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Investors are positive on Tata Steel

March 24, 2015 14:06 IST

Operating earnings to take a hit but new mining Act paves way for rise in capacity, ends many uncertainties

Tata SteelThe new mining law is seen as a positive development for Tata Steel, evident from the marginal rise on Monday in the stock price on the BSE.

Production cost might rise due to the mandate that miners will have to pay more for project-affected people.

However, investors seem optimistic as the company is to benefit from removal of uncertainties on extension of iron ore, manganese and chrome ore mines.

The new Act says existing leases, including the ones under second and subsequent deemed renewal, will be automatically renewed up to 2029-30 in the case of captive mines.

This will bring clarity for Tata Steel, which saw 10 of its iron ore and manganese mine leases go off operations last year, after the apex court called for suspending operations awaiting a second or subsequent renewal, operating under the provisions of deemed extension of lease.

Tata Steel has mining capacities for 32 million tonnes of iron ore, 2.4 mt of chrome ore and 270,000 tonnes of manganese ore.

“Since Tata Steel can now raise its steel production without worrying on iron ore supply, we view the new Bill as a positive,” Motilal Oswal Research said in its report. “We have a 'buy' rating on the company.”

Tata Steel India operations will have a capacity of nearly 13 mt after completion of phase-I of its Kalinganagar project (Odisha's Jajpur district), slated for April-June.

While the new Act is a positive for the sector from a long-term perspective, contribution to the proposed District Minerals Foundation is the only negative aspect.

At peak level, it would raise the cost of iron ore  by Rs 300-500 a tonne, said brokerages.

"This (DMF contribution) is likely to increase the cost of steel companies by Rs 480-800 a tonne (depending upon their mix of fines and lumps).

“The impact, however, will be least for Tata Steel, of three per cent, due to high Ebitda (operating earnings) per tonne at Rs 14,414,” said Edelweiss Securities.

“There might be a maximum of up to six per cent erosion to the company's Ebitda on account of additional cost towards DMF and NMET (National Mineral Exploration Trust),” said Motilal Oswal.

Citing the increased contribution to DMF, to 100 per cent of the royalty amount as against 33 per cent earlier, Kotak Securities has cut its FY17 Ebitda estimates by four to 25 per cent for Tata Steel, Hindustan Zinc and Sesa Sterlite.

Kotak Securities sees Tata Steel's royalty costs (including DMF) more than doubling to Rs 2,600-2,700 crore (Rs 26-27 billion) in FY17 from Rs 1,100 crore (Rs 11 billion) in FY14 and maintains a 'reduce' rating on the company.

Tata Steel's domestic operations have been its cash cow for quite some time, also helping service the company's consolidated debt of Rs 70,000 crore (Rs 700 billion).

In the December quarter, a fall in realisation and disruption in captive mining operations hit the India operations.

This halved the profit to Rs 881 crore (Rs 8.81 billion) from Rs 1,519 crore (Rs 15.19 billion) in the corresponding period last year.

Apart from India, Tata Steel has operations in Europe and Southeast Asia.

Aditi Divekar in Mumbai
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