With JSW Steel eyeing its share of exports to rise to 30 per cent in this fiscal amid sluggish domestic demand, it has to contend with lower Ebitda (earnings before interest, taxes, depreciation and amortisation) margins.
“Higher exports are likely to result in weaker blended per tonne realisation and Ebitda margin for JSW Steel in FY21. The Ebitda is expected to depreciate three per cent in FY21”, said an analyst.
It may be recalled that in FY20, JSW Steel ramped up exports by 30 per cent year-on-year (y-o-y) to 3.2 mn t amid 10.7 per cent dip y-o-y in domestic volumes primarily due to sagging demand from the auto sector and other flat steel consumers.
JSW Steel’s operating cash flow declined to INR 12,800 crore in FY20, dragged down by weaker Ebitda of INR 11,280 crore, down 41 per cent y-o-y. While operating cash flow for the steel company was weaker, cash capex (capital expenditure) came in higher at INR 12,800 crore in FY20, resulting in negative free cash flow of Rs 4110 crore post interest payments and acquisition spends.
According to the company annual report, the announced capex plans of INR 48700 crore over FY18–22 are just halfway through in FY20, with capex of INR 23900 crore spent thus far.
Amid uncertainties arising from COVID-19, JSW Steel is focusing on cash conservation and has thus recalibrated its capex plans to prioritize return-accretive projects. FY21 capex has thus been curtailed to INR 9,000 crore against the earlier planned spend of INR 16,300 crore. The total capex plan of INR 48,700 crore is thus likely to spill over to FY23 and beyond.
The company is planning targeted cost savings, supported by technology and digitalization, to reduce the cost base across areas of operation. Employee costs have already been cut, with FY21 likely to see flat manpower costs despite the new capacity at Dolvi.
Capex has also been curtailed, with FY21 planned at INR 9,000 crore as against INR 10,200 crore in FY20. Planned capex of INR 48700 crore over FY18–22 is, however, only halfway through and likely to spill over to FY23 and beyond. This is attributed to the company’s current focus being on conserving cash.
Leverage has risen further in FY20 to 5.7x net debt/Ebitda with INR 6400 crore y-o-y increase witnessed in net debt to INR 62,900 crore, a key concern. The steel maker’s debt is estimated to rise further to INR 67,600 crore in FY22 on weak profitability and capex plans.
However, the debt maturity profile is comfortable, with 63 per cent of long-term debt due for repayment after FY22. While INR 13900 crore of long-term debt (23 per cent of the total) is due for repayment in FY21, it is anticipated be comfortably managed with refinancing as well as cash and cash equivalents in hand of INR 12,000 crore as of March 2020.
“In the domestic front, JSW Steel should deliver above-industry volume growth in FY22, driven by expansion; margins should also improve, aided by a better product mix. Any turnaround in its loss-making overseas operations could provide a further upside. In the near term, we expect the company to tide over the disruption caused by COVID-19, supported by higher exports, cost reductions, and capex curtailment”, the analyst added.
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