Stock Review: JSW Steel

JSW Steel is in for tough times. The market hammered the companys stock down by 10.23 per cent to `695 on Monday, after the Lokayukta report, the Supreme Court (SC) imposed ablanket ban on mining in the Bellary district. This could, claim analysts, have very negative implications for the company. The company is highly leveraged to small changes in volumes/and or costs, says a foreign brokerage report. 

JSW Steel is one of Indias largest integrated steel producers, with crude steel capacity of 11 mtpa, of which 10 mtpa is in Karnataka. JSW Steel sources over 70 per cent of its iron ore form Bellary, which only underlines the magnitude of impact a blanket ban on mining in that area will have on the company. According to Citi Investment Research & Analysis (CIRA), "JSTL's 10 mpta located in Karnataka has only 15-20 per cent captive iron ore and gets 30 per cent from NMDC and 45-50 per cent in the spot market – 100 per cent from Bellary." Analysts say for its expanded capacity of 10 million tonnes in Vijaynagar, the company needs close to 16 million tonnes of iron ore – 70 per cent of this would need to be met from mines located in Bellary. According to one brokerage firm, this includes the company's captive iron ore mine in Vijaynagar Minerals, which supplied 2 million tonnes of iron ore at `600 a tonne. The apex court's order is likely to result in mining being completely stopped in VMPL, leading to JSW Steel being deprived of the benefits of its backward integration totally. The order to ban mining in Bellary means the company cannot get ore from its own mines or from NMDC. While NMDC's mines may restart after the hearing on August 5, analysts say, other mines could be closed for longer. Sanjay Jain, analyst at Motilal Oswal says: "Since JSW Steel sources nearly 70-80 per cent of its iron ore requirement from Bellary, it has been able to keep its costs under check because iron ore prices at mine mouth are at heavy discount to international prices due to oversupply in Karnataka. However, this could change and the cost of steel per tonne could go up by $100. Currently, the companys margin per tonne stands at $184." The company will have to procure this iron ore from outside, which will result in additional cost in the range of

`2,500-3,500 a tonne, depending upon the price at which it procures iron ore. In view of the above uncertainty, CIRA has cut volumes by eight-nine per cent in FY12-13. Iron ore costs is expected to go up by 24-33 per cent in, based on higher levels of iron ore purchases from non-Bellary sources. Consequently, CIRA has cut FY12/FY13 PAT estimates by 54per cent/45 per cent (Ebitda by 23 per cent).