26 Jul , 2022 By : Kanchan Joshi
JSW Steel Ltd’s profitability took a beating in the June quarter (Q1FY23) mainly on account of higher input costs.
The company reported a standalone Ebitda (earnings before interest, taxes, depreciation and amortization) per tonne of rs8,318, representing a 38% drop vis-à-vis Q4FY22. According to the company, there were some one-offs during the quarter.
Satyadeep Jain, an analyst at Ambit Capital, reckons that after adjusting for various one-offs such as unrealized mark-to-market losses on forex loans, export duties and inventory value markdowns, the company’s standalone Ebitda per tonne in Q1 was above Rs12,000 per tonne.
Broadly, JSW’s subsidiaries had a muted quarter. The company’s reported consolidated net profit fell by 75% sequentially to Rs839 crore.
The path ahead remains tough. True, there is some respite on the cost front. For instance, coking coal and iron ore prices have softened in recent months. JSW’s management expects coking coal prices to dip $50-60 per tonne in Q2FY23 on a sequential basis. But domestic steel prices have declined sharply since the imposition of export duty effective 22 May, the impact of which could offset the gains of relatively lower input cost. Demand headwinds have also weighed on steel prices. Overall, this means profit margins can be expected to remain under pressure in Q2 as well.
“Going ahead, despite benefit from lower raw material cost and commissioning of downstream capacity, we see the following risks: i) Maintaining export volume at least at 12% might dilute margins at current prices. ii) Achieving volume guidance looks daunting, despite management’s best efforts," said analysts from Edelweiss Securities in a report on 22 July.
Given this backdrop, JSW has reduced its capital expenditure (capex) guidance for FY23. While this appears to be a sensible move, investors would closely watch how debt pans out. As on 30 June, the company’s consolidated net debt rose to Rs67,221 crore from Rs56,650 crore as on 31 March due to working capital build up. JSW intends to end this fiscal with net debt at similar levels as of FY22.
“While management has pruned FY23E capex guidance by Rs5,000 crore to Rs15,000 crore in light of the current market conditions, we still expect net debt to escalate by FY23E end," said Edelweiss’ analysts.
Meanwhile, JSW’s shares have declined by 20% so far in FY23.
The company is optimistic on the potential withdrawal of the export duty on steel, although this is uncertain. Additionally, demand revival remains crucial.
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