Stock Review: JSW STEEL

THE stock of JSW Steel, India's third largest steel producer, has underperformed the Sensex over the past six months. Its September 2010 quarter results, which were in line with analysts' expectations, have not been able to give fresh trigger to its stock.

   The company's expanded capacity is expected to come on stream in the next few quarters. The company has also reduced its debt significantly in the September quarter. These factors would benefit the company in the near term.

   Higher raw material and employee costs were the dampener for the company in the September quarter. In the long run, the company will continue to be prone to raw material price increase since it's not fully integrated unlike its peers, including Tata Steel and SAIL. To improve margins, JSW Steel is commissioning a beneficiation plant by March 2011. This will lower the cost of iron ore for the company, which is now dependent on outside suppliers for iron ore. The company is aggressively paying back its debt to improve its financial legroom. After selling a portion of its equity to Japanese steel maker JFE, JSW's balance sheet has improved significantly. The company has repaid . 26 billion of debt in the September quarter, which reduced its debt-equity ratio to 0.8 from 1.6 in the previous quarter. Interest cost was down 13% in the quarter and is expected to remain lower as the company has repaid a significant amount of its high-cost debt.

   The future growth of JSW will largely be fuelled by the current capacity expansion plans. Its 3.2-million tonne expansion project at Vijaynagar is on the verge of completion, which will increase the company's steel production capacity to 11 MTPA by March 2011. This will further increase by 4.5 million tonnes after the completion of its West Bengal project by FY 14.

   Going forward, the post-monsoon demand for steel is expected to increase in the third quarter due to improved offtake from the construction sector. This will keep JSW's topline buoyant. The beneficiation plant for its domestic operation and the lowering of costs of its US subsidiary would likely add to the EBITDA margin for the company in the coming quarters.