Jindal Steel and Power- Inflection point ::Macquarie Research

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Jindal Steel and Power
Inflection point
Event
 In our view, Jindal Steel and Power is best placed in metal and mining space
in India. This company is set to become a 12mtpa steel producer by 2014,
one of the largest private-sector steel companies, along with Tata Steel (India)
and JSW Steel.
 The company’s subsidiary, Jindal Power Limited, will also increase capacity to
5,380MW from current capacity of 1,000MW. JSPL’s growth is backed by its
resources, which includes 2.5bnt of thermal coal and around 1bnt of iron ore.

Impact
 Rerating of the steel business as it increases capacity: The company is
growing its capacity by three fold to become one of the largest private sector
steel companies in India. Its differentiated technology makes it the lowest cost
producer of steel. It has been reporting a 50% growth in earnings and has
further catalysts lined up to sustain a potential 50%+ growth rate in profits.
1,350MW power plants commissioning: Has already commissioned
270MW at Raigarh in this quarter and will commission first 135MW in
Angul by Feb 2011, followed by commissioning of 135MW every 2–3
months.
Started iron ore pellet sales: JSP plans to sell close to 0.5mt iron ore
pellets replacing iron ore fines sales. Current cost is US$26–27/t and
selling price of about US$170/t, ex mines, which will help margins.
Shadeed – to add to earnings: Started commercial production in Jan, 3
months ahead of schedule. We expect it to be EPS accretive by 2%.
Bolivia – iron ore exports to start from March: JSPL expects to export
around 1mt of iron ore and has FOB cost of around $60/t and current
selling price of US$100/t.
 Growth backed by resources: JSPL’s growth is backed by its resources,
which includes 2.5bnt of thermal coal and around 1bnt of iron ore. This
improves its attractiveness as a resource company; the increase in steel
capacity to 12mtpa and the 5 fold increase in power capacity to 5GW are
backed by resources, locking low costs and high margins. It has also recently
signed with RCI for development of coking coal assets, which completes its
asset portfolio.
 Sustained earnings growth: We expect the company to report an increase
in consolidated earnings by 25% in FY11, with steel business profits expected
to grow by more than 50% in FY11. The steel business should retain its
prominence and is expected to contribute more than 70% to consolidated
earnings in the next 3 years. We expect consolidated earnings to grow at
CAGR of 20%+ in the next 3 years.
Action and recommendation
 JSP – top pick: We strongly believe that JSP is the best way to play the India
growth story and believe that the company’s earnings are at a critical
inflection point. We strongly recommend taking an exposure here.


Jindal Steel and Power Aide Memoire
Operational Issues
JPL
1. Current 1,000MW – How are you positioned in terms of contracts 12/6/3months and spot? At what price would you prefer
to do long-term contracts?
2. Proposed 1,980MW – What is holding up placement of equipment orders here? Will coal mines be functional along with the
project? Do you envisage any issues with the coal mine being allocated for the captive power plant and being used mostly
for merchant power?
3. Proposed 2,400MW – What is the status of the project? Will you be dependent on coal linkages only or do you have a
strategy for captive coal mine for this also?
JSPL
1. Current 3Mnt – What production targets do you have for this year? What impact will improving product mix have on
margins?
2. 6Mnt steel capacity at Angul – when do expect the 2Mnt DRI, coal gasifier and 1.6Mnt SMS will be ready? What is the total
project cost per ton of finished steel capacity? What is the cost of gas generation/ per ton of DRI/ per ton of steel?
3. What is the thinking behind acquisition of Shadeed Iron and Steel in Oman? What are Gas contracts here? What is the
pellet or iron ore supply? What is the production target for FY12?
4. 1,350MW – What has caused delay in this project? How much of this capacity will run on coal rejects? What coal linkages
have been awarded and what are the long term plans on coal here? Have arrangements been made for evacuation of
power from these units? How much do you think will be sold to state governments on CERC norms?
5. How long will it take to ramp up the 5Mnt iron ore pelletisation unit to full capacity? Are there any plans to sell pellets?
What are the costs and realisation?
Financing
1. Total capex requirement? Why IPO of the power business when the funds requirement is higher in the steel business?
2. How do you propose to treat cash between the two companies – will you have frequent loans and advances between
them?
Strategic Issues
1. How is the competition looking in the merchant market? What advantages in terms of access to lucrative markets does JPL
have over its competitors? Are there any specific marketing strategies which JPL has which allows it to enjoy a more stable
and higher tariff?
2. How do you justify having coal based power plants to service the merchant market, given that globally the trend is for
gas/FO based power plants?
3. Is there any progress here on the proposed 6,100MW hydel power project report?
4. What is the new agreement with the government of Bolivia? What ramp up schedule on iron ore production is planned?
What is the cost and quality of iron ore? When is the pelletisation unit expected to be operational? Are there any other
bottlenecks in terms of logistics, etc?