How focus on India has helped JSW Steel in Q2

JSW steel has done reasonably well, considering the difficult market conditions but there are limits to how long it can continue. Photo: Bloomberg

Going domestic has its advantages. JSW Steel Ltd is cutting down on exports, and instead selling more steel in India. That beats having to compete with China, which has been dumping its surplus steel in every corner of the globe. JSW Steel’s domestic steel volumes rose by 22% over a year ago in the September quarter (Q2), slightly slower than the 27% growth seen in the June quarter. Domestic sales now contribute to 88.4% of total sales compared with 85.5% in the June quarter.

So, how does this help? Selling steel in the domestic market is more profitable. JSW Steel’s net sales declined by 5.6% over the June quarter to Rs.10,743 crore, but its material costs declined by much more, falling by 10.5%. This is also attributable to a better mix, both due to higher domestic sales, and to a higher share of sales from retail outlets and steel sales to the automotive sector.

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JSW Steel also managed to keep its employee costs and other costs down, all of which contributed to better profitability. Its operating profit margin (OPM) rose by 1.8 percentage points sequentially. But it has fallen compared with a year ago, due to falling steel prices, with OPM down by 4.4 percentage points.

Now, JSW Steel also earned a net profit during the September quarter, of Rs.117 crore compared with a loss of Rs.107 crore in the June quarter. But this profit is chiefly attributable to a Rs.256 crore savings on depreciation, due to a revision in the estimated life of assets. Otherwise, it may have reported a loss.

JSW Steel has done reasonably well, considering the difficult market conditions but there are limits to how long it can continue. Lower depreciation is an artificial prop for earnings. Domestic sales are nearing 90% of the total, and may hit a ceiling soon. But there are positives too. Domestic iron ore prices are falling and should lower costs. JSW Steel will also benefit from the safeguard duty imposed on imports of certain grades of flat steel. Flat steel contributes to 79% of JSW Steel’s sales.

But the overarching problems are weak global steel demand and dull domestic investment climate. If either of these factors bottom out, it will benefit large integrated steel firms such as JSW Steel. Its share has fallen by 23% in the past one year and its results could perk up investor sentiment a bit. But the real turnaround can come only when the underlying problems of the sector are resolved.

[“source -livemint”]

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