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We believe the mining ban in Bellary could be temporary and that it does not significantly alter
JSW Steel's earnings potential. We upgrade to Buy with a new TP of Rs750 and believe the risk
reward is now favourable.
We believe the mining ban will be temporary
The Supreme Court on Friday banned mining activities in the Bellary district of Karnataka on
environmental concerns. JSW Steel procures a large part of its iron ore requirements from the
region and so could face short-term constraints. However, the ban is intended to last only a week
and was implemented as a matter of caution. We believe it could be extended but not indefinitely.
In the worst case, JSW Steel may have to procure ore from Chhattisgarh in the medium term.
Stock has corrected 46% since late October
We believe the 20% correction over the past week, as a result of the ban following the Lokayukta
report into illegal mining in Karnataka, offers a long-term investment opportunity. The stock now
trades at discounts of 20% to book value and 36% to replacement value. With expanded capacity
of 10Mt (3.2Mt of additional capacity was commissioned in July) and even assuming a
replacement value of US$1bn/Mt and net debt of US$4bn, we estimate the company’s equity
value to be US$6bn (compared with the current market cap of US$3.8bn). Despite a lack of iron
ore and coal integration, JSW Steel has managed to report EBITDA/t of US$170-210, significantly
ahead of its peers.
We upgrade to Buy and roll forward our valuation to FY13F
We believe the stock has suffered unduly for the iron ore shortage. We cut our volume forecasts
by 11% to 6.9Mt in FY12 and by 4%to 8.7Mt in FY13, which we believe provides sufficient
cushion even in the case of a significant production cut due to a shortage of iron ore. We leave
our other key forecasts largely unchanged. However, we model JSW Ispat as an associate (as
opposed to proportional consolidation earlier), in line with the company’s reporting structure. A
10% increase in iron ore prices would lower our EBITDA forecasts by 10% (all else being equal).
We roll forward our valuation to FY13F. We value JSW and its 49.3% stake in Ispat at 5.2x
FY13F EV/EBITDA (in line with the peer average). On the back of our earnings changes, our
target price falls to Rs750 (from Rs828). We upgrade to Buy
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We believe the mining ban in Bellary could be temporary and that it does not significantly alter
JSW Steel's earnings potential. We upgrade to Buy with a new TP of Rs750 and believe the risk
reward is now favourable.
We believe the mining ban will be temporary
The Supreme Court on Friday banned mining activities in the Bellary district of Karnataka on
environmental concerns. JSW Steel procures a large part of its iron ore requirements from the
region and so could face short-term constraints. However, the ban is intended to last only a week
and was implemented as a matter of caution. We believe it could be extended but not indefinitely.
In the worst case, JSW Steel may have to procure ore from Chhattisgarh in the medium term.
Stock has corrected 46% since late October
We believe the 20% correction over the past week, as a result of the ban following the Lokayukta
report into illegal mining in Karnataka, offers a long-term investment opportunity. The stock now
trades at discounts of 20% to book value and 36% to replacement value. With expanded capacity
of 10Mt (3.2Mt of additional capacity was commissioned in July) and even assuming a
replacement value of US$1bn/Mt and net debt of US$4bn, we estimate the company’s equity
value to be US$6bn (compared with the current market cap of US$3.8bn). Despite a lack of iron
ore and coal integration, JSW Steel has managed to report EBITDA/t of US$170-210, significantly
ahead of its peers.
We upgrade to Buy and roll forward our valuation to FY13F
We believe the stock has suffered unduly for the iron ore shortage. We cut our volume forecasts
by 11% to 6.9Mt in FY12 and by 4%to 8.7Mt in FY13, which we believe provides sufficient
cushion even in the case of a significant production cut due to a shortage of iron ore. We leave
our other key forecasts largely unchanged. However, we model JSW Ispat as an associate (as
opposed to proportional consolidation earlier), in line with the company’s reporting structure. A
10% increase in iron ore prices would lower our EBITDA forecasts by 10% (all else being equal).
We roll forward our valuation to FY13F. We value JSW and its 49.3% stake in Ispat at 5.2x
FY13F EV/EBITDA (in line with the peer average). On the back of our earnings changes, our
target price falls to Rs750 (from Rs828). We upgrade to Buy
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