Analysts at ICICI Securities reckon that the debt print disappointed despite JPL divestment on account of working capital buildup of ₹2500- ₹3000 crore.
“Management will do well to pare down debt aggressively over the next two quarters and cull out any expectations of increasing leverage as project capex ramp up will help asset valuations stabilize faster, in our view," said ICICI Securities analysts in a report on 17 July. The company aims to be net debt free by the end of FY23.
However, this will be a key monitorable given the near-term challenges. For one, the levy of export duty on steel effective 22 May coupled with weakness in global demand is weighing on steel prices. Domestic hot rolled coil price as on 13 July stood at ₹59,800 per tonne which is about 21% down from the average seen in April, according to SteelMint.
In Q1, owing to the lag effect, JSPL’s revenue growth emerged largely unscathed. Standalone revenue grew by 23.7% year-on-year (y-o-y) to Rs12,848.5 crore. The rise was also driven by an 8% increase in sales volumes to 1.7 million tonnes.
Even so, this did not translate into higher profitability given the increase in costs of input commodities such as coking coal. Further, elevated level of thermal coal prices meant increase in power and fuel costs. Inevitably, consolidated Ebitda (earnings before interest, tax, depreciation and amortization) per tonne fell by more than 32% y-o-y to Rs19,028.
Going ahead, coking coal cost is expected to reduce meaningfully which will cushion the margin. Also, iron ore costs are falling which bodes well in an environment where steel prices are also declining.
Meanwhile, shares of JSPL are about 39% down from their 52-week high seen in April. The removal of export duty on steel would be a key trigger. The company expects to continue exporting over 25% of the total production and would focus on alloy steel as it does not attract export duty. In Q1, the share of export revenue on a standalone basis stood at 26%, down from 29% in Q4FY22.
“We believe the export duty is likely to be a temporary phenomenon. Though we do not anticipate the modalities for removal of the same, we believe, if the steel sector has to contribute to foreign exchange of India, then export duty has to be removed sooner than later as coking coal is still being imported (about 90%) and steel industry could be net forex negative rather than supporting the forex income of the economy," said analysts at Motilal Oswal Financial Services in a report on 16 July.
