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The Supreme Court judgment lifting mining ban on Karnataka-based Category A and B iron ore mines has come as a relief for steel manufacturers. The decision is positive for companies such as JSW Steel, which are faced with under-utilisation of their steel manufacturing capacity due to lack of iron ore availability in the state.
Even for its existing steel production, JSW Steel is currently sourcing part of its requirements from other states at a higher cost, due to non-availability of iron ore in the state.
“The move to lift ban is certainly a positive development because that will increase availability and help companies like JSW Steel to increase its capacity utilisation. But, the real benefit could only be seen in the fourth quarter of FY14 or early in FY15,” says Jatin Damania, who tracks the sector at SBICAP Securities.
This is also why analysts believe the stock did not react much after the news came in. On Thursday, the stock jumped to an intra-day high of Rs 744.55 before closing down two per cent at Rs 717. The bigger worry, though, is the subdued steel demand in India and pressure on prices, which could continue to be an overhang for the stock in the near-term.
Assuming the current steel realisation of about Rs 38,600 a tonne and net profit margin of four per cent, the increase in capacity utilisation should add Rs 7,700 crore revenues and Rs 310 crore to net profit – equivalent to 20 per cent of estimated revenues and net profit for FY13.
However, the gains at the profit level could be larger. Consider this. The company requires about 13 MT of iron ore for running the plant at the existing 80 per cent utilisation level. It is currently able to manage the input requirements with the help of e-auction and about two to three MT of iron ore procured from states such as Odisha and Chhattisgarh. However, the cost of iron ore procured from these states is higher compared to that available in Karnataka. In the event of higher availability of iron ore in Karnataka, the firm can source raw material locally at cheaper rates, which would add to its profit margins.
However, the impact of both improvement in volumes and margins will only be visible after three or four quarters. According to analysts, it will take some time for the Karnataka-based mines to ramp up production of iron ore. “At this juncture, many iron ore mines are not viable and in many cases, either the lease has expired or approvals have expired. The remaining mines will have to fulfil certain norms and criteria before they start exploring, which is why we believe it could take another six to nine months before actual production starts from these mines,” said Goutam Chakraborthy, who tracks the sector at Emkay Global Financial Services.
