JSW volumes, product mix to drive FY11 growth

JSW Steel Ltd estimates its fiscal 2011 crude steel production to rise by 17% to 7 million tonnes (mt) and its steel sales to rise by around 18%. It also expects its product mix to include more of value-added products, which will fetch it better realizations and margins. A sharp jump in the prices of iron ore and coking coal is causing some concern. What’s more, with prices being reset quarterly, if steel companies are unable to pass them on soon enough, margins will be affected. For example, while the increase in global steel prices in the March quarter compared with the December quarter, has kept pace with coking coal prices, it has not matched the increase in iron ore prices. The company is proposing to acquire a coking coal mining operation in the US, which will partially reduce its exposure to price fluctuation. JSW’s performance during the March quarter was partly due to volume growth, which rose by 43% over the year-ago period and 7% sequentially. In value terms, steel sales on a stand-alone basis rose by 56% and 12% in the same period, due to better prices. JSW’s product mix during the March quarter had a higher proportion of semi-finished steel, compared with a year ago, which will get corrected in the current fiscal. Semi-finished steel will contribute only 4% of volumes compared with 22% in fiscal 2010 as the first phase of its 5 mt hot strip mill has started production in April. The company’s operating profit margin improved by nearly 1.80 percentage point sequentially to 24.1% in the March quarter. Since its new plant has just been commissioned, the next few quarters may see some pressure on margins till the plant stabilizes. While its remaining expansion projects will be commissioned over the next few years, JSW has further long-term expansion plans. It will require funds for these projects. The company is issuing warrants to the promoters comprising around 9% of the existing equity capital. A fresh equity issuance may be on the cards. The company’s share fell by 0.5% but still did better than the Bombay Stock Exchange’s metals index, which was down by around 2%. JSW’s output growth will be substantial in this fiscal 2011 but earnings growth also hinges upon its ability to pass on higher costs fully in the form of price hikes.