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JSW Steel 2QFY2013 performance highlights and results update

Contributed by Angel Broking

JSW Steel reported lower-than-expected standalone profitability during 2QFY2013. We recommend a Neutral rating on the stock.

Top-line increases led by volume growth: JSW Steel's standalone net sales grew by 15.9% yoy to Rs.8,834cr (above our estimate of Rs.8,315cr). The net sales growth was driven by higher steel volumes (+15.3% yoy to 2.1 7mn tonne); however, its realizations declined 2.2% yoy to Rs.41,884/tonne.

Operating profit up on higher sales: Overall, the company's cost of production remained flay yoy at Rs.33,851/tonne during the quarter. However, EBITDA margins grew by 27bp to 1 7.3%. The EBITDA for the quarter grew by 17.7% yoy to Rs.1,525cr.

Outlook and valuation: Steel prices have declined by 10-25% globally over the past six months mainly due to escalating debt crisis in the euro zone. Although the decline in domestic steel prices has been muted due to INR depreciation against the USD; however, Indian steel players continue to face threat of higher steel imports from free trade agreement (FTA) countries (which attract lower import duty).

JSW Steel aims to raise utilization levels at its Vijaynagar plant during 2HFY2013. However, we believe increasing steel production beyond the current levels would remain a challenge in the near-term. Although we expect iron ore supplies in Karnataka to improve gradually during FY2013, there is lack of clarity on the timelines and anticipated production from Karnataka mines. We maintain our Neutral view on the stock.