Sunday, January 29, 2012

JSW Steel - Sell

JSW Steel came out with its Q3 numbers on Friday and they show a decent performance in terms of volumes that rose by 20 per cent YoY. In the September quarter of 2011 the volumes were up by 19 per cent on a YoY basis. However, the volume scenario compared to the previous quarter remains the same as it grew only by 1 per cent whereas in the previous quarter the QoQ growth was by 10 per cent to 1.88 tonnes.

The net sales of the company stood at Rs 7,859.62 crore, higher by 35 per cent as compared to the previous year’s same quarter due to higher sales volume and flat realisation levels. The steel prices during the quarter remained flat as compared to Q2FY12. However, the operating performance of the company was a little disappointing. Its EBITDA on a QoQ basis declined by 3.36 per cent and grew by 25.2 per cent on a YoY basis to Rs 1,252 crore.
Meanwhile, the EBITDA margin continued to decline by 130 bps to 15.9 per cent due to higher coking coal cost and raw material cost which was by up by 46 per cent and 47 per cent respectively. Coking coal’s Australian FOB prices came down from USD 300 per tonne in September 2011 to USD 235 in December 2011. The gains, though, were negated by the higher rupee depreciation against the dollar. 

About the present scenario the company has stated that the demand in India has remained modest in the last six months due to weak global demand coupled with higher interest rate and high inflation which led to delay in consumption and new capex plans. The world steel production fell significantly from a peak of 130 million tonnes in May 2011 to 115 million tonnes in November 2011. And in India the demand for steel grew by a mere 1.8 per cent from April to October. The company has further stated that the month of December has witnessed a rebound in demand.

Our Recommendation :

The scrip was hovering around Rs.560 levels on 9th January 2012 and has since jumped to Rs. 680 levels giving a decent return to existing shareholders.  Investors should exit at the current price and re-enter on steep declines to Rs.500 levels.

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