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Stock corner: Reiterate ‘Buy’ on JSPL with SOTP-based target price of Rs 175

This claim has been challenged by the Odisha government in the SC (Odisha High Court had ruled in favour of JSPL).

The Supreme Court (SC) has deferred its verdict on JSPL’s case related to the offtake of iron ore from the Sarda mines. As a backdrop, we note that operations at the Sarda mines have been shut since 2014. JSP, though, had made payment for ~12mt of iron ore (mainly fines) to Sarda and the state (royalty/taxes), thereby stating its claim on the related ore. This claim has been challenged by the Odisha government in the SC (Odisha High Court had ruled in favour of JSPL).

Odisha has claimed that transportation of material forms part of mining activity (according to the MMDR Act) and necessitates an environment clearance for the mine. Hearing on this case has been going on and a verdict was expected at Wednesday’s hearing. But the decision has been deferred, with the next hearing now scheduled to the second week of January 2020.

JSPL cited it sources iron ore fines at Rs 1,800-2,000/t (ex-mine). Thus, if the company were allowed to lift the 12 mt of fines, it will lead to a benefit of Rs 2,200-2,400 crore. Moreover, this would come at a time when the domestic iron ore market may get disrupted upon expiry of iron ore leases in March 2020. Our FY21 volume estimates (~6mt) imply annual iron ore requirement of ~9.6mt. JSPL sources ~3mt from its captive mines and the balance (~7mt) from various merchant mines. Thus, the availability of this 12 mt would provide significant cushion against any possible disruption (accounting for 18-20 months of sourcing from merchant mines).

In recent times, JSPL’s stock has re-rated (up ~55% over the past 2 months) on expectations of benefit of coal block allocation (Gare Palma), possible positive verdict on the Sarda mines case and a recovery in steel prices. Domestic and global steel prices have shown signs of recovery over the past two months, which is a positive. We do not build in any benefit from the offtake of iron ore from the Sarda mines as the final verdict is still awaited. A favourable verdict for the same would drive an upside to our numbers. We note the stock may remain volatile over the near term on news flow related to the same. We continue liking JSPL as major capex is now behind and FCF generation should continue along with ramp-up in volumes. Reiterate ‘buy’ with an SOTP-based target price of Rs 175.

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Source: Financial Express