Supply revival from Jharkhand captive mines to improve profits of domestic operations
At a time when sentiment for steel producers remains soft, there is something Tata Steel can feel good about —the resumption of iron ore dispatches from its Jharkhand mines. Analysts believe iron ore costs will fall by as much as Rs 7,000 a tonne. Tata Steel has been procuring ore at Rs 8,700-9,300 a tonne, versus extraction value of Rs 1,800-2,200 a tonne.
The development will bring down costs substantially. Analysts at Geojit BNP Paribas had said if the Jharkhand captive operations did not resume after the second quarter, estimates for FY16 and FY17 earnings per share (EPS) could fall further to losses of Rs 11.4 and Rs 19.4, respectively.
Dispatch of iron ore from the Noamundi mine to Tata Steel’s Jamshedpur plant had got stalled after the state government stopped issuing transportation permits. After the firm made necessary payments, the government allowed transporting of iron ore to Jamshedpur. This mine, with a 10-million-tonne (mt) iron ore capacity, is a feeder and can provide adequate ore for producing about six mt of steel.
This is the second positive news for Tata Steel’s India operations, after the recent imposition of a safeguard duty against imports. With the duty being imposed, analysts expect steel realisations to stabilise in the second half of FY16. Analysts at Antique Stock Broking expect blended steel realisations for the company to decline Rs 1,600 a tonne in the second quarter of FY16 but stabilise from the third quarter of FY16. Continued focus on branded products, value-added product mix, and retail distribution network should minimise the impact of weak steel prices.
The safeguard duty will provide an interim relief as the duty expires on April 1, 2016. So, recovery in international steel prices is crucial. Analysts at Jefferies believe steel prices will remain low for longer, looking at benign iron ore outlook, falling costs at Chinese steel mills, slowing Chinese steel demand, and high steel exports from China and Russia. For integrated firms such as Tata Steel, the current captive low raw material prices do not add up to much as global raw material costs for rivals abroad have crashed significantly, say analysts.
While the debt-issues at Glencore might result in near-term uncertainties, at Rs 201 a share, the Tata Steel stock trades at only 0.6 times price/book value, reflecting extreme pessimism. Analysts’ one-year target prices range between Rs 225 and Rs 437, while the Bloomberg consensus is Rs 300.
Source: Business Standard
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