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Jindal Steel & Power -Lower Prices, Delay in Power; Reduce PT but Remain OW
What's Changed
Price Target Rs816.00 to Rs799.00
F11, F12, F13 EPS Down 11%, 16% and 2%
Investment conclusion: We remain positive on JSPL’s
prospects given: (a) its strong backward integration will
likely fetch premium valuations over its peers even as
rising steel prices improve sentiment for the broader
steel sector; (b) earnings from pellet plant, new plate mill
and Shadeed DRI plant are yet to be properly factored
into the stock price; (c) slightly falling merchant power
rates and regulatory delays on some of JSPL’s projects
are already reflected in the stock, which has under-
performed the Sensex by ~15% since January 10; and
(d) JSPL’s project pipeline is amongst the best in class.
What's new: During its earnings call management
guided for: (a) merchant power rates of Rs3.75-4.5 vs
our prior estimate of Rs5 for F2012; (b) commissioning
schedule for its 1350 MW power plant is about 3-6
months behind our earlier forecasts. We are lowering
our merchant tariff estimate to Rs4.2, adjusting the
commissioning schedule and increasing our PLF for the
power business, leading to EPS cuts of 10%/15%/1% for
F11/F12/F13, and a 2% reduction in our price target.
Catalysts: (1) Healthy news flow on steel pricing; (2)
production ramp-up and increased visibility of pellet
plant earnings over next 2 quarters; (3) stabilization of
two units of 135 MW plants each in C1H11.
Valuation: At EV/EBITDA of 9x and P/E of 12.2x on our
F12 forecasts, we feel the stock does not reflect JSPL’s
growth opportunities, solid raw materials self sufficiency,
consistently healthy margins and return ratios, and the
37% CAGR that we forecast for the company’s EBITDA
and PAT in F2011–13.
Investment Thesis
• Volume growth CAGR of 21% in
F2011-14e 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.
For the 1,350 MW plant being commissioned by JSPL, we
make the following changes:
• Delay in commissioning: We have assumed the third and
fourth unit in Raigarh are commissioned in April and June
2011, respectively, versus our earlier estimate of
February and March 2011. In addition, for the 6 units in
Angul, we now assume commissioning between April
2011 and February 2012 versus October 2010 and
January 2012 earlier.
• Change in PLF: We take down the PLF for F2011 to 45%
(from 85%), however increase it to 90% thereafter (from
85% earlier).
• Change in merchant rate realization: We have reduced
our F2011 merchant realization to Rs4.5/unit (from
Rs5/unit) and F2012 to R4.2/unit (from Rs5/unit).
For Jindal Power, we make the following changes:
• Change in merchant rate realization: We have reduced
our F2012 merchant realization to Rs4.2/unit (from
Rs5/unit earlier) as management has indicated that rates
could trend between Rs 3.75-4.5/unit in F2012.
• Change in commissioning dates of Tamnar II: We have
delayed the first unit to December 2012 (from September
2012); however, we have shortened the interval for
subsequent units from 6 months to 4 months. As a result,
the entire plant is commissioned by December 2013
versus March 2014 earlier.
Valuation and Price Target
Price Target Down from Rs816 to Rs799
Our price target is based on separate DCF models for the two
businesses – steel and power – with an explicit phase of six
years. Our base case values the steel business at Rs440 per
share. The valuation of 1350MW reduces from Rs99 to Rs89
per share as we further delay the commissioning of all units by
3-6 months.
Valuation Methodology – Power Business
Jindal Power (JSPL holds 96.4% equity stake) currently has
1,000 MW of operational capacity and is developing another
10,480 MW of capacity, comprising 4,380 MW of coal projects
and 6,100 MW of hydro projects. We use the FCFe
methodology to derive a fair value of Rs252.5 bn for Jindal
Power, which translates into Rs270/share for JSPL. The
reduction in merchant realization removes Rs5 per share from
JPL valuation.
Company Description
Jindal Steel and Power Limited is the largest coal-based sponge
iron producer in India and has a growing presence in the long
steel product range. The company has a high-margin power
segment, where it hopes to become one of the largest
private-sector players. JSPL is on an ambitious capacity growth
path for both its power and steel segments.
India Steel
Industry View: Attractive
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Jindal Steel & Power -Lower Prices, Delay in Power; Reduce PT but Remain OW
What's Changed
Price Target Rs816.00 to Rs799.00
F11, F12, F13 EPS Down 11%, 16% and 2%
Investment conclusion: We remain positive on JSPL’s
prospects given: (a) its strong backward integration will
likely fetch premium valuations over its peers even as
rising steel prices improve sentiment for the broader
steel sector; (b) earnings from pellet plant, new plate mill
and Shadeed DRI plant are yet to be properly factored
into the stock price; (c) slightly falling merchant power
rates and regulatory delays on some of JSPL’s projects
are already reflected in the stock, which has under-
performed the Sensex by ~15% since January 10; and
(d) JSPL’s project pipeline is amongst the best in class.
What's new: During its earnings call management
guided for: (a) merchant power rates of Rs3.75-4.5 vs
our prior estimate of Rs5 for F2012; (b) commissioning
schedule for its 1350 MW power plant is about 3-6
months behind our earlier forecasts. We are lowering
our merchant tariff estimate to Rs4.2, adjusting the
commissioning schedule and increasing our PLF for the
power business, leading to EPS cuts of 10%/15%/1% for
F11/F12/F13, and a 2% reduction in our price target.
Catalysts: (1) Healthy news flow on steel pricing; (2)
production ramp-up and increased visibility of pellet
plant earnings over next 2 quarters; (3) stabilization of
two units of 135 MW plants each in C1H11.
Valuation: At EV/EBITDA of 9x and P/E of 12.2x on our
F12 forecasts, we feel the stock does not reflect JSPL’s
growth opportunities, solid raw materials self sufficiency,
consistently healthy margins and return ratios, and the
37% CAGR that we forecast for the company’s EBITDA
and PAT in F2011–13.
Investment Thesis
• Volume growth CAGR of 21% in
F2011-14e 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.
For the 1,350 MW plant being commissioned by JSPL, we
make the following changes:
• Delay in commissioning: We have assumed the third and
fourth unit in Raigarh are commissioned in April and June
2011, respectively, versus our earlier estimate of
February and March 2011. In addition, for the 6 units in
Angul, we now assume commissioning between April
2011 and February 2012 versus October 2010 and
January 2012 earlier.
• Change in PLF: We take down the PLF for F2011 to 45%
(from 85%), however increase it to 90% thereafter (from
85% earlier).
• Change in merchant rate realization: We have reduced
our F2011 merchant realization to Rs4.5/unit (from
Rs5/unit) and F2012 to R4.2/unit (from Rs5/unit).
For Jindal Power, we make the following changes:
• Change in merchant rate realization: We have reduced
our F2012 merchant realization to Rs4.2/unit (from
Rs5/unit earlier) as management has indicated that rates
could trend between Rs 3.75-4.5/unit in F2012.
• Change in commissioning dates of Tamnar II: We have
delayed the first unit to December 2012 (from September
2012); however, we have shortened the interval for
subsequent units from 6 months to 4 months. As a result,
the entire plant is commissioned by December 2013
versus March 2014 earlier.
Valuation and Price Target
Price Target Down from Rs816 to Rs799
Our price target is based on separate DCF models for the two
businesses – steel and power – with an explicit phase of six
years. Our base case values the steel business at Rs440 per
share. The valuation of 1350MW reduces from Rs99 to Rs89
per share as we further delay the commissioning of all units by
3-6 months.
Valuation Methodology – Power Business
Jindal Power (JSPL holds 96.4% equity stake) currently has
1,000 MW of operational capacity and is developing another
10,480 MW of capacity, comprising 4,380 MW of coal projects
and 6,100 MW of hydro projects. We use the FCFe
methodology to derive a fair value of Rs252.5 bn for Jindal
Power, which translates into Rs270/share for JSPL. The
reduction in merchant realization removes Rs5 per share from
JPL valuation.
Company Description
Jindal Steel and Power Limited is the largest coal-based sponge
iron producer in India and has a growing presence in the long
steel product range. The company has a high-margin power
segment, where it hopes to become one of the largest
private-sector players. JSPL is on an ambitious capacity growth
path for both its power and steel segments.
India Steel
Industry View: Attractive
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