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JSW Steel: Forex losses spoil the show - Views on News from Equitymaster
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JSW Steel: Forex losses spoil the show
May 8, 2009

Performance summary
  • Standalone topline grew by 24% YoY during FY09 backed by higher blended sales realizations and volumes.
  • Operating margins declined to 21.1% YoY on account of increase in operating costs in FY09
  • Bottomline declined by 73.5% YoY for the full year as higher interest and depreciation charges put further pressure on profitability. The company also suffered huge forex losses during the fiscal.
  • While topline grew by 5.3% YoY during 4QFY09, net profits declined by 89.3% YoY during the quarter.
  • The board has recommended a dividend of Rs 1 per share for the financial year 2008-09.


Standalone financial snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Steel sales (000' tonnes) 1,009 1,062 5.3% 3,405 3,428 0.7%
Net sales 41,898 33,288 -20.6% 114,200 141,584 24.0%
Expenditure 32,424 29,227 -9.9% 80,654 111,681 38.5%
Operating profit (EBDITA) 9,474 4,061 -57.1% 33,546 29,903 -10.9%
EBDITA margin (%) 22.6% 12.2%   29.4% 21.1%  
Other income 362 973 169.1% 2,571 1,024 -60.2%
Interest (net) 1,911 2,149 12.4% 4,404 7,973 81.0%
Depreciation 2,333 2,309 -1.1% 6,872 8,277 20.4%
Profit before tax 5,591 577 -89.7% 24,841 14,678 -40.9%
Extraordinary expense 1,391 178   - (7,901)  
Tax 2,372 263 -88.9% 7,559 2,191 -71.0%
Profit after tax/(loss) 4,610 492 -89.3% 17,282 4,585 -73.5%
Net profit margin (%) 11.0% 1.5%   15.1% 3.2%  
No. of shares (m)         187.0  
Diluted earnings per share (Rs)*         24.5  
Price to earnings ratio (x)**         17.0  
(* annualised, ** on trailing twelve months earnings)

What has driven performance in FY09?
  • While the company was able to increase its saleable steel volumes by just around 1% during the fiscal, higher blended sales realisations enabled company to record a 24 % growth in topline during FY09. The company managed to grow the sales volumes of semis and value added products by 86% YoY and 15% YoY during the fiscal. However, slowdown in the global and domestic economy during the second half of FY09 had caused a slump in steel prices, consequently lowering the realizations in that half.

    Cost break-up…
    (Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
    Raw materials 23,253 22,833 -1.8% 56,939 84,501 48.4%
    % sales 55.5% 68.6%   49.9% 59.7%  
    Staff cost 979 625 -36.1% 2,740 2,888 5.4%
    % sales 2.3% 1.9%   2.4% 2.0%  
    Power and fuel 1,961 1,798 -8.3% 5,324 6,731 26.4%
    % sales 4.7% 5.4%   4.7% 4.8%  
    Other expenses 6,232 3,972 -36.3% 15,651 17,562 12.2%
    % sales 14.9% 11.9%   13.7% 12.4%  

  • As far as operating performance is concerned, the margins declined by 8.3% to 21.1% during the fiscal mainly on account of higher cost of raw materials. Raw material cost as a percentage of sales increased from 49.9% in FY08 to 59.7% in FY09. This was due to higher contract prices of coking coal entered in July 2008 when the prices were at their peak. Had there been no reduction in other expenses and staff costs (as percentage of sales), the EBITDA would have witnessed a greater fall.

  • Net profits declined by 73.5% YoY during the fiscal. This is mainly on account of forex losses coupled with fall in other income, higher interest and depreciation charges. However, lower tax expenses saved the bottomline from further decline. Excluding forex losses, the decline in net profits stood at 28% during the fiscal.

What to expect?
At the current price of Rs 416, the stock is trading at a multiple of 17x the company’s trailing twelve months earnings. The company recently completed its 2.8 m tonnes capacity expansion at Vijayanagar plant, enhancing its overall capacity to 6.8 MTPA. It plans to add another 3.2 m tonnes of capacity to Vijayanagar plant by 2011. Also, first phase of a new hot strip mill of 5 MTPA capacity is scheduled to be completed by end of this fiscal. The company is targeting to achieve production of around 6.1 m tonnes of steel during the fiscal.

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