Dull demand to weigh on JSW Steel, improving cash flows a challenge in FY21

Dull demand to weigh on JSW Steel, improving cash flows a challenge in FY21

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  • Sales volume guidance of 15 mt for FY21 might be a tall order now, analysts at Emkay Global said in a note to clients
  • Considering the company’s net debt to equity rose in March quarter, improving cash flows will be a challenge in FY21

MUMBAI: JSW Steel Ltd’s Q4 figures were weak as demand remained subdued, and the 15 million tonne (mt) sales outlook for FY21, unchanged from last year, looks optimistic.

“Sales volume guidance of 15 mt for FY21 might be a tall order now, which was otherwise an easily achievable target, due to a possibility of the second wave of covid-19. Low margin exports will help volumes,” said analysts at Emkay Global Financial Services in a note to clients.

The management has said that it expects to export a higher quantity of steel in FY21, but even this could be a challenge given the global pandemic. Further, the commissioning of its Dolvi plant has been postponed and could see some cost uptick in the near term. JSW Steel, however, continues to plod ahead with its capital expenditure of Rs9,000 crore in FY21. While this is lower than its earlier guidance of about Rs16,340 crore, it still remains high and could drag cashflows.

Steel prices have remained subdued, but further downside risk seems low. Lower steel production in April is expected to keep steel inventory low. In addition, import prices are marginally higher than domestic prices, thanks to the rupee depreciation.

To an extent, lower iron ore and coking coal prices are expected to offset lower steel realisations. With steel demand expected to pick up and with its expansions coming on stream, FY22 figures could be better. While the JSW Steel stock fell about 42.3% last year, a recovery anytime soon appears limited.

While steel production fell 5% year-on-year in Q4, steel sales tumbled 14% to 3.70 mt. Automotive steel was behind domestic demand for the alloy growing a tad quarter-on-quarter.

Even so, earnings before interest, tax, depreciation and amortization fell by a third y-o-y to Rs2,975 crore in Q4. Ebitda margins shrank to 16.7% in the quarter from 19.8% a year ago.

The increase in consolidated net debt to equity to 1.48 times is an overhang, which will slow its deleveraging plans. Considering that the company’s net debt to equity has increased in March quarter, improving cash flows will be a challenge in FY21.

“Although JSTL’s net debt is expected to rise over FY20-22 (estimates), we expect net debt to peak in FY22 at ₹65400 crore ( ₹60,000 crore in FY20), with net debt to Ebitda of 3.7 times,” said Motilal Oswal Financial Services in a note to clients.

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