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Lower margins ahead
JSW’s margins are set to see a steep decline in balance FY12 due to higher
iron ore costs post the mining ban in Karnataka. The situation should improve
by FY13 by which time JSW’s captive mine and many of the private mines in
Karnataka should hopefully get approval to resume production. However, the
‘new normal’ of iron ore costs for JSW is still likely to be higher than premining
ban levels resulting in lower margins over FY12-13. We cut FY12-13
EPS by 22-30% and maintain U-PF with a target price of Rs655.
Big margin squeeze in coming quarters
JSW’s steel plant is currently running at low utilization levels post the imposition
of the iron ore mining ban in the Bellary, Chitradurga and Tumkur districts of
Karnataka. Some relief is around the corner with the Supreme Court allowing sale
via e-auction of 1.5mt of iron ore per month from the 25mt of stocks in the state.
This should hopefully allow JSW to ramp-up its recently expanded capacity.
However, it is quite likely that the iron ore purchased via e-auction will be much
more expensive than before resulting in a squeeze on margins.
‘New normal’ unlikely to return to pre-mining ban levels in a hurry
The Supreme Court has directed ICFRE (Indian Council of Forestry Research &
Education) to undertake an ‘Environment Impact Assessment (EIA)’ study in the
affected districts and submit a reclamation and rehabilitation plan in three
months. We believe that it is quite likely that post this submission, the Supreme
Court will allow at least a section of iron ore mines in the three districts to resume
operations (incl. JSW’s captive mine), albeit with conditions. At the same time, it
is unlikely that the Supreme Court will give a clean chit to all mines, due to which,
JSW will still have to procure some iron ore from locations further away from its
plant resulting in higher costs. We believe that it is unlikely that JSW’s source-mix
and cost of iron ore will return to pre-ban levels in a hurry. Everything else
unchanged, margins should see a meaningful drop over FY12-13.
Cutting FY12-13 EPS 22-30%; maintain U-PF
We cut FY12-13 EPS by 22-30% factoring in 1) 9% lower steel volumes in FY12
and 2) 8-10% lower EBITDA/t in FY12-13 due to higher iron ore costs. With India
moving closer to a net steel exporter status thanks to weak steel demand growth
and rising risks to global growth as well, margins of converters like JSW are
vulnerable. JSW’s capex over FY12-13 remains high at US$3bn resulting in
negative FCF and rising debt. The US mills and Ispat will remain a drag on consol
earnings. ROEs drop to single-digits over FY12-13 on our new estimates. Global
peers with similar ROEs trade well below book value. Our TP is Rs655 at 5.5x
FY13 EV/EBITDA (cut from 6x due to lower earnings visibility) & implies 0.8x P/B.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Lower margins ahead
JSW’s margins are set to see a steep decline in balance FY12 due to higher
iron ore costs post the mining ban in Karnataka. The situation should improve
by FY13 by which time JSW’s captive mine and many of the private mines in
Karnataka should hopefully get approval to resume production. However, the
‘new normal’ of iron ore costs for JSW is still likely to be higher than premining
ban levels resulting in lower margins over FY12-13. We cut FY12-13
EPS by 22-30% and maintain U-PF with a target price of Rs655.
Big margin squeeze in coming quarters
JSW’s steel plant is currently running at low utilization levels post the imposition
of the iron ore mining ban in the Bellary, Chitradurga and Tumkur districts of
Karnataka. Some relief is around the corner with the Supreme Court allowing sale
via e-auction of 1.5mt of iron ore per month from the 25mt of stocks in the state.
This should hopefully allow JSW to ramp-up its recently expanded capacity.
However, it is quite likely that the iron ore purchased via e-auction will be much
more expensive than before resulting in a squeeze on margins.
‘New normal’ unlikely to return to pre-mining ban levels in a hurry
The Supreme Court has directed ICFRE (Indian Council of Forestry Research &
Education) to undertake an ‘Environment Impact Assessment (EIA)’ study in the
affected districts and submit a reclamation and rehabilitation plan in three
months. We believe that it is quite likely that post this submission, the Supreme
Court will allow at least a section of iron ore mines in the three districts to resume
operations (incl. JSW’s captive mine), albeit with conditions. At the same time, it
is unlikely that the Supreme Court will give a clean chit to all mines, due to which,
JSW will still have to procure some iron ore from locations further away from its
plant resulting in higher costs. We believe that it is unlikely that JSW’s source-mix
and cost of iron ore will return to pre-ban levels in a hurry. Everything else
unchanged, margins should see a meaningful drop over FY12-13.
Cutting FY12-13 EPS 22-30%; maintain U-PF
We cut FY12-13 EPS by 22-30% factoring in 1) 9% lower steel volumes in FY12
and 2) 8-10% lower EBITDA/t in FY12-13 due to higher iron ore costs. With India
moving closer to a net steel exporter status thanks to weak steel demand growth
and rising risks to global growth as well, margins of converters like JSW are
vulnerable. JSW’s capex over FY12-13 remains high at US$3bn resulting in
negative FCF and rising debt. The US mills and Ispat will remain a drag on consol
earnings. ROEs drop to single-digits over FY12-13 on our new estimates. Global
peers with similar ROEs trade well below book value. Our TP is Rs655 at 5.5x
FY13 EV/EBITDA (cut from 6x due to lower earnings visibility) & implies 0.8x P/B.
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