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Metals & Mining
India
Government increases export duty on iron ore: Good for JSW, not so for Sesa.
Indian Government increased export duty to 30% for all grades of iron ore from 20%
earlier. This will impact Sesa’s FY2013E EBITDA by 15.5% and earnings by 9.7% in
FY2013E. We lower our fair value on the stock by 7.9% to Rs175. We believe the
increase in export duty will eventually benefit JSW Steel and other steel companies
without captive mines. In the near term though, supply constraints in the iron ore
market will restrict upside. We maintain our Cautious view and recommend selective
exposure to the sector through stocks such as Tata Steel and Sterlite/ HZ that have
become attractive and are trading close to distressed valuations.
Increase in export duty to 30% is an unmistakable signal to protect the domestic steel industry
The Government has increased export duty on iron ore fines and lumps to a uniform rate of 30%
from 20% earlier. The increase in export duty is a clear signal of the Government’s intention to
protect the mineral resources for domestic long-term usage. This benefits the domestic steel
makers since iron ore is priced by leading producers such as NMDC on an export parity basis
(International prices minus export duty minus freight up the port)
Cut earning estimates for Sesa Goa by 9.7% for FY2013E, TP by Rs15
Our FY2013E forecast for Sesa Goa is based on the resumption of mining in the state of Karnataka
and assumes no ban is imposed on exports. Note that Sesa’s FY2012E iron ore volumes from
Karnataka will be entirely directed to the domestic market. Our FY2013E estimate of 18.4 mn dmt
is based on 85:15 exports: domestic volume split. We believe that high export duty, combined
with high railway freight, may make exports from Karnataka mine unviable for Sesa Goa. We cut
our FY2013E and FY2014E EBITDA estimate by 15.5% and 17.2% and operational EPS by 17.3%
and 17.7%, respectively. However, the impact on consolidated EPS is relatively lower at 9.7% and
9% for FY2013E and , respectively, due to a high proportion of earnings accruing for 20% stake
in Cairn India.
Medium-term benefit for JSW Steel, near term benefits to be minimal
NMDC prices iron ore on an export parity basis; hence, the increase in export duty should logically
result in a reduction in iron ore for the domestic steel mills. However, the benefits may be
restricted due to supply constraints post the ban on iron ore mining in Karnataka and a tightening
of approval process and stricter implementation of regulations, which have led to the elimination
of supply from non-compliant mines in Orissa. Excess iron ore inventory in Karnataka is being sold
through e-auctions, while prices in Orissa are above export parity.
However, JSW will benefit in the medium term once iron ore supply normalizes and the ban on
mining in Karnataka (expect NMDC) is lifted. A 10% increase in export duty at the current
international iron ore price can reduce domestic iron price by Rs300-350/ tonne and improve
JSW’s FY2013E EBITDA by 8-9% assuming iron ore production normalizes in Karnataka.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Metals & Mining
India
Government increases export duty on iron ore: Good for JSW, not so for Sesa.
Indian Government increased export duty to 30% for all grades of iron ore from 20%
earlier. This will impact Sesa’s FY2013E EBITDA by 15.5% and earnings by 9.7% in
FY2013E. We lower our fair value on the stock by 7.9% to Rs175. We believe the
increase in export duty will eventually benefit JSW Steel and other steel companies
without captive mines. In the near term though, supply constraints in the iron ore
market will restrict upside. We maintain our Cautious view and recommend selective
exposure to the sector through stocks such as Tata Steel and Sterlite/ HZ that have
become attractive and are trading close to distressed valuations.
Increase in export duty to 30% is an unmistakable signal to protect the domestic steel industry
The Government has increased export duty on iron ore fines and lumps to a uniform rate of 30%
from 20% earlier. The increase in export duty is a clear signal of the Government’s intention to
protect the mineral resources for domestic long-term usage. This benefits the domestic steel
makers since iron ore is priced by leading producers such as NMDC on an export parity basis
(International prices minus export duty minus freight up the port)
Cut earning estimates for Sesa Goa by 9.7% for FY2013E, TP by Rs15
Our FY2013E forecast for Sesa Goa is based on the resumption of mining in the state of Karnataka
and assumes no ban is imposed on exports. Note that Sesa’s FY2012E iron ore volumes from
Karnataka will be entirely directed to the domestic market. Our FY2013E estimate of 18.4 mn dmt
is based on 85:15 exports: domestic volume split. We believe that high export duty, combined
with high railway freight, may make exports from Karnataka mine unviable for Sesa Goa. We cut
our FY2013E and FY2014E EBITDA estimate by 15.5% and 17.2% and operational EPS by 17.3%
and 17.7%, respectively. However, the impact on consolidated EPS is relatively lower at 9.7% and
9% for FY2013E and , respectively, due to a high proportion of earnings accruing for 20% stake
in Cairn India.
Medium-term benefit for JSW Steel, near term benefits to be minimal
NMDC prices iron ore on an export parity basis; hence, the increase in export duty should logically
result in a reduction in iron ore for the domestic steel mills. However, the benefits may be
restricted due to supply constraints post the ban on iron ore mining in Karnataka and a tightening
of approval process and stricter implementation of regulations, which have led to the elimination
of supply from non-compliant mines in Orissa. Excess iron ore inventory in Karnataka is being sold
through e-auctions, while prices in Orissa are above export parity.
However, JSW will benefit in the medium term once iron ore supply normalizes and the ban on
mining in Karnataka (expect NMDC) is lifted. A 10% increase in export duty at the current
international iron ore price can reduce domestic iron price by Rs300-350/ tonne and improve
JSW’s FY2013E EBITDA by 8-9% assuming iron ore production normalizes in Karnataka.
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