Volume growth, deleveraging to boost JSW Steel’s earnings

By Ujjval Jauhari
Photo: Bloomberg

JSW Steel Ltd’s investors may draw some confidence from the recent positive developments for the steelmaker. For one, the company reported a 5% year-on-year rise in crude steel production in August. An upgrade in the rating outlook from Moody’s Investors Service Ltd reflects more confidence on debt levels.

But the company’s shares have corrected by more than 9% since August largely because of the seasonal impact on steel prices and the surge in the prices of raw material such as iron ore and coal.

That said, steel demand is expected to bounce back with a resumption in construction activity. Iron ore prices are already correcting, which should support operating performance. JSW Steel depends on external supplies of iron ore. Notably NMDC Ltd, the country’s largest iron ore producer, has revised down the price for its produce for the second month in a row, as international iron ore prices have declined.

Robust margins
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Robust margins

JSW Steel had reported record operating margins for the June quarter. The standalone Ebitda (earnings before interest, taxes, depreciation and amortization) per tonne was the highest at 26,291. This was supported by rising realizations despite domestic volumes getting impacted by covid. “The outlook change to positive reflects our view that JSW’s better-than-expected operating performance this fiscal year will help to sustain its deleveraging," said Moody’s Investor Services in its rating release.

As operating performance is expected to remain supportive, the company could see earnings being driven by an expansion in capacities. Its ongoing 5 million tonne per annum (mtpa) expansion at Dolvi is expected to be completed soon and will add to the current 18 mtpa capacity. The company has additional 7.5 mtpa capacity expansions lined up until FY24. “Over FY21-23, we expect an above-industry volume CAGR of 17%, driven by the Dolvi expansion," said analysts at Motilal Oswal Financial Services Ltd. The volume growth will drive earnings improvement even if record high steel prices do not see a substantial rise over time.

Improved cash flows mean that deleveraging may gather pace. “We expect leverage—measured by consolidated debt/Ebitda—to decline to less than 2.0x by March 2022, from 5.9x at March 2020, 4.5x at March 2021 and 2.9x at June 2021," said Moody’s.


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