The up-cycle in the steel industry has benefitted JSW Steel the most. Its operating profit, which had dipped to a low of about Rs 4,000 a tonne in Q3FY16 has seen a four-fold jump to about Rs 12,000 a tonne in Q4FY18. What is interesting is that Q4 was the best quarter of FY18 and steel prices have firmed up further by 1-2% thereafter, indicating that positives could continue in FY19 as well. To put it into perspective, the average realisation in Q4FY18 was around Rs 45,000 a tonne as against Rs 40,000 per tonne during the entire fiscal 2018.
Industry demand is clearly picking up. During fiscal 2018, JSW Steel recorded 6 percent growth in volumes to 15.62 million tonne. Domestic steel consumption increased by 7.9 percent on a year-on-year (YoY) basis to 90.68 million tonnes in FY18. During the current fiscal (FY19), demand is expected to grow at about 7-7.5 percent indicating better prospects for volume and realisations. As against this, JSW Steel has provided volume guidance of 16 million tonnes in FY19, which is a growth of 2.5 percent compared to FY18.
It is not just realisations and volumes, falling coal prices and commissioning of the captive iron ore mines in current fiscal will help in generating better profitability. These mines will replace its iron ore imports and ore bought from the domestic miners.
Part of the benefit is already visible as raw material and fuel costs grew by about 12-13 percent as against 22 percent growth in sales in Q4FY18. This has helped the company report better operating margins. During the quarter, its consolidated operating margins saw a spurt of about 400 basis points to 25.4 percent. Considering the firm pricing environment and expected reductions in the operating cost due to captive mines it is expected that the company should maintain or grow its margins in the coming quarters.
ValuationsAt the current market price of Rs 331, the stock is trading at about 13 times its estimated earnings of FY19, which is reasonable considering good earnings visibility and longterm benefits of expansion. The company is aiming to spend close to Rs 44,400 crore over the next four years to take its present capacity to about 25 million tonnes by the end of FY2020 from 18 million tonnes now. Commissioning of these new capacities will provide impetus to growth and support earnings.