JSW Steel Net Profit Slumps 85% in Q2

JSW Steel’s Q2 profits fall 85% amid weak pricing, global competition, and one-time expenses impacting earnings.

Source and citation: ET Bureau, “JSW Steel Net Profit Slumps 85% in Q2,” Oct 26, 2024.

Table of Contents

TLDR For This Article:

JSW Steel reported an 85% profit decrease due to low global prices, high imports, and a one-time loss, despite steady domestic demand.

Analysis of this news for a layman:

JSW Steel’s profits took a significant hit in Q2, dropping 85% from last year. This decline is largely because of “weak realisations”—a term used when the company earns less than expected per unit sold, often due to falling prices. Steel prices dropped globally as Chinese exports surged, causing a dip in earnings for steel producers everywhere, including India. Meanwhile, India’s steel imports have spiked, and exports have fallen sharply, making the country a net steel importer this quarter. This adds pressure on local producers like JSW, who face tougher competition at home.

The company also recorded a one-time, “exceptional loss” of ₹342 crore related to provisions for an iron ore mine in Odisha. An “exceptional loss” means it’s an unusual expense, not part of regular operations, and while it impacts profits now, it’s not expected every quarter.

On the bright side, JSW Steel has been growing in terms of domestic sales, hitting a quarterly high in India. They’ve also set a healthy growth target, anticipating steel demand in India will increase by around 10-11% in the next year. But with rising debt levels—now at ₹85,098 crore—and a debt-to-operating profit ratio that’s climbed from last quarter, there’s some risk if the market doesn’t turn in their favour soon.

Impact on Retail Investors:

Volatility Awareness: Retail investors may see price swings as global factors like Chinese exports impact JSW and other steel companies’ earnings.
Impact of Imports on Profits: Investors should keep an eye on import trends, as more imports mean stiffer competition and possibly reduced margins for Indian steel producers.
Lesson on Debt Management: The rise in JSW’s debt highlights the importance of monitoring debt levels and debt-to-profit ratios, especially in capital-intensive sectors like steel.
Potential for Dividend Adjustments: With such a drop in profit, JSW might rethink its dividend strategy, which could affect income-focused investors.

Impact on Industries:

Steel Industry: Weak global prices and high imports will challenge profitability across the Indian steel sector. Companies like Tata Steel and SAIL might also feel the pressure if similar conditions persist.
Construction and Infrastructure: Affordable steel prices could benefit these sectors as they rely on steel as a primary material. This might indirectly boost margins or reduce costs in construction projects.
Mining and Resources: JSW’s one-time loss related to the Jajang mine may serve as a caution for other mining-related companies to anticipate provisions in similar circumstances.
Manufacturing: Manufacturers that use steel as a key input, such as auto manufacturers, may benefit from lower steel prices, potentially improving their margins.

Long Term Benefits & Negatives:

Benefits:

Strong Domestic Demand: JSW’s record sales volume within India reflects strong internal demand, a positive trend that can support future growth if global prices remain volatile.
Capex Adjustments: By reducing capital expenditures, JSW aims to strengthen its cash flow and mitigate the impact of higher debt, which can help long-term stability.
Market Share Opportunities: With a robust domestic network, JSW might capitalise on growing demand in India, balancing out international pressures over time.

Negatives:

Debt Overhang: Increasing debt could limit JSW’s flexibility if steel prices don’t recover quickly, posing a risk to future earnings and market confidence.
Reliance on Global Prices: JSW’s profitability is highly dependent on global steel markets, meaning any downturn in prices due to oversupply or competition could hurt them.
Increased Competition from Imports: Rising steel imports could force Indian producers like JSW to lower prices, squeezing their margins.

Short Term Benefits & Negatives:

Benefits:

Cost Advantage for Domestic Buyers: Indian consumers of steel, such as in construction and manufacturing, could benefit from current low prices and higher availability.
Continued Domestic Sales Growth: As JSW maintains strong domestic sales, it might stabilise revenue streams even if international margins are tight.

Negatives:

Profit Volatility: Short-term profit fluctuations due to import competition and debt costs could lead to stock price volatility, impacting retail investors.
Pressure on Cash Flow: The capex reduction reflects immediate cash flow concerns, and investors may worry about JSW’s ability to fund expansion plans without raising more debt.

Analysis of JSW Steel’s Q2 Results

Indian Companies Impacted

Losers

JSW Steel: The company’s weak performance, particularly the significant decline in net profit, could negatively impact its stock price and overall valuation.
Other Steel Companies: Other steel companies like Tata Steel, SAIL, and Jindal Steel & Power could also be affected by the challenging global steel market conditions, including lower prices and increased competition.
Steel Consumers: Companies in sectors like construction, automotive, and manufacturing, which rely on steel as a key input, may face higher costs if steel prices remain elevated or if supply disruptions occur.

Gainers

Steel Consumers: In the long term, if steel prices decline due to oversupply or weakening global demand, steel consumers could benefit from lower input costs.

Global Companies Impacted