JSW Steel reported muted consolidated performance for Q1FY23

In terms of installed capacity, JSW Steel Ltd. is the biggest private steel producer in India. Additionally, it is among the cheapest steel manufacturers in the world. It provides an extensive selection of steel products, including Hot Rolled, Cold Rolled, Galvanized, and Special Steel Bars, Rounds, and Blooms. The business also operates in the steel and power sectors. JSW Steel, the marquee company of the JSW group and one of India’s leading integrated steel producers, has an installed capacity of 28.5 million tonnes yearly (MTPA).

JSW Steel announced their quarterly results for Q1FY23 on 22^nd July 2022, where they reported a sequential decline in both revenue & profits while on a YoY basis despite growth in revenue, it has reported a sharp decline in profits. This was because of the building margin pressures due to rising raw materials & energy costs and increasing net debt.

JSW Steel’s share price has given a return of 178% over the last two years from Rs 209 in July 2020 to Rs 582 levels in July 2022. Whereas it has delivered a negative return of 10.6% YTD after experiencing a sharp correction in April & May. Let’s now dig deeper into the fundamentals of JSW Steel Stock and analyse their Q1FY23 performance.

Key Highlights of JSW Steel Q1FY23 results

• JSW Steel reported revenues of Rs 38,086 crore, up 32% YoY, down 19%
• JSW Steel reported quarterly saleable steel sales volumes of 03 MT (million tonnes) in Q1FY23, up 12% YoY, down 21% QoQ
• JSW Steel reported consolidated operations reported EBITDA/tonne of Rs 9,597/tonne, down 68% YoY and 38% QoQ
• The company exports fell to 88 MT in Q1FY23 from 1.35 MT in Q4FY22, a reduction of almost 35% QoQ due to imposition of export duty in May 2022.
• JSW Steel’s PAT in Q1FY23 stood at Rs 856 crores which is down 85% YoY and 74%
• On a sequential basis JSW Steel’s consolidated net debt increased by Rs 10,571

JSW Steel results: Revenue grew 32% YoY while EBITDA fell 58% YoY in Q1FY23

For Q1FY23, JSW Steel reported consolidated revenues of Rs 38,086 crore, up 32% YoY, however down 19% QoQ. Whereas EBITDA for the Q1FY23 stood at Rs 3,352 core, down 65% QoQ and 51% YoY.

During Q1FY23, JSW Steel’s standalone operations (excluding Dolvi Phase – II) operated at 93% capacity utilisation as compared to 98% capacity utilisation during Q4FY22 due to certain scheduled shutdowns.

Further, JSW Steel reported quarterly saleable steel sales volumes of 4.03 MT in Q1FY23, up 12% YoY, however down 21% QoQ, broadly in line with analysts’ estimate of 4.1 MT. JSW Steel consolidated operations reported EBITDA/tonne of Rs 9597/tonne, down 68% YoY and 38% QoQ, broadly in line with estimates.

Moreover, the company reduced exports to 0.88 MT in Q1FY23 from 1.35 MT in Q4FY22, a reduction of almost 35% QoQ due to imposition of export duty in May 2022. Exports were about 20% of the total sales, which itself were subdued due to sudden imposition of export duty.

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Falling Steel Prices & imposition of Export Duty

The implementation of export duties has upset JSW’s volume growth narrative. The timing of the export duty coincided with weakening global steel demand and consequently, global steel prices and at the time when the steel industry was absorbing the peak input cost. The convergence of these elements caused JSW’s profitability and valuation to rapidly decline. Management highlighted that due to imposition of export duty, exports in India are down 26% QoQ at a time when domestic demand is soft.

Although a significant portion of the price increase will depend on China’s economic recovery. However, the sector is overstocked with finished steel, making any price increase ineffective. As a result, in order to get rid of their inventory, the corporations will either need to reduce their output, export some of it while recording losses, or partially do both. Analysts therefore predict that this inventory depletion will be finished by the end of Q2FY23 and that price increases will begin around the middle of September 22.

JSW Steel results: PAT fell 85% YoY & 74% QoQ

JSW Steel’s PAT in Q1FY23 stood at Rs 856 crores which is down 85% YoY and 74% QoQ. It reported a PAT of Rs 5577 crores in Q1FY22 & Rs 3374 crores in Q4FY22. This was due to a sharp reduction in other income & rising coke & energy costs.

Whereas Prime coking coal price has corrected 39% through Q1FY23 and by further 21% since the beginning of Q2FY23. Overall, prime coking coal has corrected by USD283/t (52%) since 1st Apr’22. In addition, JSW has started sourcing PCI coal, anthracite, and semi-soft coking coal from Russia at steep discount, which should reduce the costs substantially from Sep’22 onwards. Hence, investors can expect margin recovery from Q3FY23 onwards.

The company generally carries 50 days of coking coal inventory. The inventory of high costs of raw material is likely to be consumed by October 2022.

CAPEX Plans & rising Debt

JSW Steel’s capex spend was to the tune of Rs 3702 crore during Q1FY23. Considering the current market conditions, the company expects to calibrate its capex spend to Rs 15000 crore for FY23. (from Rs 20000 crore earlier). The steel maker said the global economic outlook has weakened due to high inflation across most economies, with elevated energy and food prices affecting consumption. The ongoing Russia-Ukraine conflict and frequent COVID-related lockdowns in China have disrupted global supply chains and caused spikes in energy prices.

“High inflation and energy costs are having some impact on domestic consumption. Policy rate tightening by the RBI and global central banks along with slowing global growth could impact near-term GDP growth,” the company said in the statement.

The 5 MTPA (million tonnes per annum) brownfield expansion at Vijayanagar is progressing well, with civil works underway at the site. Long lead-time items have been ordered, and Letters of Credit established. The project is expected to be completed by end of FY24. The expansion at Bhushan Power and Steel (BPSL) to 3.5 MTPA is progressing well and is expected to be completed during Q2FY23. The Phase-II expansion (from 3.5 MTPA to 5 MTPA) is expected to be completed by FY24.

On a sequential basis JSW Steel’s consolidated net debt increased by Rs 10,571 crore. As on 30th June 2022 JSW Steel’s net debt stood at Rs 67,221 crore as compared to Rs 56,650 crore as on 31st March 2022. The sequential increase in debt was mainly due to higher working capital requirement on account of inventory accretion to the tune of Rs 7874 crore. Another Rs 1,400 crore impact was on account of forex translation and balance was on account of capex related increase. Major portion of inventory build-up is likely unwind over the balance three quarters. Going forward, the unwinding of inventory is likely to aid in reduction in consolidated net debt levels from 30th June 2022 levels.

Technical Analysis of JSW Steel’s Share Price

JSW Steel’s share price have fallen almost 26% from its recent high of 790 achieved in April 2022. The 50 EMA is below 100 & 200 EMA for past 2 months as the stock experienced sharp correction. Further the JSW Steel share price has not moved much after the announcement of Q1FY23 results.

Our view

In view of the rising inventory and weak demand coupled with fewer opportunities to export profitably in the near term, the company has moderated its production. They have marginally reduced volume expectation for FY23, though management remained confident of recouping the lost volumes in subsequent quarters. With the inventory overhang from the previous quarters likely to persist for another quarter or two, decreased export opportunities and slowing domestic demand, the steel sector is currently not favorable for investment.

 

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Research done by: Ketan Sonalkar, SEBI Rgn No INA000011255

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