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Hold Onto JSW Steel

JSW Steel is expected to be hit by rising coke prices, but the company's prospects are still bright...

I had bought 10 shares of JSW Steel for Rs483.95 (on May 19, 2009). I expected to sell them at around Rs1,500, but after peaking at Rs1,400 the stock seems to have lost its steam. Of late it has been hovering at around Rs1,000-1,050. Should I hold on to the shares or sell half or all now?
- Subhankar Bose

To understand the prospects of JSW Steel, you have to look at the dynamics of the Indian metals industry. Domestic iron ore prices are expected to soften on account of capacities being built up while supply of coking coal is expected to remain constricted over the next four-five years. Coal India recently hiked coal prices by 30 per cent. According to industry watchers, coal prices could rise by at least 6 per cent in FY12. Non-integrated players (like JSW) are expected to be hit by rising coke prices. Margins could therefore be affected.

But JSW Steel is doing its bit to minimise the fall. To manage rising costs, it has acquired coal mines in USA and iron ore mines in Chile. It has been allotted coal blocks in Kulti, Sitarampur and Rohne while it plans to source iron ore from Orissa or Jharkhand. Further, JSW’s acquisition of Ispat Industries is expected to help ease margins on account of efficiencies.

JSW’s US and Chilean mines are expected to start generating cash flows from FY12. Analysts estimate that the company could be looking at producing 0.5 million tonnes per annum each of iron ore and coking coal by the next financial. Breakeven though could be some time away for these entities.

At the CMP, the company trades at 10.68 times its trailing 12-month earnings. This is slightly above its five-year median of 9.6. JSW is the most efficient of Indian steel producers (even more than Tata Steel).

Continue holding on to the company’s stocks as its projects in Karnataka and West Bengal will become operational in the next couple of years. Meanwhile, its measures to control rising input prices will improve its prospects.

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