Jindal Steel and Power- All in order; target Rs 938 :Macquarie Research,

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Jindal Steel and Power
All in order
Event
 Clearance for phase 1 of 2,400MW power plant makes way for growth:
The Ministry of Environment and Forest (MOEF) has finally issued the muchawaited
clearance letter for phase 1 of JSPL’s 2,400MW power plant at
Raigarh. We view this news as a big positive and believe it will reduce
investor concern about growth in JSP’s power business. JSPL remains our
top pick in the sector; however, we have cut our estimates by 2-7% to reflect
delays in projects and cut our TP to Rs938 from Rs962. We maintain our
Outperform rating.

Impact
 Final clearance for first phase of 2,400MW: MOEF has cleared the first phase
of 1,200MW, for which work can now start (after getting ‘consent to establish’,
which normally takes a month). On our visit in February 2011, the company was
in a state of full readiness, with construction machinery already mobilised and
30% of equipment on the ground. The approval for the remaining 1,200MW will
be taken up once that project is granted coal linkage by Coal India.
 Key condition for approval of next phase of 1,200MW: We understand that
the only key condition for approval is permission from the Ministry of Coal, as
there is a deep-seated coal deposit below that site (below 300m). JSP has
already applied through the Chhattisgarh government and has offered to
compensate for any lost revenue. Final resolution will be done shortly.
 Angul 6mtpa environmental clearance – noise continues: Following media
reports (ie, DNA), the Environment Minister issued a clarification and asked the
Orissa government to take action against JSP for having violated the earlier
condition of ‘not starting the construction even on non forest land until forest
clearance is granted’. All approvals are in place and construction continues, but
we think this might lead to some penalties in a worst-case scenario.
 Building-in delays in the projects: Assuming the work starts now, we
estimate 600MW can be commissioned by 1Q FY14. We have built-in a delay
for the first unit of 600MW to 1Q FY14. We have also built-in delays to its
upcoming 1,350MW and have marginally cut earnings for FY11–13.
Earnings and target price revision
 We have reduced our earnings by 5%, 2%, and 7% for FY11–13E,
respectively, and cut our TP to Rs938 from Rs962.
Price catalyst
 12-month price target: Rs938.00 based on a DCF methodology.
 Catalyst: March 2011 ended quarterly results in May.
Action and recommendation
 Maintain Outperform: With this approval, the company has now regularised
almost all of its projects under implementation for environmental clearances.
We believe JSP is set to report its best-ever quarterly profits in May and is
priced for accumulation after a phase of consolidation over the last 12
months. It is attractively valued, in our view, trading at 12x FY12E.