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Jindal Steel and Power (JNSP.BO)
Alert: Lower Merchant Power Prices Weigh on 3QFY11
3QFY11 PAT 13% below est. — JSPL’s consolidated PAT at Rs9.5bn (+9% YoY)
was 13% below CIRA estimate of Rs11bn on lower than expected merchant
prices. EBITDA margin at 50.4% fell 382 bps YoY and was 171bps lower than the
CIRA estimate of 52.1% mainly due to a sharp fall in power realizations, which fell
22% YoY and 11% QoQ.
Standalone PAT 14% below est. — Due to higher taxes, depreciation and interest
expenses. PAT at Rs5bn grew 54% YoY on (1) 12% YoY increase in sales volumes
to 596kt (7% ahead of estimates); (2) sharp increase in average steel realizations
(in-line with CIRA estimates) (3) better product mix; and (4) sale of 200kt of pellets,
224kt of iron ore and strong iron ore prices. EBITDA margin at 38.8% (CIRA
estimate 39.7%) rose 345bps YoY. Second unit (135MW) of 540MW CPP was
commissioned in 3Q – taking operational captive power capacity to ~620MW at
Chhattisgarh.
Jindal Power’s realizations fell in the quarter — JPL’s 1000MW Tamnar 1
project’s performance continued to suffer due to falling merchant prices. 3QFY11
ASP at Rs3.56 fell 22% YoY and 11% QoQ and was 17% below CIRA estimates of
Rs4.28/kwh. Operationally, the plant did well in the quarter with PLF of 101.4%
and generation at 2.24bnkwh was in line with CIRA estimate.
Valuations factor in a lot of positives, Maintain Hold — JSPL with its strong
execution and cash generation is one of the most integrated steel and power
companies in India. Access to captive raw material for steel and power makes
JSPL one of lowest cost producer of power and steel and gives JSPL an edge over
peers in both power and steel. However JSPL’s stock is up 5.2x/13x in the last 2/5
years and valuations price in a lot of these positives. Moreover declining merchant
power prices will weigh on near-term earnings.
Jindal Steel and Power
Valuation
We value JSPL's power business using a discounted cash flow approach as power
plants generate largely predictable cash flows for fixed time periods. While
applying DCF one can choose free cash flow to the firm (FCF) or free cash flow to
equity (FCFE). We prefer FCFE as individual projects are highly geared and
gearing changes as debt is rapidly paid off.
We value JSPL's steel business at 7x FY12 EV/EBITDA - at a discount to Tata
Steel India's target EV/EBITDA multiple of 7.5x. We use a discount given (1) Tata
Steel India's scale of operations at 6.8mtpa vs 2.4mtpa for JSPL, (2) Tata Steel
India's 100% captive iron ore vs. 50-60% for JSPL and 3) Tata Steel's product mix
being largely high end relative to JSPL. Both companies have ~55-60% of captive
coal. Tata Steel has 55-60% coking coal. JSPL has 100% thermal coal, but no
coking coal.
If we assume JSPL executes all its power projects in line with our assumptions, we
arrive at a value of Rs676/share. This includes Rs204 for the steel business, Rs19
for Bolivia, Rs325 for Jindal Power, Rs86 for 1,350MW captive power plants and
Rs40 for excess power purchased from JPL at fixed prices. At our target price the
stock would trade at a P/E of 11x and EV/EBITDA of 9.2x FY12E.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Low Risk rating to JSPL.
Downside risks include: fuel supply risk, coal mining risk, execution risk, merchant
tariff risks, financial closure risk, receivables risk, regulatory risk, R&R, land
acquisition and environmental clearance risk and lower than expected operating
parameters. Upside risks include: better-than-expected operating parameters;
faster-than-expected execution and additional project wins; higher-than-expected
merchant tariffs; higher steel prices and rupee depreciation. These upside and
downside risks could impede the stock from achieving our target price.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Jindal Steel and Power (JNSP.BO)
Alert: Lower Merchant Power Prices Weigh on 3QFY11
3QFY11 PAT 13% below est. — JSPL’s consolidated PAT at Rs9.5bn (+9% YoY)
was 13% below CIRA estimate of Rs11bn on lower than expected merchant
prices. EBITDA margin at 50.4% fell 382 bps YoY and was 171bps lower than the
CIRA estimate of 52.1% mainly due to a sharp fall in power realizations, which fell
22% YoY and 11% QoQ.
Standalone PAT 14% below est. — Due to higher taxes, depreciation and interest
expenses. PAT at Rs5bn grew 54% YoY on (1) 12% YoY increase in sales volumes
to 596kt (7% ahead of estimates); (2) sharp increase in average steel realizations
(in-line with CIRA estimates) (3) better product mix; and (4) sale of 200kt of pellets,
224kt of iron ore and strong iron ore prices. EBITDA margin at 38.8% (CIRA
estimate 39.7%) rose 345bps YoY. Second unit (135MW) of 540MW CPP was
commissioned in 3Q – taking operational captive power capacity to ~620MW at
Chhattisgarh.
Jindal Power’s realizations fell in the quarter — JPL’s 1000MW Tamnar 1
project’s performance continued to suffer due to falling merchant prices. 3QFY11
ASP at Rs3.56 fell 22% YoY and 11% QoQ and was 17% below CIRA estimates of
Rs4.28/kwh. Operationally, the plant did well in the quarter with PLF of 101.4%
and generation at 2.24bnkwh was in line with CIRA estimate.
Valuations factor in a lot of positives, Maintain Hold — JSPL with its strong
execution and cash generation is one of the most integrated steel and power
companies in India. Access to captive raw material for steel and power makes
JSPL one of lowest cost producer of power and steel and gives JSPL an edge over
peers in both power and steel. However JSPL’s stock is up 5.2x/13x in the last 2/5
years and valuations price in a lot of these positives. Moreover declining merchant
power prices will weigh on near-term earnings.
Jindal Steel and Power
Valuation
We value JSPL's power business using a discounted cash flow approach as power
plants generate largely predictable cash flows for fixed time periods. While
applying DCF one can choose free cash flow to the firm (FCF) or free cash flow to
equity (FCFE). We prefer FCFE as individual projects are highly geared and
gearing changes as debt is rapidly paid off.
We value JSPL's steel business at 7x FY12 EV/EBITDA - at a discount to Tata
Steel India's target EV/EBITDA multiple of 7.5x. We use a discount given (1) Tata
Steel India's scale of operations at 6.8mtpa vs 2.4mtpa for JSPL, (2) Tata Steel
India's 100% captive iron ore vs. 50-60% for JSPL and 3) Tata Steel's product mix
being largely high end relative to JSPL. Both companies have ~55-60% of captive
coal. Tata Steel has 55-60% coking coal. JSPL has 100% thermal coal, but no
coking coal.
If we assume JSPL executes all its power projects in line with our assumptions, we
arrive at a value of Rs676/share. This includes Rs204 for the steel business, Rs19
for Bolivia, Rs325 for Jindal Power, Rs86 for 1,350MW captive power plants and
Rs40 for excess power purchased from JPL at fixed prices. At our target price the
stock would trade at a P/E of 11x and EV/EBITDA of 9.2x FY12E.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Low Risk rating to JSPL.
Downside risks include: fuel supply risk, coal mining risk, execution risk, merchant
tariff risks, financial closure risk, receivables risk, regulatory risk, R&R, land
acquisition and environmental clearance risk and lower than expected operating
parameters. Upside risks include: better-than-expected operating parameters;
faster-than-expected execution and additional project wins; higher-than-expected
merchant tariffs; higher steel prices and rupee depreciation. These upside and
downside risks could impede the stock from achieving our target price.
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