Why JSW Steel’s Expansion Push Fails to Impress Investors

Steel demand in India is soaring due to rapid economic growth and increased government infrastructure spending. However, investors don’t seem enthusiastic about JSW Steel’s prospects, despite it being one of India’s largest steel producers.

JSW Steel’s Stock Underperformance

JSW Steel’s shares have only risen by 4% this year, lagging behind competitors Tata Steel and Steel Authority of India Ltd (SAIL), which have each seen returns of at least 25%. This underperformance is surprising given that JSW Steel is set to expand its production significantly.

Capacity and Production Plans

JSW Steel is poised to boost its production capacity from 29.7 million tonnes per annum (mtpa) as of March to 43.5 mtpa by September 2027. Around 6.5 mtpa of this increase is expected by the end of the December quarter. The company also aims to raise its sales volume to 27 million tonnes for FY25, an 8% increase, and to 30 million tonnes for FY26. Analysts predict JSW Steel’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) will grow at an average of 20% annually in the coming years.

Rising Steel Prices and Input Costs

Steel prices have risen to approximately ₹46,000 per tonne in June, up from an average of just under ₹43,000 per tonne in the March quarter. Meanwhile, the price of coking coal, a crucial input for steel production, has dropped by about 12% year-on-year in the June quarter.

Recent Financial Performance and Challenges

Despite these positive factors, JSW Steel’s stock hasn’t gained traction, likely due to disappointing financial results in the March quarter. The company’s earnings per share fell 42% short of analysts’ expectations. Analysts expect profitability to improve in the June quarter, but there are medium-term challenges.

First, rising steel imports from China, driven by a slowdown there, pose a threat. Imports to India rose 37% in FY24, reaching nearly 10 million tonnes. With the European Union increasing import duties on certain Chinese products, there’s a risk of China dumping excess steel in India.

Second, the coking coal market is highly volatile, with some grades experiencing price swings of up to $300 per tonne. This volatility affects JSW Steel’s profitability, particularly given its large capital expenditures and high debt levels.

Investment and Debt Concerns

JSW Steel invested about ₹17,000 crore for expansion in FY24 and plans to spend at least ₹20,000 crore annually for the next three years to further increase capacity. In FY24, a strong EBITDA helped reduce its net debt to EBITDA ratio from 3.2 times in FY23 to 2.62 times. Although the management believes debt has peaked, there might be a slight increase due to rising working capital needs.

Efforts to Reduce Costs and Secure Raw Materials

To lower production costs and mitigate raw material price fluctuations, JSW Steel is investing in backward linkages, increasing its iron ore mining capacity, and recently acquiring a 92% stake in a coking coal mine in Mozambique. This mine holds 270 million tonnes of prime coking coal and total reserves of 800 million tonnes. However, benefits from this acquisition will take time to materialise due to the need for regulatory approvals and logistics planning.

Currently, JSW Steel’s stock trades at 12.92 times expected earnings for FY26, on par with Tata Steel and SAIL, which have delivered higher returns. Therefore, the timely completion of new capacity, which will enhance its earnings potential, is crucial for improving the stock’s performance.