JSW Steel Ltd’s shares declined by 13% last week, with the stock touching a new 52-week low of ₹520.05 on 26 May on NSE. The government’s imposition of export duty on steel has not gone down well with the investors.
But JSW Steel’s management isn’t perturbed. In its March quarter earnings call on Friday, the management said that it expects this move by the government to be temporary akin to the trend observed in 2008. Even so, this would weigh on overall sales realization as exports are sizeable for the company. In FY22, exports contributed 28% to consolidated volumes.
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Also, global steel prices have begun to soften from mid-April, which has, in turn, rubbed off on the domestic markets. The export duty announcement, too, has had a sentimental impact on the domestic prices. The management said that they have corrected the prices by more than ₹2,000 per tonne earlier this month vis-a-vis April and expect a larger drop between now and 1 June.
What’s more, coking coal prices continue to rise. The company expects the cost of this raw material to rise by $125 per tonne in the June quarter. This is over and above the $52 per tonne sequential rise seen in Q4. Note that Q4 standalone Ebitda per tonne fell by 31.6% year-on-year and 20.5% sequentially to ₹13,517. This is despite a record sales volume of 5.1 million tonnes in the quarter.
The silver lining is that the government has lifted the import duty on coking coal, which will provide some cushion to margins. With respect to another key raw material, iron ore, the company is ramping up capacity and aims to source 53% of the requirement from its captive mines in FY23.
On the demand front, increased infrastructure activity by the government bodes well. Also, demand from the automobile industry is strong, with increased traction seen in the passenger vehicle and commercial vehicle segments.
Overall, JSW Steel expects to clock steel sales volume of 24 million tonnes in FY23. Meanwhile, consolidated net debt stood at ₹56,650 crore as of March-end, lower than ₹66,312 crore sequentially. But with falling profitability and elevated capex plans, debt levels are not expected to reduce meaningfully hereon.
“While we are optimistic about JSW Steel ramping up volume, we are concerned about its high capex intensity in times of declining steel prices. We see the absorption of additional volumes from Dolvi-II coming at the time of supply surplus,” said analysts at Edelweiss Securities Ltd in a report on 27 May.
Given the industry headwinds of export duty and high coking coal prices, IDBI Capital Markets & Securities has downgraded the stock to a hold rating.
