JSW Steel -Better days ahead ::Espirito Santo,

JSW Steel
Better days ahead
Our on the ground and industry checks indicate swift progress on
approvals for category A/B leases with final go-ahead for the mines
expected, once the Forest bench at the Supreme Court of India
resumes court hearings, from the second week of July onwards. We
think JSW Steel is poised to enter a sweet spot with low raw material
costs and higher volume growth, once category A/B iron ore mines in
Karnataka are opened. The shift from the current e-auction pricing
mechanism towards leaseholder determined base/floor prices should
result in falling fines’ prices. Interestingly, with the impending MMDR
bill, we think JSWS is well insulated on earnings impact, given its nonintegrated
nature. Factoring in concerns over ongoing CBI
investigations, we value JSWS at a 15% discount to its historical
average EV/EBITDA and have a FV of Rs755/share. JSWS now trades
at a 26% discount (4.9x FY13E EV/EBITDA) to its historical 5-year
average EV/EBITDA and we see value in the stock. Reiterate BUY.

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Mines get a go-ahead; ore availability set to improve
As per recent reports, the Federation of Indian Mineral Industries (FIMI) has
prepared/submitted R&R plans for all the mining firms (under category A/B) to
the Indian Council of Forest Research & Education (ICFRE). ICFRE in turn has
approved 10/18 leases so far and submitted the rest to the Centre Empowered
Committee (CEC). CEC has already approved R&R plans of four to five mining
leases so far. Based on our channel checks, we find things on the ground have
been progressing smoothly with the mines expected to be open by end Julyearly
August. We think mining operations will receive a final go-ahead, once the
Supreme Court hearings resume from the second week of July.
Fines’ prices to head south as buyers market emerges
We expect a surplus of iron ore fines in Karnataka on the back of a) fines
expected to account for 68-70% of incremental mined output, given friable
nature of ore; b) with the export of low grade fines no more viable (export duty
at 30%), it will necessarily boost domestic supplies; c) monetization of existing
dumps (Goa Govt. has indicated similar steps as well); d) stringent compliance
on formation of dumps and e) limited sintering/pelletization facilities in the state.
On the back of this demand supply imbalance, we expect a buyer’s market for
iron ore fines to emerge with prices expected to head south. Our channel checks
indicate fines’ prices in Karnataka region have corrected by ~10-15% since
January 2012.
Reiterate BUY with a FV of Rs755/share
Contrary to the street, we think neither ore availability nor increasing ore
procurement costs will be a problem for JSWS. We expect JSWS to have a
cushion on ore supplies on the back of a) ore won and yet to be received, b) ore
expected to be procured via the balance of the leftover Karnataka state
inventories and c) NMDC supplies. We expect JSWS with captive pelletization/
sintering capacities to emerge as a key beneficiary. Furthermore, the Karnataka
government has filed an affidavit seeking CEC to revise upward its proposed
Karnataka mining cap (from 30 to 40MT). We think any positive news flow on
this front will further aid upward movement in the stock price. JSW Steel trades
at 4.9x FY13 EV/EBITDA, i.e. at a 26% discount to historical 5-year trading
average and we see value in the stock. JSW Steel remains our top pick in the
sector.