JSW Steel loses shine in June quarter; the road ahead is tough

The company reported a standalone EBITDA (earnings before interest, taxes, depreciation and amortization) per tonne 8,318 represents a decline of 38% as compared to Q4FY22. According to the company, there were some ups and downs during the quarter.

Satyadeep Jain, an analyst at Ambit Capital, believes the company’s standalone Ebitda per tonne in Q1 after adjusting for various one-offs such as unrealized mark-to-market loss on foreign currency debt, export duty and inventory value markdown was up. 12,000 per ton.

Broadly speaking, JSW subsidiaries had a sluggish quarter. The company’s reported consolidated net profit fell by 75% sequentially 839 crores.

The road ahead remains difficult. True, there has been some relief on the cost front. For example, coking coal and iron ore prices have softened in recent months. JSW’s management expects coking coal prices to decline by $50-60 a tonne on a sequential basis in Q2 of FY23. But domestic steel prices have fallen sharply since the implementation of export duty effective May 22, the impact of which could offset the benefits of lower input costs. Demand headwinds have also had an impact on steel prices. Overall, this means that profit margins can be expected to remain under pressure in the second quarter as well.

“Going forward, despite lower raw material costs and commissioning of downstream capacity, we see the following risks: i) maintaining export volumes at least 12% could reduce margins at current prices. ii) Management Despite the U.S.’s best efforts, volume guidance appears to be difficult to obtain,” analysts at Edelweiss Securities said in a report dated July 22.

Given this backdrop, JSW has lowered its capital expenditure (capex) guidance for FY23. While this seems like a prudent move, investors will watch closely how the debt works out. By June 30, the company’s consolidated net debt increased to 67,221 crore to 56,650 crore as on March 31 on account of working capital formation. JSW intends to end this fiscal with net debt at the same level as FY22.

“While management has lowered FY23E capex guidance 5,000 crore 15,000 crore in light of current market conditions, we still expect net debt to grow by the end of FY23E, said analysts at Edelweiss.

Meanwhile, JSW shares are down 20% so far in FY23.

The company is optimistic about a possible withdrawal of export duty on steel, though it is uncertain. Additionally, demand revival remains significant.

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