JSW Steel numbers were released just before the market close on Wednesday and didn’t look very bad if you were compared the reported numbers to the consolidated poll. The problem though was in the internals which was weak. The inline operating profit needs to be attributed to the receipt of Rs 466 crore due to VAT/GST incentives which gave a boost to the operating performance.

KEY DISAPPOINTMENTS

Lower sales volumes and guidance cut

Q2FY20 sales volumes came in at 3.6mt which was lower than CNBC-TV18 poll of 3.7mt. Now at the halfway mark, the sales volumes are down 6 percent and so the management has scaled back its FY20 guidance. JSW trimmed volumes guidance by 3 percent on annualized basis implying a new sales target of 15.5 mn tonnes in FY20 vs 16 mn tonnes previously.

EBITDA/tn at lowest since Q1Fy18

Adjusted Ebitda per ton came in at 6500/tn which is lower than the expected 7360/tn. The key reasons for EBITDA/tn miss were than realisations corrected by 16 percent year-on-year but costs are not down as much as the company was sitting on some higher-cost coking coal and iron ore inventory. Additionally, realisations were lower due to suppressed domestic prices & higher proportion of exports

All of its overseas subsidiaries have recorded EBITDA losses during Q2

International operations reported operating losses owing to the global slowdown and their problems were compounded due to inventory losses which could get reversed in the coming quarters. The management remains optimistic that both the US plates & pipes business and the European business will turnaround by the end of this fiscal or by first quarter FY21.

THE POSITIVES

Capex trimmed

The company has recalibrated its capex plan and identified certain downstream projects to be deferred to the next year. The company has also toned down its FY20 capex guidance to Rs.11000cr from Rs.15700cr previously as they are going slow on Cold Roll Mill, coke oven plant, etc.

EBITDA/tn could have based out according to management

Management expects domestic steel prices and spreads have bottomed out. The company expects efficiency in Q3 and Q4 to pick up on the fuel side once the monsoon subsides. Meaningful fall in coking coal price and savings on iron ore will help in some improvement in spreads going forward. Coking coal costs are more than 25 USD lower vs Q2FY20 average purchase price and iron ore costs are likely to dip due to higher captive use + lower market rates

The street will have to trim estimates

Brokerages will have to adjust estimates lower as H1FY20 EBITDA/tn was approx. 8250/tn which is lower by 1000/tn in comparison to street expectations. Hence they will have to trim their EBITDA/tn estimates for the year

What can help the stock bounce back?

Though the management remains committed to the Bhushan Power & Steel acquisition the street will cheer if somehow JSW steel finds its way out of the deal. Remember the acquisition is pending seeking certain clarifications which include immunity from fraud cases or attachment of property, change in resolution plan by NCLT.

First Published:Oct 24, 2019 7:04 PM IST