Growth capex to stay despite slow demand; JSW hopes for a rebound in Q3

JSW Steel, the country’s largest steel producer, is scaling down its capex for FY23 in the wake of falling steel prices and slowing demand, but the axe will not fall on growth projects.

The planned capex for FY23 was Rs 20,000 crore and this is being calibrated to Rs 15,000 crore. This is part of an overall Rs 47,457-crore capex that JSW has lined up over FY22-FY24, which includes expanding capacity from 27 million tonnes (mt) to 37 mt in India. It will be completed by FY25.

Seshagiri Rao, joint managing director (joint MD) and group chief financial officer (group CFO), JSW Steel, said when the capex of Rs 47,457 crore was announced, it was for growth, sustenance and special projects.

“Given our Q1 performance, we thought we should moderate capex outflow this year. But we have not touched the growth capex at all,” Rao said. What has been put on hold, he said, were special projects and discretionary capex. A part of sustenance, capex could also be pushed to next year.  But the financing for 7.5 mt expansion at Vijaynagar and 2.5 mt at Bhushan Power & Steel would continue, Rao added.

After a stellar showing in FY22, JSW Steel reported an 85.7 per cent drop in consolidated net profit to Rs 839 crore in Q1 of FY23. A combination of factors made the operating environment in Q1 challenging.

“The government imposed export duty in May and this changed the sentiment in India. Assuming that prices will fall further, the local user industry stopped buying and apparent consumption fell. Exports dropped by 26 per cent quarter-on-quarter (QoQ),” said Rao.

India’s apparent steel consumption dropped 5.6 per cent QoQ. In the global market, steel production increased, particularly from China.

But Indian steelmakers were handicapped by the 15 per cent export duty. JSW Steel’s exports fell 35 per cent QoQ in Q1 of FY23. The company’s inventory level — of around 2.3 mt — is currently at an all-time high.  

JSW’s net debt has increased by about Rs 10,571 crore QoQ in Q1 of FY23. And, a significant portion was mainly due to locking up of working capital in inventory.

But will Q2 be any better? According to Rao, there would be some stability because global steel production is falling. This is because mills were advancing shutdowns, which would result in supply-side adjustment. Also, coking coal has fallen below $230 a tonne from $600.

“But this quarter will remain tough because of high-cost inventories. Q3 onwards, things will look much better,” he said.

Rao also believes it’s a matter of time before the export duty is withdrawn.

“The kind of feedback we are getting is that the export duty was imposed only to contain inflation,” he said.

In addition, the benefit from the steep fall in coking coal —though higher than last year — is expected to kick in from October. Also, demand from certain segments in the domestic market is looking up, particularly from renewables, auto and housing.

“So we are feeling much more comfortable in domestic demand recovery compared to Q1,” said Rao.