Steel demand in India is booming thanks to rapid economic growth and the government push on infrastructure spending. Yet, the Street does not seem excited about the prospects of JSW Steel, one of the largest domestic producers of the metal.
So far this calendar year, JSW Steel shares have risen by 4%, underperforming peers Tata Steel Ltd and Steel Authority of India Ltd that have returned at least 25% each.
At first glance, that is somewhat puzzling since JSW is poised to take advantage of robust demand by building capacity. By September 2027, its capacity will increase to 43.5 million tonnes per annum (mtpa) compared to 29.7mtpa at the end of March. Around 6.5mtpa will come on-stream as soon as the December quarter.
Moreover, the company has guided for sales volume of 27 million tonnes (mt) for FY25, up 8% from a year ago. For FY26, the target is 30 mt. Analysts at JP Morgan Pvt. Ltd are predicting the company to grow its Ebitda at an average 20% annually over the next few years. Ebitda is earnings before interest, tax, depreciation and amortization.
Steel prices are rising. They are hovering around ₹46,000 per tonne in June compared to an average of just under ₹43,000 per tonne in the March quarter. Prices of coking coal, a key input in steel making, have fallen by about 12% year-on-year or $22-27 per tonne, in the June quarter.
March quarter blip
While JSW Steel has all these factors in its favour, the Street’s indifference to the stock is perhaps explained by its financial performance in the March quarter. The company’s earnings per share fell short of the median estimate of analysts polled by Bloomberg by about 42%.
As both input and output prices stabilise, analysts are projecting profitability to improve in the June quarter. Nonetheless, there are a couple of challenges in the medium term.
One, steel imports from China are rising, particularly because of a slowdown in that country. Imports rose 37% in FY24, reaching nearly 10 million tonnes. The recent increase in import duty by the European Union (EU) on certain products from China can further increase excess capacity in China and increase the threat of dumping in India.
Two, the coking coal market is prone to significant price volatility. Some grades of the fuel record price fluctuations of as much as $300 per tonne, affecting JSW Steel’s profitability. While this is a sector specific issue, the threat of an earnings deterioration is relatively higher for JSW Steel given its massive capex and elevated debt.
The company has invested about ₹17,000 crore for expansion in FY24. It will spend at least ₹20,000 crore in each of the next three fiscal years to build capacity. In FY24, a strong Ebitda helped reduce its net debt to Ebitda ratio to 2.62 times from 3.2 times in FY23. According to the management, debt has likely peaked out, but there is a possibility of some increase in the coming quarters owing to a rise in working capital.
To be sure, to reduce its cost of production and insulate itself from raw material price volatility, the company is also investing in backward linkages to increase its iron ore mining capacity. It also announced the acquisition of 92% stake in a coking coal mine in Mozambique last month. The mine has 270mt of prime coking coal and total reserves of 800mt. However, gains from this acquisition are some time away. Apart from regulatory approvals, the company needs to work out the logistics of mining and transporting the fuel to its factories.
The stock is now trading at 12.92 times expected earnings for FY26, showed Bloomberg data, in line with the multiples for Tata Steel and SAIL, both of which have yielded higher returns. Thus, the timely commissioning of new capacity, which will boost its earnings outlook, is a critical trigger for the stock’s performance.
