Why JSW Steel's Seshagiri Rao believes analysts are missing the woods for the trees

An estimate-beating performance is usually welcomed by a thumbs up from the Street. Instead, when markets opened on Monday morning, JSW Steel's stock slipped by 4 percent. The response must have been disappointing as on October 23, the steel major has announced a net profit of  Rs 1,593 crore, as against one of the estimates that had expected the bottom line at Rs 1,005 crore.

The recovery in its earning was striking as in the first quarter, JSW Steel had suffered a loss of Rs 582 crore, laid low by the COVID-19 disruption.

The stock fall was not all. Credit Suisse downgraded the stock to neutral from outperform, even as it raised the target.

Seshagiri Rao, JSW Steel's Joint Managing Director and CFO refused to judge if the brokerages were right or wrong. Or, if the street was being hard on the company's stock.

Perhaps, the brokerages have already factored in the gains of the second quarter, not to mention that the steelmaker's stock has already hit a 52-week high. Its stock had outperformed peers by a mile. The upside, the brokerages thus deem, could be limited in the remaining two quarters of the year.

But are the Street and the brokerages missing the woods for the trees?

In a detailed conversation with Moneycontrol, as Rao explained why JSW Steel is in a better position than its peers to make the most of the larger rebound in the economy in the coming quarters, it sure felt that the industry veteran was more sanguine than the street.

Rao's optimism is based on two main pillars.

Better steel demand and stable prices

One, he expects steel demand in the third and fourth quarters of the current financial year to better the levels seen in the second.

"I will be cautious. In the first two quarters, we lost 5 million tons of steel consumption as economic activity, initially came to a standstill and then made a recovery," says Rao. "In the third quarter, the demand will be normal, and we won't lose," he adds.

The trend is visible in its production numbers. The company's standalone production volumes stood at 3.85 million tonnes for the second quarter, as against 2.96 million tonnes in the June quarter. A year ago, it produced 3.84 million tonnes in the September quarter.

The fourth quarter, says Rao, demand will grow, year-on-year. And that is because of the base year effect, as in March 2020, the industry lost nearly a fortnight of sales as COVID-19 set in and the government announced the lockdown. So the fourth quarter ending March 31, 2021, will benefit.

Rao's outlook on the demand hinges on the auto sector continuing its recovery  - JSW Steel sold 33 percent more automotive steel in Q2, YoY - and on the rural markets, backed by better monsoon and bumper harvest.

On steel prices, the senior executive admits that the rates in the second half of the year, may not increase by a similar 18 percent seen in the first six months. But the prices, won't fall, says Rao.

The belief is based on the unrelenting appetite of China, which produced 34 million tons more in the nine months, till September. It continues to import. The trend, says Rao, will continue.

While demand in the rest of the world market has fallen, so has production. Of the 132 blast furnaces that were shut globally following the pandemic, only 25 have re-opened till now.

"Production and demand are going in the same direction," says Rao, signalling a stable price scenario.

Benefit of scale

With demand improving and prices remaining stable, the conditions may be conducive for JSW Steel as it expands capacity at its facility in Dolvi, Maharashtra.

Though the expansion has been delayed by six months, the doubling of capacity to 10 million tons, will take JSW Steel's overall volume to 23 million tons a year. "No other major capacity addition is coming online," points out Rao. The expansion will be completed by March 2020.

More importantly, 80 percent of the expansion in downstream facilities  - from 5 million tons to 9 million tons a year - will be completed by March. This will increase the share of value-added and specialised products in the overall product portfolio pie to 39 percent. This will improve the company's margins, says Rao.

The scaling up of production at iron ore mines will also help. "We have started production at eight of the nine mines in Karnataka. The remaining one will begin production this quarter," said Rao. This will provide the company with 7 million tons of the key raw material. The rest, of the total requirement of 22 million tons, will be procured from the market.

While in Odisha it has started operating four mines that it got through auction, JSW Steel won't yet ship the ore from the state to its unit in Karnataka because of high logistics cost. That will have to wait for a slurry pipelines and conveyors.

The company's units in Dolvi and Salem are already self-sufficient in iron ore needs.

In another sign that the important factors have recovered and expected to do better, JSW Steel has brought back bonuses and variable component payments for its employees. These were deferred earlier.