Q2FY24 Review: JSW Steel: Healthy Q2 on lower costs; headwinds ahead

23 Oct 2023 , 11:43 AM

JSTL’s Q2FY24 consolidated Ebitda at Rs78.9bn, beat IIFLe. This was led by healthy volumes and lower cost at SA level, even as overseas performance was a drag. Rise in coal costs will hurt Q3 profitability despite higher steel prices, which are now at a significant premium to imports. Capacity expansion is on track to reach 37mtpa by FY25 and 50mtpa by FY30, largely through the brownfield route. Hence, net debt will sustain at the current levels. Analysts of IIFL Capital Services cut FY24-25 Ebitda estimate by 5%. Retain REDUCE. 

Healthy volume and cost savings drive Q2 beat: 

JSTL’s standalone Ebitda of Rs69bn (up 3x YoY on low base and 42% QoQ) beat IIFLe, supported by a healthy volume of 5.41mt, lower coking coal cost (US$55/t vs guidance of US$45/t), lower mining royalty (due to lower captive production) and sharp reduction in Other expenses on a pertonne basis. Cost savings meant that standalone Ebitda stood at Rs12,750/t – up Rs2,890/t QoQ, despite the Rs4,439/t QoQ drop in NSR. Consolidated Ebitda of Rs78.9bn was dragged by the QoQ drop in performance of overseas subs amid a weak market, as also by a QoQ drop in profitability for Bhushan led by a sharper drop in NSR. 

Jump in coal costs to hurt Q3 profitability: 

With coking coal prices up over US$100/t vs the recent lows, mgmt expects ~US$30/t QoQ jump in coking coal cost for Q3 (helped by ~2 months of inventory). This would be partly offset by higher steel NSR given the strength in steel prices since early Sep’23. However, steel prices are at risk given the high premium to landed cost of steel imports; even amid strong demand domestically. For the full year, mgmt maintained production and sales guidance of 26.3/25mt at consolidated level. 

On track to expand capacity to 37mtpa by FY25-end: 

The ongoing expansion projects (5mtpa Vijaynagar, 1.5mtpa Bhushan) are on track for completion by FY24 and should lead to end FY25 India capacity to reach 37mtpa with steady share of VAP. Mgmt reiterated the intent to expand to 50mtpa capacity by FY30, largely through brownfield expansion at existing sites. Net debt increased to Rs692bn due to consolidation of JISPL, starting Aug’23. Absolute debt levels should sustain at the current levels, given the focus on capacity expansion.