JSW Steel’s stock saw a good run-up on the bourses, appreciating almost 90 per cent from its 52-week low of Rs 464 on December 20, 2011 till mid-February, 2012. The stock, which had appreciated on expectations of the ban on iron-ore mining being lifted for mines cleared by the Central Empowered Committee (CEC) in its report to Supreme Court, has come off its peak as the matter still remains unresolved. The court hearing has been postponed to March 30, from March 23.
Given that the company’s steel capacity utilisation, which had recovered lately after falling sharply post-ban on iron ore mining, has again slipped to some extent, inventories of iron ore (at industry level) are depleting and JSW is in the midst of expanding its power and steel capacities in FY13, the lifting of iron-ore mining ban is crucial and will be the most important trigger for the stock.
Though analysts feel a solution may be round the corner and hence many are positive on the stock, any meaningful delay in lifting the mining ban will add pressure on the stock. Also, given the relatively weak global economic situation, any decline in prices could be a negative for the sector and the stock.
| PROFITABILITY BOOST IN FY13 | |||
| FY11 | FY12E | FY13E | |
| Net sales (Rs cr) | 23,900 | 31,983 | 35,806 |
| % chg y-o-y | 26.1 | 33.8 | 16.0 |
| Ebitda (Rs cr) | 4,663 | 5,344 | 6,499 |
| Ebitda (%) | 19.5 | 16.7 | 18.2 |
| Net profit (Rs cr) | 1,754 | 1,197 | 1,977 |
| % chg y-o-y | 9.8 | -31.7 | 65.2 |
| EPS (Rs ) | 84.6 | 51.9 | 87.1 |
| PE (x) | 5.3 | 8.6 | 5.1 |
| E: Estimates Source: CapitaLine Plus, Bloomberg, analyst reports | |||
Utilisation under pressure
The company, which at one point was at risk of running its plants at just 30 per cent capacity when the ban on mining was imposed in Karnataka in July 2011, received some respite with iron-ore e-auctions being allowed in the state. Though not a cost effective way of producing steel, the e-auctions helped JSW increase capacity utilisation to an average of 72 per cent in the quarter ending December 2011. Utilisation rate increased further in January pushing up output by 39 per cent year-on-year (YoY) to 805,000 tonnes. However, in February, JSW’s output dipped 24 per cent over January, as the quality of available iron-ore was not up to the desired levels. Analysts say capacity utilisation has fallen to around 65 per cent in this backdrop.
Also, not much iron-ore is available now for e-auction. According to reports, existing inventories would be able to meet demand for less than two months. NMDC, which is the only miner allowed to extract 12 million tonnes per annum (mtpa) of iron-ore in the state, has been able to ramp up production to 6.5 mtpa only, reckon analysts. Thus, it is crucial that mines cleared by CEC in the state should start producing iron-ore. This will not only allow increased production and capacity utilisation but also help improve profitability of companies like JSW.
During the December quarter, while JSW’s sales grew 36.2 per cent to Rs 7,860 crore on higher steel prices and capacity additions (helped by 7.7 per cent increase in demand for steel in India), raw material costs increased 47 per cent on higher cost of iron-ore procured through e-auctions. Power and fuel costs also jumped 53 per cent, partly led by the depreciation of the rupee. Thus, Ebitda margins declined to 9.4 per cent in the December 2011 quarter from 16.7 per cent in the year-ago period.
Hence, from the profitability perspective too, starting of iron ore mining is crucial, even though international prices of iron ore and coal (used for power generation) have come off recently.
Hopes for restarting
Reports indicate CEC had cleared 45 of the 166 mines in Karnataka for iron ore mining. Additionally, around 70 mines may be allowed to start operations after paying penalties. While the Supreme Court directive is pending, the level of inventories of iron-ore in Karnataka is depleting. Thus, many analysts are hoping the Supreme Court will provide some respite now. Giriraj Daga at Nirmal Bang feels some respite should definitely come by April 15. Categories A and B mines (as classified by CEC report) are likely to be allowed to mine the ore by then, feels Daga.
Last month, even analysts at Citi had upgraded the JSW stock to ‘buy’ after CEC’s recommendations were submitted to the Supreme Court. They felt that improved ore availability will help reduce average ore procurement costs, push up capacity utilisation, reduce costs and improve profitability. Analysts at Citi said the JSW stock, which has rallied from its bottom, may see further upside from current levels (then Rs 758; and target price Rs 920). They placed it as their ‘Top Pick’ in the steel space.
Bikash Bhalotia of PINC also had observed that post-CEC recommendations iron ore supply is unlikely to be a concern for JSW, although higher cost is likely to keep margins low. He had also upgraded his target price to Rs 865.
Profitability boost
Meanwhile, the ongoing expansion will help reduce costs further. JSW’s power generation capacity will increase from 300Mw to 860Mw by March-April, which will be sufficient to meet captive requirements even after expansion of steel capacity to 12 mtpa from 10 mtpa. In November 2011, JSW had commissioned a 171-km pipeline from Almatti Dam to the Vijaynagar plant to ensure water supplies.
Further, the slurry pipeline project (part of benefication-2 project) was completed in December 2011, which will help transfer iron ore and reduce transportation costs. Doubling of iron ore beneficiation capacity to 20 mtpa by September 2012 will help more usage of lower quality ore, and save on costs. However, for these benefits to accrue, availability of iron-ore and start of mining operations in Karnataka will be essential and will be most important trigger for the stock.
