Despite a 2% drop in sales volume, JSW Steel Ltd reported a 5% growth in revenue for the September quarter. That feat was possible due to higher sales of value-added products, which have high entry barriers and face relatively less competition and are consequently priced higher. From 23% a year ago, the share of value-added products in overall sales rose to 33%.
So, even though volumes fell, realizations improved almost 12% from a year ago, according to an analyst with a domestic broking firm. This helped the company overcome cost pressures. JSW Steel’s operating profit or Ebitda (earnings before interest, taxes, depreciation and amortization) grew 9% to Rs.2,430 crore. Net profit jumped to Rs.762 crore.
The performance beat Street estimates. While the stock rallied 2.8% on Tuesday, the sustainability of positive momentum in margins and earnings may become a challenge in coming quarters.
The most important headwind the company and the industry are facing is the global slowdown. As demand slows, China and South Korea are stepping up exports to India. According to JSW Steel, steel imports jumped 32% from the June quarter.
Imports would not have been much of a problem if steel usage was high. But steel consumption is still soft in India—up just 0.9% from the June quarter. While imports are adding to the supply glut, low raw material rates mean that product prices are trending lower. “The regional steel prices have softened mirroring continued softness in raw material prices, low demand and surging exports from China,” JSW Steel said in a statement. Responding to the market conditions, JSW Steel has cut steel prices from 1 October.
True, an increasing share of value-added products in overall sales is helping the company record better realizations. But that alone cannot insulate the company from softening steel prices. Also the fact that the company’s realizations softened from the first quarter (sequentially) supports the view that low steel prices can still impact JSW Steel’s profitability.
The other headwind is the unavailability of iron ore. To make up for the shortfall the company is importing iron ore. Falling international rates have made imports viable. But imports cannot be a long-term arrangement as changes in the value of the Indian currency or overseas ore prices can make them uneconomical.
Summing up, despite low volumes, JSW Steel did rather well in the September quarter. The question now is whether it can sustain the positive momentum in these challenging times.
Source: livemint.com
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