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Jindal Steel and Power (JSP)
Metals & Mining
Delay in new projects likely. We retain our REDUCE rating on JSP even after
(1) factoring in our positive view of the steel business and pellet prices and (2) roll over
of target price to FY2013E financials. Our target price increases by a modest 9.4% to
Rs700, comprising Rs347 for steel and Rs354 for power business. JSP trades at an
expensive 9.7X and 9X FY2012E and FY2013E EBITDA. Limited capex spend on new
projects signals slippages in execution. Delays in new projects are common, however,
JSP’s premium valuations leave little room for error/ slippage in execution.
Same old story—expensive valuations and delay in execution underpin our REDUCE rating
We revise our target price on JSPL to Rs700 from Rs640 earlier, a modest revision even after
(1) factoring in our positive view of the steel business; we raise our steel business EBITDA forecast
by 11.9% and 29.7% for FY2012E and FY2013E. The revision is primarily led by a revision in pellet
production and realization and (2) roll over of target price to FY2013E financials. We raise our
earnings estimates for FY2012E and FY2013E by 6.7% and 5.4% to Rs51.3 and Rs58.6,
respectively; the entire revision is driven by steel business, while we have taken a cut in our power
business estimates. Our fair value of the steel business of Rs347 is based on 6.7X FY2013E EBITDA.
We value JSPL’s power business at Rs354/share (Rs333 earlier) based on March 2013 SOTP. Our
power business valuation comprises of (1) Rs193/share (Rs179 bn) for the 1,000 MW merchant
power plant (Tamnar I), (2) Rs77/share (Rs72 bn) as value from the proposed 2,400 MW merchant
power plant at Raigarh and (3) Rs85/share (Rs78 bn) for the 1,350 MW captive power plant being
built in Angul and Raigarh—we assume that power generated from nine of these units will be sold
entirely on a merchant basis (while one unit will be used for captive consumption).
Limited capex signals further execution slippages
We highlight that progress on JSPL’s planned projects in the power and steel business has been
muted. We suspect that 2mtpa DRI plant and 1.6mtpa steel melting shop at Angul may be delayed
and model revenues from the same only in FY2014E. Limited capex on this project is an indicator
of potential delay.
We also highlight that progress on JPL’s planned projects including Tamnar expansion of 2,400
MW has been muted. Although the project has now obtained formal environmental clearance
(although only for 1,200 MW), the construction is yet to commence. Management has guided for
commissioning of the first unit by March 2013. In our view, the project is likely to get delayed as
the construction is yet to commence and JPL has incurred a minimal capex of Rs6-7 bn (~5% of
overall project cost). Further, we do not see any traction on the 1,980 MW of additional capacities
planned to be built in Jharkhand, across two locations—Gudda and Dumka.
Meanwhile, execution on the 1,350 MW captive units (6x135 MW at Orissa and 4x135 MW
at Chhattisgarh) has not been encouraging and has significantly lagged the original
commissioning guidance. JSPL has so far commissioned just three units (the last one being
declared commercial in March 2011) and management has guided for commissioning of
balance seven units by end-FY2012E. However, we highlight that total CWIP of Rs10 bn for
these seven units, implying an average capex of just Rs10.6 mn/MW (less than 30% of total
capex) signals a further delay in commissioning of these units.
Estimates raised in steel business, cut in power
We raise consolidated EPS by 6.7% and 5.4% to Rs51.3 and Rs58.6 for FY2012E and
FY2013E, respectively. We have revised our EPS for power business to Rs22/share in
FY2012E (previously Rs23/share) and to Rs26/share in FY2013E (previously Rs32/share) as we
adjust for commissioning delays in the captive units at Chhattisgarh and Orissa. Our
estimates now factor the following commissioning schedule – (1) balance two units of
Chhattisgarh (4X 135 MW) to commission in 2HFY12, (2) incremental commissioning of two
units in FY2012E and three units in FY2013E at Orissa (6X 135 MW) and (3) commissioning
of first unit at Tamnar II by 1QFY14E and commissioning of the full plant by FY2014E.
We increase our earnings estimate for the steel business for FY2012E and FY2013E; revision
is driven by marginal increase in steel and pellet prices. JSPL, having 100% iron ore selfsufficiency,
will benefit from the cost-push based increase in steel prices. We increase our
steel business earnings estimate by 16.9% for FY2012E and 29.7% for FY2013E.
Key takeaways from 4QFY11 earnings call
The company expects steel production of 2.5 mn tonnes in FY2012E versus 2.27 mn
tonnes in FY2011.
JSPL expects pellet production of 4-4.5 mn tonnes. Of this, 2 mn tonnes will be
consumed internally and balance sold in the domestic market. Pellet sales will vary
depending upon the market conditions. JSPL produced and sold 2.8mn tonnes and 0.56
mn tonnes of pellets in FY2011.
JSPL expressed optimism that shipments of iron ore from Bolivian mine will commence
from 1QFY12E though it refrained providing formal guidance on shipments for FY2012E.
JSPL is developing infrastructure facilities linking the mine to the port.
The 1.5mtpa DRI plant of Shadeed Iron and Steel produced around 300kt of sponge iron
in 4QFY11 and generated a net profit of US$3.5 mn on revenues of US$77.5 mn. This is
a creditable performance, in our view. JSPL expects HBI production from Shadeed for
FY2012E to be in the region of 1.25 mn tonnes.
JSPL has outlined total capex of Rs110 bn and Rs100 bn in FY2012E and FY2013E
respectively. Of this Rs40 and Rs60 bn will be spent on steel business capex and Rs70 bn
and Rs40 bn on power business capex for FY2012E and FY2013E, respectively.
The company continues to search for coal assets overseas to secure coal for its existing
and planned steel and power projects. It expects its coal mine in Indonesia to start
commercial production in 12-15 months. Production at its South African coal mine is
already underway, though infrastructure related problems continue to hamper operations
there.
The company has recently launched an open offer to acquire all the shares of Rocklands
Richfield (already holds 14.46% stake) valuing the company at AUD$88 mn with a view
to secure its coking coal requirement. Rocklands Richfield is an Australian coal miner
which controls a series of high-grade coking coal deposits in the Bowen Basin of Australia
and also has a 480ktpa coking coal plant in Eastern China. The offer opens on May 5.
The management expects merchant power realizations to move in a narrow band of
Rs3.8 - Rs4.2 in FY2012E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jindal Steel and Power (JSP)
Metals & Mining
Delay in new projects likely. We retain our REDUCE rating on JSP even after
(1) factoring in our positive view of the steel business and pellet prices and (2) roll over
of target price to FY2013E financials. Our target price increases by a modest 9.4% to
Rs700, comprising Rs347 for steel and Rs354 for power business. JSP trades at an
expensive 9.7X and 9X FY2012E and FY2013E EBITDA. Limited capex spend on new
projects signals slippages in execution. Delays in new projects are common, however,
JSP’s premium valuations leave little room for error/ slippage in execution.
Same old story—expensive valuations and delay in execution underpin our REDUCE rating
We revise our target price on JSPL to Rs700 from Rs640 earlier, a modest revision even after
(1) factoring in our positive view of the steel business; we raise our steel business EBITDA forecast
by 11.9% and 29.7% for FY2012E and FY2013E. The revision is primarily led by a revision in pellet
production and realization and (2) roll over of target price to FY2013E financials. We raise our
earnings estimates for FY2012E and FY2013E by 6.7% and 5.4% to Rs51.3 and Rs58.6,
respectively; the entire revision is driven by steel business, while we have taken a cut in our power
business estimates. Our fair value of the steel business of Rs347 is based on 6.7X FY2013E EBITDA.
We value JSPL’s power business at Rs354/share (Rs333 earlier) based on March 2013 SOTP. Our
power business valuation comprises of (1) Rs193/share (Rs179 bn) for the 1,000 MW merchant
power plant (Tamnar I), (2) Rs77/share (Rs72 bn) as value from the proposed 2,400 MW merchant
power plant at Raigarh and (3) Rs85/share (Rs78 bn) for the 1,350 MW captive power plant being
built in Angul and Raigarh—we assume that power generated from nine of these units will be sold
entirely on a merchant basis (while one unit will be used for captive consumption).
Limited capex signals further execution slippages
We highlight that progress on JSPL’s planned projects in the power and steel business has been
muted. We suspect that 2mtpa DRI plant and 1.6mtpa steel melting shop at Angul may be delayed
and model revenues from the same only in FY2014E. Limited capex on this project is an indicator
of potential delay.
We also highlight that progress on JPL’s planned projects including Tamnar expansion of 2,400
MW has been muted. Although the project has now obtained formal environmental clearance
(although only for 1,200 MW), the construction is yet to commence. Management has guided for
commissioning of the first unit by March 2013. In our view, the project is likely to get delayed as
the construction is yet to commence and JPL has incurred a minimal capex of Rs6-7 bn (~5% of
overall project cost). Further, we do not see any traction on the 1,980 MW of additional capacities
planned to be built in Jharkhand, across two locations—Gudda and Dumka.
Meanwhile, execution on the 1,350 MW captive units (6x135 MW at Orissa and 4x135 MW
at Chhattisgarh) has not been encouraging and has significantly lagged the original
commissioning guidance. JSPL has so far commissioned just three units (the last one being
declared commercial in March 2011) and management has guided for commissioning of
balance seven units by end-FY2012E. However, we highlight that total CWIP of Rs10 bn for
these seven units, implying an average capex of just Rs10.6 mn/MW (less than 30% of total
capex) signals a further delay in commissioning of these units.
Estimates raised in steel business, cut in power
We raise consolidated EPS by 6.7% and 5.4% to Rs51.3 and Rs58.6 for FY2012E and
FY2013E, respectively. We have revised our EPS for power business to Rs22/share in
FY2012E (previously Rs23/share) and to Rs26/share in FY2013E (previously Rs32/share) as we
adjust for commissioning delays in the captive units at Chhattisgarh and Orissa. Our
estimates now factor the following commissioning schedule – (1) balance two units of
Chhattisgarh (4X 135 MW) to commission in 2HFY12, (2) incremental commissioning of two
units in FY2012E and three units in FY2013E at Orissa (6X 135 MW) and (3) commissioning
of first unit at Tamnar II by 1QFY14E and commissioning of the full plant by FY2014E.
We increase our earnings estimate for the steel business for FY2012E and FY2013E; revision
is driven by marginal increase in steel and pellet prices. JSPL, having 100% iron ore selfsufficiency,
will benefit from the cost-push based increase in steel prices. We increase our
steel business earnings estimate by 16.9% for FY2012E and 29.7% for FY2013E.
Key takeaways from 4QFY11 earnings call
The company expects steel production of 2.5 mn tonnes in FY2012E versus 2.27 mn
tonnes in FY2011.
JSPL expects pellet production of 4-4.5 mn tonnes. Of this, 2 mn tonnes will be
consumed internally and balance sold in the domestic market. Pellet sales will vary
depending upon the market conditions. JSPL produced and sold 2.8mn tonnes and 0.56
mn tonnes of pellets in FY2011.
JSPL expressed optimism that shipments of iron ore from Bolivian mine will commence
from 1QFY12E though it refrained providing formal guidance on shipments for FY2012E.
JSPL is developing infrastructure facilities linking the mine to the port.
The 1.5mtpa DRI plant of Shadeed Iron and Steel produced around 300kt of sponge iron
in 4QFY11 and generated a net profit of US$3.5 mn on revenues of US$77.5 mn. This is
a creditable performance, in our view. JSPL expects HBI production from Shadeed for
FY2012E to be in the region of 1.25 mn tonnes.
JSPL has outlined total capex of Rs110 bn and Rs100 bn in FY2012E and FY2013E
respectively. Of this Rs40 and Rs60 bn will be spent on steel business capex and Rs70 bn
and Rs40 bn on power business capex for FY2012E and FY2013E, respectively.
The company continues to search for coal assets overseas to secure coal for its existing
and planned steel and power projects. It expects its coal mine in Indonesia to start
commercial production in 12-15 months. Production at its South African coal mine is
already underway, though infrastructure related problems continue to hamper operations
there.
The company has recently launched an open offer to acquire all the shares of Rocklands
Richfield (already holds 14.46% stake) valuing the company at AUD$88 mn with a view
to secure its coking coal requirement. Rocklands Richfield is an Australian coal miner
which controls a series of high-grade coking coal deposits in the Bowen Basin of Australia
and also has a 480ktpa coking coal plant in Eastern China. The offer opens on May 5.
The management expects merchant power realizations to move in a narrow band of
Rs3.8 - Rs4.2 in FY2012E.
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