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JSPL: Go For Growth & Raw Metals Integration: Turning OW
Post its market performance in 2010 we upgrade JSPL to
Overweight with a price target of Rs816 (20% upside). We are
more constructive on the stock owing to: (1) Profitability of
JSPL’s new projects that are coming closer to commissioning
are underestimated by the market; (2) In an inflationary
environment JSPL’s long iron ore status, full thermal coal self
sufficiency and low dependence on coking coal should likely
stand out, and (3) JSPL’s growth slope looks stronger and
less riskier than its peers.
What's new? We adjust our steel price assumptions for
F11-F13, build in the recent delay in commissioning of the 135
MW power units, and revise our consolidated F2011–13 EPS
forecasts.
Why Overweight: Strong steel price trends, a likely jump in
earnings in next 2-3 years, and progress on 2,400MW Tamnar
II power plant and the 1.6mt Angul steel plant do not seem to
be reflected fully in the stock price. In addition, JSPL’s annual
iron ore and coal production of 7mt and 5mt along with its
reserves of 180mt and 1,000mt, respectively, will likely be
assigned enhanced valuations as this advantage becomes
fully reflected in coming quarters. At F2012e EV/EBITDA of
7.8x, JSPL looks attractive to us given our forecast of EBITDA
CAGR of 25% in F10-F13, its low earnings volatility, and
strong competitive advantages.
Possible catalysts include: Favorable steel pricing news
flow in the next 6 months; quarterly results in 1H11, which
should highlight JSPL’s raw materials advantage and
profitability of its recently commissioned pellet plant;
commissioning of more 135 MW power units in next 2-3
quarters; and the start of construction on a steel making
facility at Angul project.
Investment Thesis
• Volume growth CAGR of 21% in
F2011-14 for steel and 56% in
power.
• High level of vertical integration with
large reserves of iron ore and
thermal coal.
• Some new projects coming close to
commissioning, while some
projects that were commissioned in
last 3-4 quarters seem set for a
jump in earnings.
• Given the above factors and the
steepening earnings trajectory, we
disagree with general view that the
stock is fully valued.
Key Value Drivers
• Prices for steel
• Merchant power realizations
• Coking coal prices
• Steel and power production as new
projects are commissioned and
stabilized
Catalysts
• Steel price trends
• Quarterly results in 1HCY11
• Commissioning of more 135 MW
power units in coming.
• Beginning of construction work on
steel facilities at Angul site
Key risks:
• Slump in steel prices with
deterioration in macroeconomic
conditions globally and in India.
• Meaningful regulatory and
environmental setback on projects
like Angul and Tamnar II.
• Fall in power realizations with a
slowdown in industrial activity in
India, or otherwise.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
JSPL: Go For Growth & Raw Metals Integration: Turning OW
Post its market performance in 2010 we upgrade JSPL to
Overweight with a price target of Rs816 (20% upside). We are
more constructive on the stock owing to: (1) Profitability of
JSPL’s new projects that are coming closer to commissioning
are underestimated by the market; (2) In an inflationary
environment JSPL’s long iron ore status, full thermal coal self
sufficiency and low dependence on coking coal should likely
stand out, and (3) JSPL’s growth slope looks stronger and
less riskier than its peers.
What's new? We adjust our steel price assumptions for
F11-F13, build in the recent delay in commissioning of the 135
MW power units, and revise our consolidated F2011–13 EPS
forecasts.
Why Overweight: Strong steel price trends, a likely jump in
earnings in next 2-3 years, and progress on 2,400MW Tamnar
II power plant and the 1.6mt Angul steel plant do not seem to
be reflected fully in the stock price. In addition, JSPL’s annual
iron ore and coal production of 7mt and 5mt along with its
reserves of 180mt and 1,000mt, respectively, will likely be
assigned enhanced valuations as this advantage becomes
fully reflected in coming quarters. At F2012e EV/EBITDA of
7.8x, JSPL looks attractive to us given our forecast of EBITDA
CAGR of 25% in F10-F13, its low earnings volatility, and
strong competitive advantages.
Possible catalysts include: Favorable steel pricing news
flow in the next 6 months; quarterly results in 1H11, which
should highlight JSPL’s raw materials advantage and
profitability of its recently commissioned pellet plant;
commissioning of more 135 MW power units in next 2-3
quarters; and the start of construction on a steel making
facility at Angul project.
Investment Thesis
• Volume growth CAGR of 21% in
F2011-14 for steel and 56% in
power.
• High level of vertical integration with
large reserves of iron ore and
thermal coal.
• Some new projects coming close to
commissioning, while some
projects that were commissioned in
last 3-4 quarters seem set for a
jump in earnings.
• Given the above factors and the
steepening earnings trajectory, we
disagree with general view that the
stock is fully valued.
Key Value Drivers
• Prices for steel
• Merchant power realizations
• Coking coal prices
• Steel and power production as new
projects are commissioned and
stabilized
Catalysts
• Steel price trends
• Quarterly results in 1HCY11
• Commissioning of more 135 MW
power units in coming.
• Beginning of construction work on
steel facilities at Angul site
Key risks:
• Slump in steel prices with
deterioration in macroeconomic
conditions globally and in India.
• Meaningful regulatory and
environmental setback on projects
like Angul and Tamnar II.
• Fall in power realizations with a
slowdown in industrial activity in
India, or otherwise.
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