Stock Review: JINDAL STEEL & POWER

If Jindal Steel and Power's (JSPL) results are any indication, then the FY11 fourth quarter outlook for domestic steel manufacturers does not appear promising, despite a significant rise in steel prices.

During the quarter, JSPL was not able to fully pass on the rise in prices to its consumers, as reflected in the compression of its margins. If this is the case with companies such as JSPL, which have their own captive resources, the road ahead looks tough for non-integrated steel producers.

JSPL reported its fourth-quarter and annual results after the close of trading hours on Thursday. For the quarter ended March 2011, the company's consolidated revenue grew 21% year-on-year mainly on account of sales of steel products and pellets. Its operating profit margin fell 100 basis points to 45%, while higher interest costs pushed its net profit margin 400 basis points lower than in the same quarter a year ago.

The company's production of sponge iron and pig iron has drastically fallen by 92% and 61%, respectively. Its pellets production, on the other hand, has increased over 300% from the year-ago period, mainly on account of captive purposes. This is because the margins in pig iron and sponge iron are lower than in the steel business.

The management is, therefore, changing its product mix so that its overall margins improve.
The steel business contributed close to 60% to total sales and 30% to the net profit during the quarter. Therefore, the management feels it is more lucrative to use its pig iron and sponge iron for internal consumption rather than sell it in the market.

Ahead of the results, the company announced its plans to acquire all shares of Rocklands Richfield via an on-market cash offer at A$0.25 a share. This values the Australian coal miner at A$88 million or approximately . 413 crore. As on March 2011, JSPL's consolidated net debt stood at . 13,506.81 crore.

The company's consolidated net sales for the year rose 16% to . 13,111.60 crore over the previous year. Its operating profit decreased 440 basis points over the previous year. Meanwhile, its net profit rose 5% to . 3,753 crore.

At the close of trade on Thursday, the stock gained 2% and closed at . 694 on the Bombay Stock Exchange. It trades at a 12-month trailing price earnings ratio of 17 times.