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In two months, JSW Steel (JSW) has surged 28 per cent on bourses, touching a 52-week high of Rs 1,084 last Thursday, supported by the company’s strong performance despite challenges on the iron-ore availability front. JSW’s production data for FY14 beat its forecast. While iron ore availability in Karnataka is improving, the acquired and merged Ispat unit at Dolvi is likely to see better operational performance, with its pellet and power facilities set to be commissioned in FY15.
All these bode well for the company and its prospects look sound. However, of late, the rupee’s appreciation, which led to softer domestic steel prices, has raised concern on steel stocks. JSW has corrected eight per cent compared to its peak levels. The concern on steel prices is also reflected in analysts’ recommendations. Of the 17 analysts polled by Bloomberg since March 2014, seven have ‘buy’ ratings, six ‘hold’ and four ‘sell’, with a consensus target price of Rs 952. However, looking at JSW’s long-term prospects, investors with a one- to two-year view could accumulate the stock on dips.
Output growth continues
For FY14, the company has reported crude steel production of 12.2 million tonnes (mt), higher than 11.2 mt for FY13 and slightly ahead of its FY14 forecast of 12 mt. Though the company hasn’t reported its sales volume yet, analysts feel JSW will beat its forecast of 11.55 mt for FY14. For the first nine months of the financial year, the company had already clocked sales of 8.76 mt. Analysts at Antique Broking feel JSW will beat its FY14 volume forecast. They expect the company to record sales volumes of 12.7 mt and 13.8 mt for FY15 and FY16, respectively. They attribute the high sales volume to the improved iron ore availability in Karnataka and the fact that this will facilitate higher capacity utilisation of the company’s Vijaynagar plant, Against the current levels of about 80 per cent.
Ore availability improving
Following the bans on category A & B iron-ore mines in Karnataka being lifted, iron-ore availability in the state is improving. While analysts expect the state to have recorded production of 20 mt per annum (mtpa) at the end of FY14, Goutam Chakraborty at Emkay Global sees an addition of two-three mtpa to iron ore output during FY15. Owing to this, along with one-two mt of usable iron ore dumps, he feels iron ore availability in Karnataka will stand at 23-25 mt during FY15. With low imports (2-2.5 mt) from other states, iron ore availability will be better and the company should be able to achieve higher capacity utilisation for its Vijaynagar plant in FY15. Also, the fresh mining output is likely to keep iron ore prices under check, adds Chakraborty.
Operating performance to improve
JSW’s earnings before interest, tax, depreciation and amortisation (Ebitda) per tonne improved from Rs 6,859 in the June 2013 quarter to Rs 7,478 a tonne in the December quarter. The Dolvi unit, acquired from Ispat, is expected to report much better operational performance in FY15, once the coke-oven battery and pellet plants are commissioned, substantially lowering costs. In addition to iron ore prices in Karnataka being under check, a cut in coal prices also brings respite to JSW. Spot coking coal prices have continued to decline — from $152 a tonne in September to $110 a tonne. Reports suggest Indian steel producers are negotiating for the June 2014 quarter contracts to be signed at $125 a tonne, against $143 a tonne for the March 2014 quarter contracts.
Domestic prices a concern
With the rupee’s recent appreciation, domestic steel prices have started correcting, as international steel prices remain soft. Along with other steel producers, JSW had also revised prices from April 1, which resulted in a cut of Rs 500-750 a tonne for hot rolled coil and Rs 500 for wire rods. Analysts at Elara Capital say global steel prices might decline further, and this will be reflected in the lower cost base and overcapacity in the system.
Chakraborty, who has changed his Ebitda-per-tonne estimate for FY15 to Rs 7,500, factoring in the recent steel price concern, says a better product mix will prevent JSW from seeing any substantial fall in realisations. Nevertheless, considering the recent steel price correction and the fact that demand might remain volatile during the first half of FY15, owing to the general elections and the monsoon, the JSW stock might remain volatile in the near term.
