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JSW Steel (JSTL)
Metals & Mining
Production down to 30% as new directive exacerbates supply problems. JSW
Steel has scaled down capacity utilization from its 10 mtpa Vijaynagar steel plant to
30% after (1) the Supreme Court directed NMDC to sell iron ore produced in Karnataka
through e-auctions despite NMDC’s long-term supply agreement with JSW and (2)
minimal dispatch of iron ore sold through the e-auction route due to procedural delays.
Continued problems with iron ore supply can lead to a further cut in our earnings
estimates. SELL.
Iron ore availability worsens and impacts production
JSW issued a press release indicating that it has scaled down its Vijaynagar plant capacity
utilization to 30% from the planned 80%. JSW is the second largest domestic steel player with
crude steel share of production of 10% in FY2011 and is a large player in the flats segment. JSW
cited several reasons for its scale back:
The Supreme Court’s directive to sell iron ore produced by NMDC in Karnataka through
the e-auction route irrespective of the long-term contracts. NMDC has a long-term supply
agreement and was selling ~10K tonnes of iron ore (~25% of iron ore sourcing after the
Supreme Court’s decision to ban mining in Bellary region of Karnataka) to JSW. JSW’s press
release mentions that “disruption of supplies by NMDC cut the lifeline to run the furnaces in
safe condition”. We presume JSW will continue sourcing 7-10K of iron ore from Bailadila mines
(Chattisgarh) of NDMC.
Procedural delays. JSW’s press release mentions that Supreme Court’s decision to sell 1.5 per
mn tonnes per month from iron ore stockpiles through the e-auction route has been ineffective
due to (1) overpricing of low grade fines, which led to 31% of iron ore remaining unsold and
(2) of the 69% iron ore auctioned, only 10% has been dispatched due to procedural delays.
We model 7.6 mn tonnes of crude steel production in FY2012E; the company produced 2.9 mn
tonnes during Apr-Aug 2011. The company would have to produce 665k tonnes of crude steel/
month for the remaining seven months to meet our FY2012E estimates. Our estimates are at
risk if the current iron ore sourcing challenges remain unresolved.
Maintain SELL rating
JSW currently trades at 6.5X FY2012E EBITDA with a high downside risks to our estimates. Even if
the current issues of mining and iron ore availability are resolved, iron ore sourcing may increase
on sustainable basis and impact profitability and return ratios. In addition, high leverage may also
play spoilsport. We maintain our SELL with end-FY2013E target price of Rs660/ share.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel (JSTL)
Metals & Mining
Production down to 30% as new directive exacerbates supply problems. JSW
Steel has scaled down capacity utilization from its 10 mtpa Vijaynagar steel plant to
30% after (1) the Supreme Court directed NMDC to sell iron ore produced in Karnataka
through e-auctions despite NMDC’s long-term supply agreement with JSW and (2)
minimal dispatch of iron ore sold through the e-auction route due to procedural delays.
Continued problems with iron ore supply can lead to a further cut in our earnings
estimates. SELL.
Iron ore availability worsens and impacts production
JSW issued a press release indicating that it has scaled down its Vijaynagar plant capacity
utilization to 30% from the planned 80%. JSW is the second largest domestic steel player with
crude steel share of production of 10% in FY2011 and is a large player in the flats segment. JSW
cited several reasons for its scale back:
The Supreme Court’s directive to sell iron ore produced by NMDC in Karnataka through
the e-auction route irrespective of the long-term contracts. NMDC has a long-term supply
agreement and was selling ~10K tonnes of iron ore (~25% of iron ore sourcing after the
Supreme Court’s decision to ban mining in Bellary region of Karnataka) to JSW. JSW’s press
release mentions that “disruption of supplies by NMDC cut the lifeline to run the furnaces in
safe condition”. We presume JSW will continue sourcing 7-10K of iron ore from Bailadila mines
(Chattisgarh) of NDMC.
Procedural delays. JSW’s press release mentions that Supreme Court’s decision to sell 1.5 per
mn tonnes per month from iron ore stockpiles through the e-auction route has been ineffective
due to (1) overpricing of low grade fines, which led to 31% of iron ore remaining unsold and
(2) of the 69% iron ore auctioned, only 10% has been dispatched due to procedural delays.
We model 7.6 mn tonnes of crude steel production in FY2012E; the company produced 2.9 mn
tonnes during Apr-Aug 2011. The company would have to produce 665k tonnes of crude steel/
month for the remaining seven months to meet our FY2012E estimates. Our estimates are at
risk if the current iron ore sourcing challenges remain unresolved.
Maintain SELL rating
JSW currently trades at 6.5X FY2012E EBITDA with a high downside risks to our estimates. Even if
the current issues of mining and iron ore availability are resolved, iron ore sourcing may increase
on sustainable basis and impact profitability and return ratios. In addition, high leverage may also
play spoilsport. We maintain our SELL with end-FY2013E target price of Rs660/ share.
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