Quarterly preview of JSW steel by Nomura research,

JSW Steel
Strong quarter – smart raw material cost management
We expect JSW Steel to report strong 2QFY11 results, as: 1) the raw material price
increase was limited due to increased purchase of iron ore on a spot basis;
2) higher volumes; and 3) improved product mix.
Volumes recover in 2QFY11
JSW Steel reported total production of 1.57mn tonnes in 2QFY11. While it has not
declared the actual sales volume, we expect sales volume of 1.6mn tonnes. Since
other companies have declared strong volumes and sold out of inventory, we expect
JSW Steel to follow as well.
At the same time, we estimate that JSW Steel will also see the percentage of semifinished
products falling below 5% from close to 9% in 1QFY11.
Realizations helped by improved product mix
We expect JSW’s blended realization to fall by INR1,500/t to INR37,505/t from
1QFY11 levels. Please note that its realization fall is lower for JSW Steel as its product
mix improvement will mitigate the fall.
Limited raw material cost increase along with high operating
leverage
We expect raw material costs to increase by close to INR1,500/t primarily on account
of higher coking coal costs. Although JSW Steel is largely a non-integrated steel
maker with just 20% of captive iron ore and 100% imported coking coal, we believe a
cost increase during the quarter will be limited as the company procured iron ore more
on a spot basis, which was at a lower rate. The company should also see high
operating leverage due to expected strong volume growth and despite higher raw
material costs, we expect its total cost of production to fall by INR1,500/t q-q in
2QFY11.
Results in strong EBITDA
As a result of the above, we expect EBITDA/t to remain flat q-q at INR8,359/t. However,
we expect its EBITDA to increase to INR13.4bn from INR10bn in 1QFY11 on account
of higher sales.
Cash from stake sale to further boost earnings
Higher EBITDA, coupled with slightly lower interest costs and higher other income
(since the company received close to INR48bn of cash from its stake sale to JFE
Steel), should translate into net profit of INR6.2bn, up from INR3.5bn in 1QFY11.