Jindal Steel and Power - Strong standalone results :: Kotak Sec

Visit http://indiaer.blogspot.com/ for complete details �� ��


Jindal Steel and Power (JSP)
Metals
Strong standalone results overshadowed by weak performance of JPL. JSP’s
2QFY10 standalone performance exceeded our estimate, led by better-than-expected
realizations. Consolidated net income of Rs8.9 bn grew 10.6% yoy but declined 6.3%
qoq. Jindal Power’s (JPL) performance was weak, impacted by 5% qoq and 17% yoy
decline in realization. We will revisit our earnings and valuations post our earnings call.


Standalone performance better than our estimate
Jindal Steel and Power (JSP) reported 2QFY11 net income of 4.8 bn (+9.8% qoq, 56.8%yoy),
5.7% ahead of our estimate. Steel deliveries were strong during the quarter, growing 14.5% qoq
and 14.4% yoy to 462K tons. EBITDA of Rs8.6 bn exceeded our estimate and grew 8.2% qoq and
55.3% yoy. We are surprised by the rather modest decline in realization and stable EBITDA/ ton on
a sequential basis. Note that peers have reported a steep decline in profitability during the quarter.
Raw material costs hardly changed despite an uptick in volumes and an increase in contract coking
coal prices. Pellet sales were negligible for the quarter. Consolidated EBITDA of Rs15 bn, grew
15% yoy and -3.9% qoq. JSPL reported consolidated net income of Rs8.9 bn (+10.6% yoy).
Jindal Power— revenues decline on weaker short-term market and lower generation
Jindal Power (JPL) reported 2QFY11 net sales at Rs7.9 bn and PAT of Rs4.6 bn on generation of
1,972 MU. The implied realizations (assuming 8% AuX) dropped marginally from Rs4.6/kwh in
1QFY11 to Rs4.3/kwh in 2QFY11. Gross generation declined 12% sequentially on account of the
shutdown of two units for annual maintenance. Management has indicated that it sold ~75% of
power on a merchant basis while the balance was sold at a rate of Rs3.1/kwh, implying an average
merchant realization of Rs4.9/kwh during the quarter. JSPL has maintained healthy merchant
tariffs as it has locked-in contracts for 6-9 months at lucrative tariffs of Rs5/kwh. We note that
tariffs in the bilateral market have declined marginally Rs4.92/kwh in the month of August as
compared to an average tariff of Rs5.83/kwh in 1QFY11.
Review estimates post quarterly earnings call
We will revisit earnings estimates after the quarterly earnings call once we gain clarity on a number
of issues. Currently, we value JSP at an SOTP-based target price of Rs625/share. We currently value
the steel business at Rs265/ share. We value the power business at Rs361/share comprising (1)
Rs183/share for the 1,000 MW merchant power plant (Jindal Power), (2) Rs87/share as value
enhancement from the proposed 2,400 MW merchant power plant at Raigarh and (3) R91/share
for the 1,350 MW captive power plant being set up at Angul and Raigarh — we assume the
power generated out of this plant will be sold on a merchant basis.