Insufficient iron-ore supplies and the resulting decline in steel output have led analysts to cut their earnings estimates for the company.
JSW Steel’s problems have only grown bigger with the disruption in iron-ore supplies hurting steel output at its 10 million tonne per annum (mtpa) plant in Karnataka. Since this plant accounts for about 70 per cent of JSW’s capacity, its steel production is estimated to decline, unless the situation changes for the better.
These events have led analysts, most of whom were already neutral to bearish, to cut their volume and earnings estimates for the company. They have also lowered their price targets for the stock, which fell 1.54 per cent to Rs 609.10 on Tuesday. For instance, Nirmal Bang’s analysts, who maintain their ‘sell’ rating on the stock, have cut their price target to Rs 514 from Rs 570 earlier.
| VOLUME CONCERNS | ||||
| New Assumptions | Change (%) | |||
| FY12 | FY13 | FY12 | FY13 | |
| OPERATIONAL DETAILS | ||||
| Crude steel production (mt) | 6.5 | 8.8 | -9.3 | -4.8 |
| Steel volume (mt) | 6.8 | 9.2 | -8.8 | -4.6 |
| Realisation (Rs/tonne) | 41,427 | 37,999 | 2.5 | 1.5 |
| Cost (Rs/tonne) | 34,851 | 30,545 | 2.3 | 1.1 |
| Ebitda(Rs/tonne) | 6,576 | 7,455 | 3.6 | 3.3 |
| FINANCIALS (Rs crore) | ||||
| Net sales | 30,721 | 38,944 | -6.0 | -2.8 |
| Ebitda | 4,860 | 7,466 | -5.1 | -1.3 |
| PAT | 884 | 2,611 | -16.7 | -2.6 |
| All figures are estimates mt is million tonnes Change is compared to the earlier estimates of the research house Source: Nirmal Bang Institutional Equities Research | ||||
HOPES RISE...
After the Supreme Court imposed a blanket ban on iron-ore mining in Karnataka, in early August, it had allowed NMDC (the only miner allowed to mine iron-ore in Karnataka) to mine and supply one mt of iron-ore a month.
Providing further relief to steel players, on September 2nd,, Supreme Court allowed for e-auction of 25 mt (14 mt low-grade and 11 mt high-grade) iron-ore inventory available in Karnataka. This translated into availability of 1.5 mt of ironore per month (50,000 tonnes a day) for steel manufacturers.
The order had made JSW’s management confident of garnering adequate iron ore to run its plants at 80 per cent capacity utilisation, for which it would require 45,000-50,000 tonnes a day of high grade iron ore or 60,000 tonnes a day of lower grade iron-ore.
It was estimated that JSW will get 10,000-15,000 mt a day from NMDC, to slowly increase to 15,000-20,000 a day after capacity ramp-up. Further, 20,000 tonnes a day was being sourced from mines in Chhattisgarh, Jharkhand and Orissa, though transportation costs were higher. Analysts had anticipated that procurements through e-auction would help resolve the iron ore availability issue for JSW, and Prabhudas Lilladher analysts had then observed that the order would enable JSW to operate the plant at 80 per cent utilisation.
...ONLY TO FADE
However, JSW has not received any meaningful supplies from NMDC. From the first e-auction done from existing inventories of iron-ore in the State, JSW is still to receive its share of the raw material due to procedural delays.
JSW's statement on September 26th says “The Honourable Apex Court's directive on 5th August 2011 to supply one mt per month to steel industry by NMDC even after a lapse of 50 days is yet to be fulfilled. The release of 1.5 mt per month out of stock piles through e-auction has also not given any relief."
MSFL's analyst in a report observes that the Supreme Court's earlier decision of e-auctioning of 1.5 mt iron ore per month seems to have turned into a white elephant since the ore auctioned on September 14th (total sale of 396,000 tonnes, of which 110,000 tonnes is JSW's share) is yet to reach the industry due to many procedural delays.
Reports also indicate the e-auction price of low-grade fines had been priced at Rs 21,000 a tonne, against the market price of Rs 12,000 a tonne leading to 31 per cent of e-auction volumes being not taken by any steel player. For JSW, the supplies of iron-ore from other states has also been disrupted due to floods observe Nirmal Bang's analysts.
IMPACT
This has forced JSW to reduce capacity utilisation of its 10 mtpa Vijaynagar steel plant in Karnataka to a mere 30 per cent, the minimal level required to keep the plant running. Its other one mtpa plant at Salem is also likely to face difficulty, as it is dependent on iron ore supplies from Karnataka.
The crisis on iron ore mining in Karnataka is unlikely to end soon. Analysts at MSFL also believe the illegal mining crisis seen in Karnataka may spill over to other iron ore supplying states, impacting availability.
ESTIMATES CUT
The reduction in capacity utilisation has put JSW’s earnings to risk, and analysts are downgrading the stock. Analysts at MSFL have cut volume estimates by 21.4 per cent and 14.4 per cent to 6 mt and 7.71 mt in FY12 and FY13, respectively. Analysts at Nirmal Bang add that “assuming 30 per cent capacity utilisation for rest of FY12 and 70 per cent utilisation in FY13, JSW may report loss of Rs 201 crore in FY12 and net profit estimates could reduce by 27 per cent in FY13.” However, for now, they have considered 30 per cent utilisation in October, 50 per cent in the rest of the December 2011 quarter, 70 per cent in the March 2012 quarter and 80 per cent in FY13, in their estimates.
Ravindra Deshpande at Elara Capital in his report notes, “We continue to be bearish on JSW Steel despite steep correction in the (stock) price because of lower volume growth, higher iron ore costs and higher interest expenses (higher debt burden on balance sheet post acquisition of Ispat).
Bikash Bhalotia at PINC Research says more clarity will appear after the next e-auction in a few days. He also added that, gradually parity in e-auction and market prices may also come.
