Posted on 28 Oct 2020
Steel companies were expected to rebound after the washed-out first quarter. But JSW Steel did even better, thanks to better volume growth and higher realisations. However, its pricey valuations could still be a deterrent for investors. The stock slid about 3% post the results, showing investors want valuations to cool down further. The stock had rallied sharply in the past three months on the back of Chinese demand and uptick in steel prices.
JSW’s steel volumes grew well at 14% year-on-year, which is good given the circumstances. Realisations have been good in the quarter and helped buoy the top line substantially. Lower power and fuel costs further helped decrease costs during the quarter, in addition to the savings from covid-19 related cost cuts.
That led to a sharp expansion of about 88% y-o-y in consolidated operating profits. Operating profit per ton was also quite impressive at about ₹10323. Some of the growth is also likely from the pent-up demand post the opening of the economy.
The company has increased prices in October by about ₹2000 per ton, which means that the second half has started on a good note. JSW’s guidance of 15 million tons is also good implying a sales run-rate of about 4.1 million tons per quarter in the next two quarters. While the firm did well in Q2 to achieve sales of about 4.1 million tons, replicating the same over the next two quarters may be a tad difficult.
However, sales growth will look better next year. The Dolvi expansion of about 5 million tons of steel production is expected to come into production in the fourth quarter. So, this will certainly expand revenues in the coming years. But the company’s expansion spree has also meant that debt levels are high, which remains a key concern. “JSW Steel is currently one of the most levered steel companies globally. We don’t expect JSW Steel to generate positive free cash flow until FY23,” said analysts at Ambit Capital in a note to clients.
Another play that needs to be watched is global steel supplies and prices. As production in China is expected to ramp up, supplies could increase keeping a check on price increases. Besides, the stock has raced up in the past few months with its stock trading at nearly 6% above its pre-covid high. Its price-earnings multiple of about 17-18 times FY21 earnings seems stiff.
“Post the sharp run-up in the past couple of months, we believe JSW’s valuation is now stretched,” said analysts at Ambit.
Source:Live Mint
