel production meaningfully during FY14 would remain a challenge. More, JSW Ispat’s merger with JSW Steel is likely to erode JSW Steel’s margins. However, in light of better-than-expected Q2FY14 results, we keep our rating and target price under review.” Abhisar Jain at Centrum Broking, who says JSW is likely to meet its sales guidance of 11.56 mt in FY14, is reviewing his target price of Rs 771.

Source: Business Standard