Steeling The Show
So, what are the odds that JSW won’t get bogged down by the China-led dumping? Aware of the ground realities, the company is making smart moves and responding to threats swiftly, something that its rivals have been slow to do.
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Going into the corporate results season this October, the mood all around was distinctively sombre and subdued. No one was expecting fireworks from India Inc. in its performance during the July-September quarter. In fact, weak rural demand along with appreciation of the rupee against the dollar and slow expansion of exports had most experts predicting one of the slowest revenue growth in years for India Inc. The prognosis for the metal and steel sector was among the worst.
When the results came, India Inc failed to live up to even the modest expectations of analysts, with the majority of companies falling short of the earnings estimates. Revenues of steel companies too fell by 17 per cent, according to Crisil Research. However, there were companies that surprised on the positive side. In this lot there were obvious names like Infosys from the IT pack and Maruti Suzuki from the auto pack, as well as unexpected surprise elements such as Reliance Industries and JSW Steel that not many analysts had bet on.
JSW Steel beat analyst expectations of a consecutive quarter of loss by reporting a consolidated profit of Rs 116.95 crore. It had made a consolidated loss of Rs 106.81 crore in the quarter ended June. Analysts had expected a loss of Rs 165 crore in the second quarter. On a year-on-year basis, its net profit fell 84 per cent from Rs 748.76 a year ago in the same quarter. Net sales fell 21.5 per cent to Rs 10,742.73 crore from Rs 13,691.76 crore during the same quarter a year ago. Total expenditure during the quarter fell 17.37 per cent to Rs 9,859.85 crore from a year ago.
To its credit, JSW Steel managed to stay in the green at a time when the country’s steel sector is reeling under the onslaught of cheaper imports — which doubled to 10 million tonnes (MT) in the year to March 2015 — and falling exports amid falling global steel prices.
Mehul Sukkawala, analyst at Standard & Poor’s, estimates that “steel imports surged 85 per cent between April and August compared to the same period two years ago”. Imports from Japan, South Korea and China have risen 98, 93 and 41 per cent, respectively in the first half of this fiscal, say JSW Steel officials.
According to Seshagiri Rao M.V.S., joint managing director and group CFO, JSW Steel, companies from China, which get state loans at rates as low as 1 per cent, are dumping steel even at a loss, as are companies from Japan and South Korea. While Chinese exporters are losing $80-100 per tonne, the Japanese and the South Koreans are shipping at a 35 per cent discount to local prices.
“Chinese exports rose from 66 MT in 2013 to 97 MT in 2014. In the first half of 2015 they’ve already logged 52 MT and may export 120 MT by 2015 end,” says Rao. “They are using local subsidy and currency devaluation to promote exports, which is causing a great deal of concern and damage to the steel industry worldwide, and India in particular.”
What’s worse, India’s steel exports too have slumped, having fallen 26 per cent during April-September, thanks to excess global supply upon fall in consumption by China which once guzzled half of all supplies. New projects have more than doubled world steel production capacity to 2,241 MT now from 1,060 MT in 2000. The OECD expects this to rise to 2,361 MT by 2017. Excess supply reached a record high of 516 MT in 2013, causing global steel prices to plunge by more than two-third from $600 per tonne in 2011.
So, what is JSW Steel doing to deal with the twin challenges of rising imports and falling exports? According to Rao, it has two options: to reduce cost or to change its product mix. “Compared with other steel companies, JSW is better placed. Our product mix is wider. We will be able to focus on more value-added products and not commodity products,” says Rao, adding, “We have different products available with us — automotive steel, electrical steel, tinplate steel. Even on the hot rolled coils side we have different types of products — we have cold rolled, galvanising, colour coated.”
Analysts say JSW is in a better position than its peers to benefit from the 200 per cent safeguard duty on import of hot rolled flat steel products for 200 days the government imposed recently.
In addition, JSW plans to increase the share of value-added products to 37 per cent of sales in FY2015-16, from 33 per cent in the previous fiscal and 24 per cent in the year to March 2014.
The company is already one of the cheapest producers of steel in the industry. Unlike other companies that use high-grade iron ore, JSW Steel has invested in beneficiation technology that uses less expensive low-grade iron ore and converts it into high-grade ore, driving the cost lower, says Rao.
Moreover, the company has diversified its sources of coal, instead of sourcing from one place. Besides, it uses blended coal, which works out much cheaper. “With this we are able to contain the cost,” says Rao, adding, “When steel prices in India fell 20 per cent in one year, we were still profitable because of these measures.”
Focus On Retail
There is a greater focus on retail now. “We aim to grow our retail sales by 70 per cent in the current fiscal and increase it to 25 per cent of our total sales. Retail was so far in the range of 15 per cent,” he said.
By September end, JSW cut its exports by 59 per cent while increasing domestic sales volumes by 22 per cent, retail sales by 80 per cent and branded product sales by 115 per cent. With 4 per cent growth during the quarter, the company posted highest ever sales volume of 3.18 MT, despite some plant closures.
JSW plans to further shrink exports to 17 per cent of total sales from the current 27 per cent. The additional 4 MT capacity that it is setting up will be used to feed projects, industrial construction, and infrastructure projects in India. By the end of the current fiscal, the company will have a production capacity of 18 MT. Over the next two years, JSW aims to keep on track Rs 9,000-crore investment plans, and increase capacity to 40 MT over the next decade.
“There is a great opportunity to increase our market share in the current environment,” says Rao, adding, “We are doing countercyclical investments by increasing our capacity when others are talking of reducing investments. When there was an incremental demand of 1.6 MT in the first six months JSW Steel sold 1 MT more in the domestic market, or 67 per cent of the incremental demand.’’
Tarang Bhanushali, steel analyst at IIFL, however, has a word of caution. “The company may have to scale down its expansion plans as the steel industry is unlikely to do well over the next year or so,’’ he says, adding, “Still, the company is doing better than its peers, has made inroads into new area of retail, and pushed its value-added products well into the auto industry.”
Goutam Chakraborty, analyst at Emkay Global Financial Services, too sees the company doing better in the current scenario. “In a weak iron ore pricing scenario, JSW gains over others since they don’t as yet own captive ore mine and buy the raw material,’’ he says. A drop in coking coal and imported iron ore prices have helped the company improve margins, he adds.
Chakraborty has a ‘Buy’ on the JSW Steel stock, as he believes the structural growth story for the company will remain intact even though steel prices are likely to drop further.
But challenges remain. For one, growth in infrastructure and construction sectors have remained muted. These are large consumers and low consumption by them hurts the sector. In India, from a 3.5 per cent growth in the year to March 2013, demand dropped to less than one per cent in the following year and is now showing faint signs of revival at 3 per cent.
Two, the company’s consolidated debt at Rs 39,000 crore remains a concern. Says Bhanushali, “Weak earnings outlook and the ongoing capacity expansion would keep debt at elevated levels in the medium term… We cut fiscal 2016 earnings estimates by 25 per cent to factor in lower realisations. High leverage remains a risk. The company has obtained relaxation in debt covenants from its lenders for first half of the current fiscal.”
Three, profitability of Indian steelmakers has been shrinking over time. For instance, companies saw their net profit more than halve between 2007-08 and 2013-14 from a compound annual growth rate of 25 per cent between 2002-03 and 2007-08. As the sector adds production capability, capacity utilisation is declining even though Indian steel companies are one of the most competitive after those in Commonwealth of Independent States. Almost all companies from the sector slipped into the red in the last fiscal.
Large borrowings by steel companies has, in turn, affected banks that gave them money. According to the Reserve Bank of India data, steel companies accounted for
10.2 per cent of bad and doubtful loans of all banks even though they had borrowed just 4.5 per cent of their loans.
Rising debt and bad loans have made investors avoid stocks of steel companies. As a result, over the past year, the share price of Bhushan Steel and Jindal Steel and Power has plunged to almost a third of their 52-week highs, that of Tata Steel and SAIL has halved and while that of JSW Steel has fallen 28 per cent. Falling market cap also makes it difficult for these companies to raise funds from the capital markets.
So, what are the odds that JSW won’t get bogged down by the China-led dumping? Aware of the ground realities, the company is making smart moves and responding to threats swiftly, something that its rivals have been slow to do. A pick-up in the Indian economy and demand for steel will be crucial in the coming months, though the government has started spending on infrastructure. The company has de-risked itself better than its competitors.
(This story was published in BW | Businessworld Issue Dated 30-11-2015)