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JSW Steel: The positive side of forex - Views on News from Equitymaster
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JSW Steel: The positive side of forex
Jul 21, 2009

Performance summary
  • Standalone topline grows by 6.7% YoY mainly on the back of higher sales volumes.
  • Operating profits grows by 18% YoY, higher as compared topline, thus enabling EBITDA margins to expand by 1.8% during the quarter.
  • Bottomline grows by 55% YoY mainly on account of significant rise in other income due to gains on forex and FCCB buyback during the quarter.


Consolidated financials
(Rs m) 1QFY09 1QFY10 Change
Steel sales (000' tonnes) 817 1,321 61.7%
Net sales 36,715 39,168 6.7%
Expenditure 30,387 31,701 4.3%
Operating profit (EBDITA) 6,328 7,467 18.0%
EBDITA margin (%) 17.2% 19.1%  
Other income 273 2,414 784.4%
Interest (net) 1,531 2,206 44.1%
Depreciation 1,852 2,718 46.8%
Profit before tax 3,217 4,957 54.1%
Extraordinary expense - -  
Tax 1,024 1,556 52.0%
Profit after tax/(loss) 2,194 3,400 55.0%
Net profit margin (%) 6.0% 8.7%  
No. of shares (m)   187.0  
Diluted earnings per share (Rs)*   31  
Price to earnings ratio (x)**   19.9  
(* annualised, ** on trailing twelve months earnings)

What has driven performance in 1QFY10?
  • The topline of company grew by 6.7% YoY in 1QFY10 mainly on account of higher sales volumes. Saleable steel volumes grew by 61.7% to 1.32 m tonnes wherein semis and longs products grew by 84% YoY and 136% YoY respectively, while flat products grew by 47% YoY during the quarter. On the production side, the company managed to grow its crude steel production by 41% YoY to 1.38 m tonnes mainly on account of expansion of capacity at its Vijayanagar plant to 6.8 MTPA (m tonnes per annum) during the quarter.

    Cost break-up…
    (Rs m) 1QFY09 1QFY10 Change
    Raw materials 19,321 24,071 24.6%
    % sales 52.6% 61.5%  
    Staff cost 774 920 18.8%
    % sales 2.1% 2.3%  
    Power and fuel 1,555 2,332 50.0%
    % sales 4.2% 6.0%  
    Other expenses 8,737 4,378 -49.9%
    % sales 23.8% 11.2%  

  • On the operating front, lower than proportionate rise in operating costs led to 18% YoY growth in operating profits. This was mainly on account of various cost reduction initiatives taken by the company during the quarter. In fact as per the company reports, the blended cost of production was lower by around 34% YoY in 1QFY10 as compared to corresponding period last year. Operating margins improved to 19.1% in 1QFY10 from 17.2% in 1QFY09.

  • The bottomline growth at 55% YoY comes in higher as compared to operating profits mainly on account of more than eight fold jump in other income during the quarter. The significant rise in other income can be attributed to gains of around Rs 2.4 bn and Rs 40 m on forex and FCCB buy back during the quarter. However, excluding these gains, PBT shows a decline of 21% YoY. Higher depreciation and interest costs have impacted the bottomline negatively.

What to expect?
At the current price of Rs 615, the stock is trading at a multiple of 19.9x 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.

With the GDP growth rate of India revised to 6.6%, the uptrend in industrial activity coupled with increased spending in construction and infrastructure is likely to enhance the prospects of steel consumption in the country. In fact, as per WSA (World Steel Association) reports, steel consumption in India is expected to grow by around 2% in 2009. Thus, JSW Steel with its enhanced scale of operations, wide market presence, product range and low conversion cost is likely to benefit from the strong demand in the coming quarters.

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