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We believe strong drivers are in place for JSP given its robust expansion plans in both steel
and power. Continued high raw material integration should help it maintain margins at
elevated levels. We forecast an earnings CAGR of 17% for FY11-13 and initiate coverage at
Buy with a target price of Rs820
Oman Shadeed and Angul expansion set to drive steel volumes…
Jindal Steel & Power (JSP) currently operates a 3Mt steel plant in Orissa, which is backed by
captive iron ore and coal and enjoys among the highest margins in the industry globally. It
recently set up a 5Mt pellet plant at its existing facility in Barbil, Orissa, which is now
operating at full capacity. The company expects to be able to sell about 1.5Mt in the spot
market, with the remainder being used for captive consumption. It also commenced
production at the 1.5Mt Oman Shadeed facility in January 2011, three months ahead of
schedule. In addition, JSP is setting up a 2Mt DRI-EAF based integrated steel plant in Angul,
Orissa, which it expects to commission by March 2012.
… while power volumes should also continue to rise
JSP’s 1,000MW merchant power plant has now been running at full capacity for several quarters.
The company expects to start work on a new 2,400MW power plant in the next few months and to
commission its first unit by December 2012. Coal linkage has already been acquired for the first
1,200MW and the rest is in the process of being tied up. It recently commissioned two units of its
135MW captive power plant (CPP) at Raigarh and expects to commission the remaining 270MW
and 135MWx6 CPP units at Angul by March 2012.
With these strong drivers in place, we initiate coverage at Buy and a Rs820 TP
We expect JSP’s robust expansion plans in both steel and power to see it achieve top-line growth
of 21% CAGR over FY12-13F. Strong backward integration should keep EBITDA margins at
elevated levels: we forecast an EBITDA CAGR of 16% over FY12-13F. We value JSP using the a
sum-of-the-parts approach, valuing the steel business at 7.5x FY13F EV/EBITDA and the power
business using a free cash flow to equity (FCFE) approach to arrive at a target price of Rs820.
JSP is our top pick in the Indian steel space. Key downside risks include: 1) delays in
implementing expansion plans; 2) a failure to receive approvals or environmental clearances for
captive coal blocks on a timely basis – key to achieving a low cost of production; and 3)
implementation of the draft MMDR bill, which could affect profitability.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We believe strong drivers are in place for JSP given its robust expansion plans in both steel
and power. Continued high raw material integration should help it maintain margins at
elevated levels. We forecast an earnings CAGR of 17% for FY11-13 and initiate coverage at
Buy with a target price of Rs820
Oman Shadeed and Angul expansion set to drive steel volumes…
Jindal Steel & Power (JSP) currently operates a 3Mt steel plant in Orissa, which is backed by
captive iron ore and coal and enjoys among the highest margins in the industry globally. It
recently set up a 5Mt pellet plant at its existing facility in Barbil, Orissa, which is now
operating at full capacity. The company expects to be able to sell about 1.5Mt in the spot
market, with the remainder being used for captive consumption. It also commenced
production at the 1.5Mt Oman Shadeed facility in January 2011, three months ahead of
schedule. In addition, JSP is setting up a 2Mt DRI-EAF based integrated steel plant in Angul,
Orissa, which it expects to commission by March 2012.
… while power volumes should also continue to rise
JSP’s 1,000MW merchant power plant has now been running at full capacity for several quarters.
The company expects to start work on a new 2,400MW power plant in the next few months and to
commission its first unit by December 2012. Coal linkage has already been acquired for the first
1,200MW and the rest is in the process of being tied up. It recently commissioned two units of its
135MW captive power plant (CPP) at Raigarh and expects to commission the remaining 270MW
and 135MWx6 CPP units at Angul by March 2012.
With these strong drivers in place, we initiate coverage at Buy and a Rs820 TP
We expect JSP’s robust expansion plans in both steel and power to see it achieve top-line growth
of 21% CAGR over FY12-13F. Strong backward integration should keep EBITDA margins at
elevated levels: we forecast an EBITDA CAGR of 16% over FY12-13F. We value JSP using the a
sum-of-the-parts approach, valuing the steel business at 7.5x FY13F EV/EBITDA and the power
business using a free cash flow to equity (FCFE) approach to arrive at a target price of Rs820.
JSP is our top pick in the Indian steel space. Key downside risks include: 1) delays in
implementing expansion plans; 2) a failure to receive approvals or environmental clearances for
captive coal blocks on a timely basis – key to achieving a low cost of production; and 3)
implementation of the draft MMDR bill, which could affect profitability.
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