Amid the alleged irregularities in the allocation of coal blocks taking their toll, on Monday, JSW Steel joined the list of companies whose coal blocks had been deallocated. The block, Gourangdih ABC in West Bengal, had been jointly allocated to JSW Steel and Himachal Emta Power.
However, the move did not have any impact on the JSW stock. On the contrary, JSW shares closed at Rs 727.10 on the BSE on Tuesday, gaining two per cent over the previous close. Though the company is scouting for coal blocks and depends on imported coal for its Karnataka plant, the deallocation of the West Bengal block, with estimated reserves of about 125 mt, wouldn't result in any major loss for the company in the immediate term. Analysts feel the block would have helped its proposed plant in Bengal (estimated to cost Rs 40,000 crore), land acquisition for which has been completed by the company (some progress has also been made on the steel and power plant fronts).
Also, the coal block, if developed, would have contributed to the company only by 2016-17. Reports suggest so far, JSW had spent Rs 450-500 crore on the project (primarily on land). In a report after the JSW-Ispat merger, analysts at Motilal Oswal Securities had stated the Bengal project was taking a backseat in JSW's overall growth strategy, owing to execution delays. Analysts, therefore, had not accorded much value to the Bengal plant in their estimates for the JSW stock.
| EARNINGS BOOST IN FY14 | |||
| In Rs crore | Q1 FY13 | FY13E | FY14E |
| Net sales | 9,910 | 47,592 | 48,274 |
| % change y-o-y | 33.2 | 38.5 | 1.4 |
| Ebitda | 1,909 | 8,370 | 9,212 |
| Ebitda (%) | 19.3 | 17.6 | 19.1 |
| Net profit | 50 | 1,268 | 2,309 |
| % change y-o-y | -89.8 | 135.8 | 82.2 |
| EPS (Rs) | 2.1 | 52.8 | 95.6 |
| PE (x) | 348.1 | 13.7 | 7.6 |
| E: Estimates Consolidated financials Source: Nirmal Bang Securities | |||
In August, JSW Steel had reported a 15 per cent rise in steel production at 0.763 mt, despite the iron ore supply crunch, owing to mining bans in Karnataka. This raised production in the April-August period 22 per cent to 3.582 mt. With this, about 42 per cent of its FY13 production target of 8.5 mt has been achieved. Given the recent approval to Category-A mines to start iron-ore mining in Karnataka, the FY13 target looks achievable.
On August 31, the company had announced the merger of JSW Steel with JSW Ispat. While the merger increases the combined debt, leading to a higher debt-equity ratio, there are gains in the longer run. For now, the net debt of the merged entity, including acceptances, would increase to Rs 33,376 crore (against JSW Steel's debt of Rs 24,100 crore at end of the quarter ended June). The net debt (excluding acceptances) to equity ratio would stand at 1.15, compared with the current 1.09. Equity dilution of about eight per cent would also be carried out, given the swap ratio of 1:72 (for every 72 Ispat shares, investors get a JSW share).
The merger would result in cost savings of Rs 350-500 crore annually, owing to economies of scale and lower interest costs, as JSW Ispat's weighted average interest costs are about 350 basis points higher than JSW Steel's. The combined entity, with capacity of about 14.3 million tonnes per annum (mtpa), would benefit in terms of raw material negotiation, better access to bulk imports and finished steel exports, according to an Emkay analyst. After the merger, JSW Steel plans to leverage the infrastructure of the Dolvi unit to add an additional three to four mtpa of capacity through brownfield expansion.
On a turnaround at Ispat, analysts at Edelweiss say it would take two years for the earnings before interest, tax, depreciation and amortisation to rise to Rs 2,700 crore from the current Rs 1,200 crore. This would be helped by a benefit of Rs 300 crore accruing from the power plant and other projects (55-mw plant to be commissioned by January 2013), Rs 200 crore from coke oven batteries (commissioning in September 2013), and Rs 1,000 crore from the pelletisation plant (expected by March 2014).
Though the Ispat turnaround would take some time, easing of iron-ore supplies in Karnataka is a good trigger. Analysts say JSW's improved performance could lead to more upside for the stock.
