JSW Steel Ltd recorded 7.43 million tonnes (mt) of steel production and 7.82 mt of sales in 2011-12 against its revised guidance of 7.5 mt and 7.8 mt, respectively, for the year. Going ahead, it has guided for 8.5 mt in production and 9 mt in sales for 2012-13, betting on resumption of iron-ore mining in category A and B mines.
The Supreme Court-appointed Central Empowered committee has recommended resumption of mining operations in leases that fall under the ‘A’ category. However, uncertainties still exist on resumption of mining from category B mines, even as analysts feel category A may start production only by July-August 2012. For JSW Steel, the resumption of category B mines will be crucial both for achieving production and sales targets as well as a plant capacity utilisation of over 70 per cent.
While lifting the mining ban would provide a trigger for the stock, analysts are still cautious. Pallav Agarwal of Karvy Stock Broking Ltd wrote in a recent note: “We have currently factored in steel volumes of 8.5 mt (sales) in FY13 and we believe it would be challenging for the company (JSW Steel) to achieve the targeted steel volumes, given the uncertainty over resumption of normal iron ore mining in Karnataka and the relatively subdued steel demand growth outlook in FY13.”
| UNIMPRESSIVE YEAR AHEAD | |||
| In Rs crore | Q4FY12 | FY12 | FY13E |
| Net sales | 10,153 | 34,124 | 35,647 |
| % change y-o-y | 40.8 | 43 | 4.46 |
| Ebitda | 1,887 | 6,033 | 6,422 |
| % change y-o-y | 13.6 | 26.2 | 6.4 |
| Ebitda (%) | 18.2 | 17.6 | 18.0 |
| Adjusted PAT | 610 | 1,688 | 1,896 |
| % change y-o-y | -23.1 | -3.8 | 12.3 |
| EPS (Rs ) | 34.1 | 22.7 | 83.3 |
| PE (x) |
–
| 28.8 | 7.9 |
| E: Estimates Source- Capitaline plus, analyst reports, Bloomberg | |||
Given these uncertainties and a recent Central Bureau of Investigation (CBI) probe into JSW Steel’s alleged illegal mining in Karnataka, most analysts offer a ‘hold’ or ‘sell’ rating on the JSW Steel stock. After the results, they have price targets ranging Rs 570-660 for the stock. Agarwal, who maintained a ‘hold’ rating, says: “We believe that given the overhang of the CBI probe against the company and concerns on iron ore availability the stock would remain under pressure in the short term.”
Q4: Costs pressures remain
Higher steel production during the March quarter helped JSW Steel post a 33 per cent year-on-year (y-o-y) jump in sales volumes at 2.31 mt. Its stand-alone revenue rose 35.3 per cent in the quarter. Margins at 17 per cent improved from 15.7 per cent in the December 2011 quarter, thanks to lower input costs, especially coal. However, on y-o-y basis, the impact of iron ore procurement through e-auctions (not cost-efficient) was evident as margins declined by a whopping 550 basis points. Gains on cancellation of foreign exchange (Rs 199 crore) cushioned the decline in profits (Rs 752 crore) to 9.7 per cent, which otherwise would have declined 26.6 per cent. On a consolidated basis, Earnings before interest depreciation taxes and amortisation (Ebidta) was helped by US plate and pipe productions and better utilisations. Additionally, an insurance claim was also settled, the amount of which remained undisclosed. JSW Ispat Steel Ltd, a unit of JSW Steel, too, reported a positive Ebidta (up 32 per cent sequentially and 52 per cent y-o-y), but high interest costs led to a loss at the net level. However, JSW’ Steel’s Chile iron ore mines reported weak Ebitda of $0.9 million for the quarter, compared with $25 million in the first nine months.
Expansion plans progressing well
The new captive power plant of 300 Mw, commissioned in March 2012, took its total capacity to 860 Mw, which should be sufficient to meet the annual steel production target of 12 mt at its Vijaynagar plant in Karnataka. In the interim, since the steel plant is running at lower capacity utilisation, JSW Steel will have around 200 Mw of surplus power, which could be sold commercially. The sale per unit of power will add around 0.50 paisa to Ebitda.
Meanwhile, the 173-km water pipeline from the Almatti dam to the Vijaynagar plant has been completed and will eliminate scarcity of water for the plant. Hot strip mill expansions are expected to be completed by September, taking the hot strip capacity from 3.5 mt to 5 mt. The expansion of its beneficiation plant is also progressing well and all four modules are to be commissioned in a phased manner in the current financial year. On JSW Ispat Steel, the management said it will take 18-24 months for the plant to get self-sufficient. For the Chile mines iron-ore mines, it will be ramped up from 1 mt per annum currently to 2.5 mt in the next two years.
The road ahead
Though expansions are on track, given the iron-ore supply issues, JSW Steel’s FY13 guidance looks a bit ambitious. The resumption of mining is crucial for JSW, which has survived FY12 on the ore procured through e-auctions. From the total auctions of about 18.6 mt in FY12, JSW Steel bought 10.7 mt. Around 75 per cent of the auctioned iron-ore had been received by JSW Steel till March, and the balance will help keep its plants running during the June 2012 quarter. However, during the September quarter, the situation will again become crucial. NMDC Ltd, the only player allowed to mine up to 12 mt per annum, will produce iron ore at an annual rate of 7-8 mt, which means maximum of around 0.5 mt per month may be available for JSW Steel. Thus, for the remaining 1-1.5 mt of its requirement, timely resumption of mining operations holds key.
Analysts thus expect JSW Steel to miss its guidance. Giriraj Daga of Nirmal Bang sees production at 7.8 mt and sales at 8.2 mt in FY13. He feels after the conditional approval for category A mines, it will take two-three months for these mines to start production. Approval for Category B mines is still pending, which is necessary for JSW Steel if it has to achieve 70 per cent capacity utilisation. Hence, Daga sees 67 per cent capacity utilisation in the first half of FY13 and 75 per cent during the second half.
