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JSW Steel Neutral
JSTL.BO, JSTL IN
Stock below BV, but operating environment has
worsened - Remain Neutral
JSTL has corrected sharply since the SC mining ban. While it is now trading
below book value, we believe the operating environment remains volatile and we
expect iron ore costs to increase. We remain Neutral with a revised PT of Rs800
(after cutting our FY12E/13E EPS by 14%/4%), although we highlight the
possibility of a near-term bounce given some relief after Friday’s order.
Iron ore costs to increase: JSTL has shut down its older BF and Corex on the
expanded capacity of 11MT. The SC has allowed NMDC (NR) to operate its
Bellary mine, which should provide some relief to JSTL. We expect JSTL’s
iron ore costs to increase from here as the company starts working on
alternative sourcing options (Chitradurga in Karnataka and possibly even
Chattisgarh) and we are unlikely to go to peak Bellary iron ore production
anytime soon. We expect the domestic iron ore market to move away from
'discount to export prices' to ‘export prices', and possibly for certain products
such as lumps to ‘import parity pricing’, although the last one is likely only on a
longer-duration mining ban. We increase our domestic iron ore cost assumption
by Rs600/MT and expect only a part of this to be recovered by steel prices.
Production impact: We reduce our FY12 saleable steel estimate for JSTL to
7.6MT from 8.2MT (excluding ISPAT) as we believe JSTL now has to source
iron ore from multiple sources and ore production is likely to remain impacted
in Bellary at least for the next three months, until the next SC decision.
Balance sheet and cash flow impact: ISPAT (NR) financials are still not yet
out and thus there is upside risk to our final debt numbers on a consolidated
basis. Even with reduced profitability we do not see (as of now) risks to debt
servicing. JPM FY12E consolidated leverage stands at 1.0x (we have taken
acceptances as part of debt).
Stock bounce back likely given some relief, but operating environment has
worsened: Given the partial SC relief on the mining issue, we highlight the
possibility of a near-term bounce in JSTL stock, given that it is trading below
BV. However, we believe the advantage JSTL enjoyed over the last 4-5 quarters
from the iron ore export ban has now gone away and iron ore costs could remain
elevated until the end of FY12. We remain Neutral with a revised Jun-12 PT of
Rs800 (based on 5.6x FY13E EV/EBITDA).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel Neutral
JSTL.BO, JSTL IN
Stock below BV, but operating environment has
worsened - Remain Neutral
JSTL has corrected sharply since the SC mining ban. While it is now trading
below book value, we believe the operating environment remains volatile and we
expect iron ore costs to increase. We remain Neutral with a revised PT of Rs800
(after cutting our FY12E/13E EPS by 14%/4%), although we highlight the
possibility of a near-term bounce given some relief after Friday’s order.
Iron ore costs to increase: JSTL has shut down its older BF and Corex on the
expanded capacity of 11MT. The SC has allowed NMDC (NR) to operate its
Bellary mine, which should provide some relief to JSTL. We expect JSTL’s
iron ore costs to increase from here as the company starts working on
alternative sourcing options (Chitradurga in Karnataka and possibly even
Chattisgarh) and we are unlikely to go to peak Bellary iron ore production
anytime soon. We expect the domestic iron ore market to move away from
'discount to export prices' to ‘export prices', and possibly for certain products
such as lumps to ‘import parity pricing’, although the last one is likely only on a
longer-duration mining ban. We increase our domestic iron ore cost assumption
by Rs600/MT and expect only a part of this to be recovered by steel prices.
Production impact: We reduce our FY12 saleable steel estimate for JSTL to
7.6MT from 8.2MT (excluding ISPAT) as we believe JSTL now has to source
iron ore from multiple sources and ore production is likely to remain impacted
in Bellary at least for the next three months, until the next SC decision.
Balance sheet and cash flow impact: ISPAT (NR) financials are still not yet
out and thus there is upside risk to our final debt numbers on a consolidated
basis. Even with reduced profitability we do not see (as of now) risks to debt
servicing. JPM FY12E consolidated leverage stands at 1.0x (we have taken
acceptances as part of debt).
Stock bounce back likely given some relief, but operating environment has
worsened: Given the partial SC relief on the mining issue, we highlight the
possibility of a near-term bounce in JSTL stock, given that it is trading below
BV. However, we believe the advantage JSTL enjoyed over the last 4-5 quarters
from the iron ore export ban has now gone away and iron ore costs could remain
elevated until the end of FY12. We remain Neutral with a revised Jun-12 PT of
Rs800 (based on 5.6x FY13E EV/EBITDA).
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