News of mining ban reversal in Karnataka fails to lift JSW Steel shares

MUMBAI: News of the Supreme Court lifting the mining ban on Category A mines in Karnataka has done little to improve investor sentiment in JSW Steel as news of its merger with Ispat, its debt laden subsidiary, increases near term concerns.

The stock has fallen over a percent in trade so far on the Bombay Stock Exchange today, compared with a 0.18% fall in the benchmark Index.

Following the news of the merger, several brokerages have reduced targets on the stock which currently trades at 9.4 times its trailing twelve months earnings per share.

While the long term benefits of the merger is earnings accretive to the stock, the intermediate period remains challenging. With the exception of the June 2012 quarter, JSW Ispat has been reporting losses for the last four consecutive quarters. The merger will increase JSW Steel's share of Ispat's losses. The merger will also increase its debt significantly.

The combined entity will have a capacity of 14.3mtpa, which the company plans to nearly triple over the next eight years. Though the merger will bring numerous synergies including cost saving to the company in the coming years, operations will remain under pressure given the current macro environment where demand for steel remains low and procurement of raw materials is still a challenge.

The Supreme Court has allowed Category 'A' mines to restart production or iron ore, but the ramp-up is likely to take some time before things return to normalcy.

ICICI Securities, Nomura, CLSA and Bank of America have already reduced their targets on the stock following the news. According to Bloomberg data, out of the 52 brokerage calls on the stock, 19 say buy, 15 say hold and 18 say sell.