Stock Review: JSW STEEL

In an environment of rising raw material costs, JSW Steel can bank on its thrust on backward integration and capacity expansion to drive its future earnings growth. The recent results also hinted at a turnaround at the recently acquired Ispat Industries, which will be an additional positive going forward. In the short-term, however, the margin pressure is expected to continue till its ongoing projects become fully operational.
In the March '11 quarter, the price of iron ore at $183 per tonne was higher by about 35% year-on-year. Similar was the case with coking coal, the price of which rose over 45% in the quarter. Both these key raw materials' prices may continue to move north in the June 2011 quarter as well.

As a result, the company's consolidated operating profit margin in the fourth quarter decreased by 100 basis points to 23%. Despite this, the company managed to report a decent 30% net profit growth to . 793.6 crore while the net sales grew 33% to . 7209.4 crore. However, considering the equity dilution in the year due to the buyout of Ispat Industries, the EPS was only 10% higher against the year-ago period.

Over the next year, JSW Steel plans to increase its total production by 50%. The company is adding 20% more to its current 10-million-tonne capacity at its Vijaynagar facility. This is in addition to the 3.2 MTPA expansion, which was recently completed at the same location and has started contributing to the company's revenue from the fourth quarter of FY11.

The recent commencement of operations at its mines in Chile will ease the company's exposure to the price vagaries of iron ore. With a capacity of 1 MTPA, this mine is set to serve around 10% of the company's total annual requirement. The company also has coal mines in the US, where, subject to certain permits, it has the capacity to produce approximately 0.75 million tonne of coal by the end of FY12, which will increase to 3 million tonne within the next three years. Once all these capacities come into play, JSW Steel will be the largest domestic steel maker. The stock closed 1.9% higher at . 940.75 on the Bombay Stock Exchange on Wednesday. At the current market price it trades at 11.14 times its 12-month price earnings ratio and is fairly valued.