What can be worse for a company that recently became one of the largest steel making companies in India but attracted attention for the wrong reasons? JSW Steel is now the most affected company after a ban was placed on iron ore mining in the Bellary region of Karnataka. The company had to curtail its production by 70 per cent and at present is operating at 30 per cent of its capacity. The troubles may not end soon as the demand for steel is falling on the back of higher interest rates, thus making the scenario quite difficult for steel players in general and JSW Steel in particular. The current challenges for JSW Steel do not seem like they can be easily overcome. Even the stock market, where the scrip was once a darling of the investors, has deserted it as it has underperformed its peers and is down by 54 per cent YTD (Tata Steel is down by 42 per cent YTD while SAIL is down by 45 per cent). Does this mega fall in the share price of JSW Steel make it an interesting buy? What impact will the iron ore ban have on the financials of the company going forward? Here are the answers.
Bad Timing
The ban on mining came at a time when JSW Steel had just started the commercial operation of its 3.2 million tonne blast furnaces at its Karnataka plant. This means that the efficiency and output of producing additional steel would take a beating despite its new plants having ramped up the production capacity from 7.8 million tonnes in FY11 to 11 million tones. By putting up this plant JSW Steel has emerged as the largest steel making plant at a single location. But now this single location plant is becoming an issue with the company due to the non-availability of iron ore at competitive prices. In fact, the Bellary region has 16 million tonnes’ steel making capacity of which as high as 10 million tonnes is with JSW Steel. This explains why JSW Steel is the most affected.
Double Trouble
The present situation for the steel sector across the country is looking weak. In the first five months of the current financial year steel consumption merely grew by 1.3 per cent to 28.05 million as against 11 per cent recorded during the same period last year. This is mainly due to a continuous slowdown in the industrial activity, retail and infrastructure sectors. Also, with rising interest rates and firm inflation we believe that the steel using industries, especially auto and the infrastructure sectors, would report slower growth, thus impacting the demand for steel. JSW Steels’ 75 per cent of production is for flat products and any slowdown in automobiles and rate-sensitive sectors impact it the most.
For the year ended March 2011, the company derived 43 per cent of its revenues by catering to the infrastructure and auto segment (for detail break-up on end use market for JSW Steel please refer to the pie chart). But our discussion with the company spokesperson revealed that the industry has not seen any major contraction yet in the overall demand and the company is continuing to sell whatever has been produced without any inventory holding. He further stated that he doesn’t see any contraction in the coming quarters as well. This discussion took place just before the company announced its production cut to 30 per cent.
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