Zacks_Analysts' Blog : PKX's Orissa Project gets a Setback - Analyst Blog

Korean steel producer, POSCO’s (PKX) $12 billion (Rs 52,000 crore) steel plant project at Orissa suffered a setback after the state government stopped the land acquisition procedure indefinitely in response to stiff opposition from the local communities.

It’s the sixth year since the steel major signed a memorandum of understanding (MOU) with the Orissa government in 2005 to build a 12 million ton annual capacity plant in the eastern provinces of the state covering approximately 1,621 hectares of land.

The project since the very beginning has fuelled agitation among the local people who are protesting against land acquisitions and environmental issues. However, in January this year, the project finally got the green signal from the Environment ministry and received conditional approval with 28 new conditions for the integrated steel plant and 32 fresh conditions for the captive port.

The indefinite halt notwithstanding, the company is still optimistic about the project. The POSCO project is the single largest foreign direct investment (FDI) in India.

POSCO is the world’s third largest steelmaker on the basis of output. The company, chiefly because of its wide regional diversification with its growing presence in the international markets through investments in Australia, China, India, Indonesia and Brazil, can reap enormous benefits. The Orissa project too has limitless possibilities, enabling POSCO to tap the growing demand for steel globally. The company also gains from its joint ventures, acquistions, and raw material independency.

In addition, higher proportion of value-added products (such as cold-rolled steel, automotive steel plates and electric steel sheets) in the company’s product mix is a boost to revenue and earnings growth as these products attract better realizations and margins over commodity hot-rolled coils.

However, growth momentum in the quarters ahead might get restricted due to headwinds emanating from higher raw material cost and rival steel manufacturers worldwide, including Arcelor Mittal (MT), Nippon Steel Corp. (NISTY.PK) and Hyundai Steel Company.

We currently maintain a Neutral recommendation on the stock.