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Electrosteel Castings report: Iron ore mines get MOEF clearance

Contributed by Angel Broking

Electrosteel Castings (ECL) receives forest clearance: We resume coverage on ECL in view of a positive development (receipt of forest clearance). ECL has received forest stage-I clearance for its iron ore mines located at Kodolibad, West Singhbhum, Jharkhand, from Ministry of Forests and Environment (MOEF).ECL expects to receive stage-II clearance in the coming 2-3 months and then sign mining lease with the state government. After signing the mining lease, ECL can develop the mine and resume production. The mine has reserves of 91mn tonnes with 64% Fe content. ECL expects to commence production from this mine in FY2013. However, procedural delays cannot be ruled out in our view.

Update on coking coal mine: ECL has a coking coal mine in Parbatpur, Jharkhand, with reserves of 231mn tonnes. The mine has received full statutory clearances and ECL is currently developing the mine. The company expects meaningful production from this mine to commence from 2HFY2013.

ECL to turn into a fully integrated player: With upcoming production from coking coal and iron ore, ECL will turn into a fully integrated steelmaker. Although there is lack of clarity on the timelines for commencement of meaningful production from its coking coal and iron ore mines, ECL’s margins are expected to be significantly higher than its peers once it reaches optimum production capacity at its mines. Moreover, ECL’s associate, Electrosteel Steels (34.8% stake) with 2.2mn tonnes of steel capacity is expected to benefit the most, as ECL will supply coking coal and iron ore from its mines to Electrosteel Steels at subsidized rates (cost + 20%).

Outlook and valuation: We have a positive stance on ECL’s initiatives of gradually venturing into steel making through its associate Electrosteel Steels. Furthermore, the company’s backward integration initiatives through allocation of coking coal and iron ore mines are expected to result in cost savings from FY2013. The stock is currently trading at 0.4x each for FY2012E and FY2013E. We recommend Buy on the stock with an SOTP target price of Rs.32.