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JSW Steel Neutral
JSTL.BO, JSTL IN
Preliminary read from the mining ban and impact on
JSW
JSW so far has not made any public comments on the implications of the
SC ban on all mining activities. Stock has corrected 21% in the last 4
trading sessions. While JSTL is now trading below book value (0.85x
FY12E), gauging the earnings impact is very difficult as of now.
Iron ore implications for JSTL: We would like to highlight that as of
now JSTL has not made any public comments on the implications
from the entire issue. JSW sources most of its iron ore from the Bellary
Hospet region in Karnataka (where the SC has banned mining) via a
combination of captive iron ore, from NMDC (NR) and from local
miners. The ban essentially would impact across the board iron ore
sourcing for the company and depending on the duration of the ban,
could significantly impact production and/or cost of production. Over the
last 1 year, domestic spot prices in Karnataka had fallen very sharply
given the export ban (state owned miner NMDC had to cut prices). JSTL
had commented that iron ore costs were Rs2700/MT ($60/MT) v/s FOB
prices of $150-160/MT. Local prices are adjusted for the 20% export
duty and the high transportation costs. We estimate a 1% increase in
iron ore costs impact consolidated EPS by 1.4%. However, if the
duration of the ban is longer, then sourcing large quantities of iron ore,
either from the Chitradurga area or from Goa, would not be very easy,
and costs would increase driven by a) demand supply mismatch; b)
transport costs increase and c) lower grade iron ore impacting costs. This
would lower steel production from the new expansion.
Impact on financials: A push up in the cost curve would also push up
steel prices, thus possibly mitigating some of the impact. However given
that JSTL is in the process of commissioning its 3MT BF, fixed costs
like depreciation and interests costs would also rise materially this year
(we estimate 26% y/y increase in FY12E). Net debt/equity stood at 1.1x
FY11 (we include the Acceptances as part of debt).
Duration of the ban: There is no clarity on the duration of the mining
ban. We estimate that total sponge iron production in Karnataka was
c.0.5MT in FY11. We estimate steel production in Karnataka at near
11MT (c.20% of India's total steel production). Given this
background, we believe a long term ban on iron ore production is
unlikely.
Stock below book: JSTL has corrected sharply over the last few days,
post the publication of the ‘Lokayukta Report’ (report is in the public
domain). We are not worried on the leverage given the recent stake sale
to JFE. JSTL is now trading below Book Value (0.85x FY12E, last time
was during GFC), however there is likely to be high degree of
uncertainty till the mining ban issue is resolved.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel Neutral
JSTL.BO, JSTL IN
Preliminary read from the mining ban and impact on
JSW
JSW so far has not made any public comments on the implications of the
SC ban on all mining activities. Stock has corrected 21% in the last 4
trading sessions. While JSTL is now trading below book value (0.85x
FY12E), gauging the earnings impact is very difficult as of now.
Iron ore implications for JSTL: We would like to highlight that as of
now JSTL has not made any public comments on the implications
from the entire issue. JSW sources most of its iron ore from the Bellary
Hospet region in Karnataka (where the SC has banned mining) via a
combination of captive iron ore, from NMDC (NR) and from local
miners. The ban essentially would impact across the board iron ore
sourcing for the company and depending on the duration of the ban,
could significantly impact production and/or cost of production. Over the
last 1 year, domestic spot prices in Karnataka had fallen very sharply
given the export ban (state owned miner NMDC had to cut prices). JSTL
had commented that iron ore costs were Rs2700/MT ($60/MT) v/s FOB
prices of $150-160/MT. Local prices are adjusted for the 20% export
duty and the high transportation costs. We estimate a 1% increase in
iron ore costs impact consolidated EPS by 1.4%. However, if the
duration of the ban is longer, then sourcing large quantities of iron ore,
either from the Chitradurga area or from Goa, would not be very easy,
and costs would increase driven by a) demand supply mismatch; b)
transport costs increase and c) lower grade iron ore impacting costs. This
would lower steel production from the new expansion.
Impact on financials: A push up in the cost curve would also push up
steel prices, thus possibly mitigating some of the impact. However given
that JSTL is in the process of commissioning its 3MT BF, fixed costs
like depreciation and interests costs would also rise materially this year
(we estimate 26% y/y increase in FY12E). Net debt/equity stood at 1.1x
FY11 (we include the Acceptances as part of debt).
Duration of the ban: There is no clarity on the duration of the mining
ban. We estimate that total sponge iron production in Karnataka was
c.0.5MT in FY11. We estimate steel production in Karnataka at near
11MT (c.20% of India's total steel production). Given this
background, we believe a long term ban on iron ore production is
unlikely.
Stock below book: JSTL has corrected sharply over the last few days,
post the publication of the ‘Lokayukta Report’ (report is in the public
domain). We are not worried on the leverage given the recent stake sale
to JFE. JSTL is now trading below Book Value (0.85x FY12E, last time
was during GFC), however there is likely to be high degree of
uncertainty till the mining ban issue is resolved.
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