JSW Steel’s Q3 show marred by cost pressures

Crude steel production was at 4.41 million tonne in Q3, up 8% sequentially, while average capacity utilisation stood at 94%, with some production coming in from the recently commissioned Dolvi Phase-2 expansion.

Helped by rising production, total sales at 4 million tonne grew 6% sequentially. However, declining steel realisations capped the rise in standalone revenue from operations to just 3% sequentially. Standalone realisations were down 2% quarter-on-quarter at ₹71,058 per tonne, as per analysts at Elara Securities (India) Pvt Ltd.

Rising coal and power prices, on the other hand, pushed up input cost inflation, and as a result operating costs surged 8% sequentially weighing on the company’s operating performance. Operating profit at ₹6,797 crore fell 22% sequentially. Per tonne Ebitda also contracted 26% sequentially to ₹16,993, as per analysts’ calculations.

Not surprising then that standalone net profit of ₹3,424 crore was down 36.4% sequentially.

Cost pressure is likely to continue into Q4 as well, with volatility in coal prices, adding to investor concerns.

“We expect margins to remain under pressure in the near term with a sharp increase in coking coal costs and bottoming out of domestic iron ore prices amid strong global iron ore prices,” said analysts at Kotak Institutional Equities.

To take care of cost pressures, the price hikes by the company will be monitored. Of curse, there is a possibility is that higher coal prices, if sustained, will lead to steel prices being raised by all manufacturers. However, for now, domestic and imported prices are largely at similar levels.

Analysts at Jefferies India Pvt Ltd in their note said Indian HRC steel price is down 8% from December quarterly average and broadly in-line with landed imports. Spot coking coal, on the other hand, is 20% above the December quarterly average. They, therefore, expect a compression in JSW’s standalone Ebitda per tonne, going ahead.

Rising volumes led by capacity expansions will provide some solace. The 5 million tonne expansion at Dolvi is already stabilising while another 5 million tonne per annum brownfield expansion at Vijayanagar is progressing well. Downstream expansion projects at Vijayanagar, Vasind, and Tarapur, too, are in advanced stages of implementation.