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Jindal Steel and Power (JNSP.BO)
Upgrade to Buy: The Power of Steel
Buy (1L) – Target Price Rs726
Upgrade to Buy (1L) from Hold (2L), Top pick in conglomerates — 1) Increase in
steel value due to higher steel prices; 2) Captive iron ore and thermal coal is big
advantage in an environment of increasing raw material prices; 3) Environmental
clearance issues are largely behind us and execution remains more or less on track; 4)
Valuations are attractive with 11x 1Yr fwd P/E, FY11-13 EPS CAGR of 24% and 30%
RoE; 5) JSPL has underperformed Sensex by 21% over last year. With this upgrade,
JSPL is our top pick in the India conglomerate space, among JPA (JAIA.BO; Rs84.40;
1M), Reliance Infra (RLIN.BO; Rs616.60; 1H) and Adani Enterprises (ADEL.BO;
Rs606.70; 2L).
Hedged business model (though tilted towards power) implies low risk, moderate
returns — Power/Steel constitute 63%/37% of Rs726 TP (67%/33% of Rs676 earlier).
Diversified business model and low production costs reduce sensitivity to the steel
cycle. Captive raw materials reduces earnings risk and volatility, and should enable the
steel business to earn healthy ~39% margins in FY12-13E. JSPL stands to benefit if
end-product (power/steel) prices increase due to raw material cost increases.
Target price and earnings revision — TP change factors in 1) higher steel prices; 2)
lower merchant prices; 3) Roll-over of power DCF values to Sep11E from June11E; 4)
Rollover of Steel EV/EBITDA & P/E to June12E from March 12E. We revise down
FY12E/FY13E EPS by 13%/1% respectively to factor in 3-6 month delays in captive
power capacity commissioning.
Project status update — Unit1 (135MW) at Angul has been commissioned. JSPL will
commission the 2mtpa sponge iron plant and 945MW of captive capacity by March 12.
Work on the 1,200 MW (phase 1) of the Tamnar 2 project is set to start and
environmental clearance has been received.
Downside risks — Delay in phase 2 of Tamnar 2 (1,200MW) due to unavailability of
coal linkage; lower merchant tariff and lower steel prices.
Upgrade to Buy (1L) from Hold (2L)
We upgrade JSPL to Buy (1L) from Hold (2L) given strong business
fundamentals, attractive valuations, healthy earnings growth and RoEs, stock
underperformance and on-track execution.
JSPL’s strategy of owning captive raw material (coal, iron ore) makes it one of
the lowest-cost producers of electricity and steel in the country – a major
advantage in any commodity business. JSPL has captive thermal coal required
for 4,180MW (out of 5,380MW) capacity. The company has 50-60% of iron ore
required for its steel operations, 100% of thermal coal for its sponge iron plant
and captive power plant and 0.8mtpa of coke capacity.
Power/Steel constitute 63%/37% of our target price of Rs726. Diversified
business model and low production costs reduce sensitivity to steel cycle. Global
steel prices are up ~25% YTD, driven by rising costs. Despite a muted global
steel outlook, captive raw materials should allow JSPL’s steel business to enjoy
margins of ~39% in FY12-13E.
Largely captive coal reduces earnings risk of power business and JSPL will
benefit more if merchant prices rise due to higher imports of coal in the country.
Access to captive raw materials also ensures that earnings of the company are
less volatile and more predictable than lesser integrated steel and power
companies. The earning growth depends largely on timely execution of projects
and prices of steel and power. The added volatility from sharp fluctuations in spot
prices of iron ore and thermal coal is largely not a factor affecting earnings,
though the company is exposed to spot coking coal prices.
JSPL’s steel business enjoys flexibility of production. JSPL can vary its steel
product mix based on market conditions and pricing trends. It has the flexibility of
selling surplus iron ore fines, lumps and pellets externally.
JSPL’s international forays are geared toward securing underdeveloped sources
of raw materials rather than buying fully-developed assets – a sensible approach
in our view. The company has secured iron ore mining rights in Bolivia
(potentially 25mtpa when fully ramped up), has a mining concession for a coal
block in Mozambique and is in process of acquiring Rockland Richfield in
Australia, which has coking coal deposits.
The company has achieved significant progress on execution of 1,350MW of
captive power capacity and 2mtpa sponge iron capacity. Expansion projects
remain more or less on track despite controversies surrounding environmental
clearance issues. JSPL has commissioned Units 1&2 (270MW) at Chhattisgarh
and unit 1 (135MW) at Angul (Orissa). The 2mtpa sponge iron plant in Orissa is
expected to be commissioned by March12 and the steel melting shop by Sep12.
Environmental clearance for phase 1 of 1,200MW of Tamnar 2 project has been
received and the company is close to restarting work on the ground.
Environmental clearance for phase 2 of Tamnar 2 is not final yet and final
environmental clearance is likely to be received once the coal linkage is received.
JSPL is likely to sell ~500kt of iron ore from Bolivia in FY12 (vs 1.5mtpa earlier)
as the company is in the process of procuring a barge loader and building
infrastructure (road/rail/conveyor belt) from the iron ore mine to the port (110km).
No iron ore has been sold from Bolivia so far.
Strong sponge iron prices are likely to benefit the gas-based HBI plant in Oman.
The plant has a contract with the Oman government to get subsidized gas at
US$1/mmbtu for 20 years with an escalation clause of 3%. We expect the
EBITDA/t in FY12 to be ~$80/t. JSPL sold around 300kt of HBI in FY11 and we
expect the Shadeed plant to operate at utilization level of ~70% (capacity
1.5mtpa).
Management’s track record of capital allocation has been excellent, which is
evident from the fact that company has not had any major equity dilution over the
past ten years. The company has grown PAT to Rs37.5bn in FY11 from Rs460mn
in FY1999, implying a CAGR of 44% over the past 12 years. JSPL has also been
able to achieve attractive RoEs of 30%-57% over FY04-FY11.
JSPL’s stock has underperformed BSE Sensex by 21% over the past year.
TP raised to Rs726 (Rs676 earlier)
We raise our JSPL target price to Rs726 from Rs676 earlier:
Roll forward DCF values for Jindal Power and JSPL’s captive power projects to
Sep11E from June11E earlier.
Roll forward EV/EBITDA multiple of 7x for the steel business to June12E from
March 12E earlier.
Roll forward P/E multiple of 8x for JSPL Bolivia to June12E from March 12E
earlier.
Roll forward EV/EBITDA multiple of 5.5x for Shadeed (Oman) to June12E from
March 12E earlier.
Increase in HRC prices from FY12E/FY13E to US$830/US$823 from
US$745/US$702 respectively and raise the steel EBITDA by 7% for FY12 and
cut by 3% in FY13. Higher realizations offset by increased costs.
Reduce our FY12 volume assumptions for sale from Bolivia from 1.5mtpa to
0.5mtpa.
Reduce our merchant prices for FY12E/FY13E to Rs4.00/Rs3.75 from Rs4.5/Rs4
per kwh respectively. We maintain our long-term merchant price assumption of
Rs3.5/kwh from FY14 onwards.
Build in some delays (3-6 months) in commissioning of Tamnar 2, Dumka and
Godda Projects.
Jindal Steel and Power
Company description
Jindal Steel and Power (JSPL) came into existence in 1998 after the demerger of
Jindal Strips Limited. Over the past ten years, JSPL has transformed itself from
being a producer of sponge iron to a diversified conglomerate having a presence in
steel manufacturing, power generation and mining a wide range of minerals, from
iron ore and coal to diamonds and limestone. The company also has a presence in
the oil, gas and infrastructure sectors.
JSPL owns ~180m tonnes of domestic iron ore, ~2.56bn tonnes of domestic thermal
coal and ~20bn tonnes of iron ore in Bolivia. The company has ~2.4mtpa steel and
~1622MW power capacity currently operational.
JSPL is a part of O.P. Jindal Group and has ~15,000 employees.
Investment strategy
JSPL, with its strong execution, cash generation and balance-sheet management,
has emerged as one of the most integrated steel and power companies in India.
Access to captive raw material supplies for steel and power, flexibility to vary steel
product mix, ten years of timely execution without dilution and low cost of power
generation give JSPL an edge over its peers in both power and steel.
We have a Buy (1l) rating on JSPL given strong business fundamentals, attractive
valuations, healthy earnings growth and RoEs, stock underperformance and ontrack execution.
Valuation
We value JSPL's power business using a discounted cash flow approach as power
plants generate largely predictable cash flows for fixed time periods. While applying
DCF one can choose free cash flow to the firm (FCF) or free cash flow to equity
(FCFE). We prefer FCFE as individual projects are highly geared and gearing
changes as debt is rapidly paid off.
We value JSPL's steel business at 7x June12 EV/EBITDA - at a discount to Tata
Steel India's target EV/EBITDA multiple of 7.5x. We use a discount given (1) Tata
Steel India's scale of operations at 6.8mtpa vs 2.4mtpa for JSPL, (2) Tata Steel
India's 100% captive iron ore vs. 50-60% for JSPL and 3) Tata Steel's product mix
being largely high end relative to JSPL. Both companies have ~55-60% of captive
coal. Tata Steel has 55-60% coking coal. JSPL has 100% thermal coal, but no
coking coal.
If we assume JSPL executes all its power projects in line with our assumptions, we
arrive at a value of Rs726/share. This includes Rs244 for the steel business, Rs10
for Bolivia, Rs331 for Jindal Power, Rs84 for 1,350MW captive power plants and
Rs45 for excess power purchased from JPL at fixed prices. At our target price the
stock would trade at a P/E of 13.5x and EV/EBITDA of 11x FY12E.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Low Risk rating to JSPL.
Downside risks include: fuel supply risk from Coal India, coal mining risk, execution
risk, merchant tariff risks, financial closure risk, receivables risk, regulatory risk,
R&R, land acquisition and environmental clearance risk and lower-than-expected
operating parameters. Upside risks include: better-than-expected operating
parameters; faster-than-expected execution and additional project wins; higherthan-expected merchant tariffs; higher steel prices and rupee depreciation. These
upside and downside risks could impede the stock from achieving our target price.
Adani Enterprises
(ADEL.BO; Rs606.70; 2L)
Valuation
We have a target price of Rs661 for Adani Enterprises, which is derived using a
sum of the parts (SOTP) methodology given the conglomerate nature of the
business. By far the biggest constituents of our fair value at 35% and 28% are the
group's ports and power divisions respectively, which we value using a DCF model
in which FCFE is discounted at a cost of equity of 12-13%. The next biggest
contributors to the "value pie" at respective weightings of 18% and 12% are Coal
Mining (valued using a DCF and CoE discount rate of 13%) and Trading (FY12E
EV/EBITDA of 6x). Real Estate (5%), Agri (1%) and City Gas also contribute to an
overall fair value of Rs661/share (excluding net debt).
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Low Risk rating to Adani Enterprises.
Key downside risks to our target price lie in: (1) poor project execution; (2)
commodity trading; (3) financial closure; (4) environmental and legal clearance; (5)
coal license in Bunyu; (6) real estate volumes; (7) resource estimation risk; and (8)
inadequate coal in Bunyu to fire the Mundra project.
Key upside risks to our target price lie in: (1) better-than-expected project execution;
(2) more project wins in coal mining, ports and power; and (3) higher cash
generation in trading businesses.
Jaiprakash
(JAIA.BO; Rs84.40; 1M)
Valuation
Our Rs114 target price for JPA is based on a sum-of-the-parts valuation,
specifically: 1) Construction business valued using 7x Sep-12E EV/EBITDA; 2)
Cement at 7x Sep-12E EV/EBITDA; 3) Hotels valued at 8x Sep-12E EV/EBITDA -
all in line with sector averages. Additionally, in the interest of conservatism, 4) JPVL
is valued at a 10% discount to the CIRA target price of Rs65; and 5) Jaypee
Infratech is valued at a 10% discount to the current price.
Risks
We rate JPA Medium Risk, in line with our quantitative risk-rating system, which
tracks 260-day historical share price volatility. We believe Medium Risk is
appropriate given that real estate forms a significant part of the business. Key
downside risks, which could prevent the shares from reaching our target price,
include: 1) The construction business is subject to project risks and is sensitive to
economic variables; 2) The cement business is subject to demand-supply
dynamics; 3) Further delays in the Yamuna Expressway project; 4) Slowing
hydroelectric power capex; 5) Development and commercial risks in developing and
selling land associated with the Yamuna Expressway project; and 6) Substantial
declines in real estate prices in the northern parts of India.
Reliance Infrastructure
(RLIN.BO; Rs616.60; 1H)
Valuation
Our Rs902 12-month SOTP target price for R-Infra is composed of: 1) EPC + Power
business using an EV/EBITDA multiple of 6x Mar12E; 2) We value infrastructure
projects in R-Infra using a discounted cash flow (DCF) methodology as of Mar-11E
with a cost of equity of 13% and use a 25% discount to NAV; 3) We value the Delhi
distribution business at a P/Equity Base of 1.5x; and 4) We value the stake in RPower at 20% discount to its current market price.
Risks
We rate R-Infra High Risk even while our quantitative risk rating system, which
tracks the 260-day share price volatility of the stock, suggests Medium Risk. We
believe the High Risk rating is justified on account of the conglomerate nature of the
company with multiple moving parts and the recent SEBI consent order. Key
downside risks to our target price are: 1) Execution risks on its infrastructure
projects leading to delayed commissioning; 2) Failure to secure fuel supply for
incremental power projects; 3) Failure to financially close incremental infrastructure
projects; 4) Higher interest rates and market risk premium leading to lower
valuations for various infrastructure projects; 5) Right of way and clearance risks; 6)
Change in regulatory mechanism; and 7) Hydrology-related risks for the hydel
power projects.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jindal Steel and Power (JNSP.BO)
Upgrade to Buy: The Power of Steel
Buy (1L) – Target Price Rs726
Upgrade to Buy (1L) from Hold (2L), Top pick in conglomerates — 1) Increase in
steel value due to higher steel prices; 2) Captive iron ore and thermal coal is big
advantage in an environment of increasing raw material prices; 3) Environmental
clearance issues are largely behind us and execution remains more or less on track; 4)
Valuations are attractive with 11x 1Yr fwd P/E, FY11-13 EPS CAGR of 24% and 30%
RoE; 5) JSPL has underperformed Sensex by 21% over last year. With this upgrade,
JSPL is our top pick in the India conglomerate space, among JPA (JAIA.BO; Rs84.40;
1M), Reliance Infra (RLIN.BO; Rs616.60; 1H) and Adani Enterprises (ADEL.BO;
Rs606.70; 2L).
Hedged business model (though tilted towards power) implies low risk, moderate
returns — Power/Steel constitute 63%/37% of Rs726 TP (67%/33% of Rs676 earlier).
Diversified business model and low production costs reduce sensitivity to the steel
cycle. Captive raw materials reduces earnings risk and volatility, and should enable the
steel business to earn healthy ~39% margins in FY12-13E. JSPL stands to benefit if
end-product (power/steel) prices increase due to raw material cost increases.
Target price and earnings revision — TP change factors in 1) higher steel prices; 2)
lower merchant prices; 3) Roll-over of power DCF values to Sep11E from June11E; 4)
Rollover of Steel EV/EBITDA & P/E to June12E from March 12E. We revise down
FY12E/FY13E EPS by 13%/1% respectively to factor in 3-6 month delays in captive
power capacity commissioning.
Project status update — Unit1 (135MW) at Angul has been commissioned. JSPL will
commission the 2mtpa sponge iron plant and 945MW of captive capacity by March 12.
Work on the 1,200 MW (phase 1) of the Tamnar 2 project is set to start and
environmental clearance has been received.
Downside risks — Delay in phase 2 of Tamnar 2 (1,200MW) due to unavailability of
coal linkage; lower merchant tariff and lower steel prices.
Upgrade to Buy (1L) from Hold (2L)
We upgrade JSPL to Buy (1L) from Hold (2L) given strong business
fundamentals, attractive valuations, healthy earnings growth and RoEs, stock
underperformance and on-track execution.
JSPL’s strategy of owning captive raw material (coal, iron ore) makes it one of
the lowest-cost producers of electricity and steel in the country – a major
advantage in any commodity business. JSPL has captive thermal coal required
for 4,180MW (out of 5,380MW) capacity. The company has 50-60% of iron ore
required for its steel operations, 100% of thermal coal for its sponge iron plant
and captive power plant and 0.8mtpa of coke capacity.
Power/Steel constitute 63%/37% of our target price of Rs726. Diversified
business model and low production costs reduce sensitivity to steel cycle. Global
steel prices are up ~25% YTD, driven by rising costs. Despite a muted global
steel outlook, captive raw materials should allow JSPL’s steel business to enjoy
margins of ~39% in FY12-13E.
Largely captive coal reduces earnings risk of power business and JSPL will
benefit more if merchant prices rise due to higher imports of coal in the country.
Access to captive raw materials also ensures that earnings of the company are
less volatile and more predictable than lesser integrated steel and power
companies. The earning growth depends largely on timely execution of projects
and prices of steel and power. The added volatility from sharp fluctuations in spot
prices of iron ore and thermal coal is largely not a factor affecting earnings,
though the company is exposed to spot coking coal prices.
JSPL’s steel business enjoys flexibility of production. JSPL can vary its steel
product mix based on market conditions and pricing trends. It has the flexibility of
selling surplus iron ore fines, lumps and pellets externally.
JSPL’s international forays are geared toward securing underdeveloped sources
of raw materials rather than buying fully-developed assets – a sensible approach
in our view. The company has secured iron ore mining rights in Bolivia
(potentially 25mtpa when fully ramped up), has a mining concession for a coal
block in Mozambique and is in process of acquiring Rockland Richfield in
Australia, which has coking coal deposits.
The company has achieved significant progress on execution of 1,350MW of
captive power capacity and 2mtpa sponge iron capacity. Expansion projects
remain more or less on track despite controversies surrounding environmental
clearance issues. JSPL has commissioned Units 1&2 (270MW) at Chhattisgarh
and unit 1 (135MW) at Angul (Orissa). The 2mtpa sponge iron plant in Orissa is
expected to be commissioned by March12 and the steel melting shop by Sep12.
Environmental clearance for phase 1 of 1,200MW of Tamnar 2 project has been
received and the company is close to restarting work on the ground.
Environmental clearance for phase 2 of Tamnar 2 is not final yet and final
environmental clearance is likely to be received once the coal linkage is received.
JSPL is likely to sell ~500kt of iron ore from Bolivia in FY12 (vs 1.5mtpa earlier)
as the company is in the process of procuring a barge loader and building
infrastructure (road/rail/conveyor belt) from the iron ore mine to the port (110km).
No iron ore has been sold from Bolivia so far.
Strong sponge iron prices are likely to benefit the gas-based HBI plant in Oman.
The plant has a contract with the Oman government to get subsidized gas at
US$1/mmbtu for 20 years with an escalation clause of 3%. We expect the
EBITDA/t in FY12 to be ~$80/t. JSPL sold around 300kt of HBI in FY11 and we
expect the Shadeed plant to operate at utilization level of ~70% (capacity
1.5mtpa).
Management’s track record of capital allocation has been excellent, which is
evident from the fact that company has not had any major equity dilution over the
past ten years. The company has grown PAT to Rs37.5bn in FY11 from Rs460mn
in FY1999, implying a CAGR of 44% over the past 12 years. JSPL has also been
able to achieve attractive RoEs of 30%-57% over FY04-FY11.
JSPL’s stock has underperformed BSE Sensex by 21% over the past year.
TP raised to Rs726 (Rs676 earlier)
We raise our JSPL target price to Rs726 from Rs676 earlier:
Roll forward DCF values for Jindal Power and JSPL’s captive power projects to
Sep11E from June11E earlier.
Roll forward EV/EBITDA multiple of 7x for the steel business to June12E from
March 12E earlier.
Roll forward P/E multiple of 8x for JSPL Bolivia to June12E from March 12E
earlier.
Roll forward EV/EBITDA multiple of 5.5x for Shadeed (Oman) to June12E from
March 12E earlier.
Increase in HRC prices from FY12E/FY13E to US$830/US$823 from
US$745/US$702 respectively and raise the steel EBITDA by 7% for FY12 and
cut by 3% in FY13. Higher realizations offset by increased costs.
Reduce our FY12 volume assumptions for sale from Bolivia from 1.5mtpa to
0.5mtpa.
Reduce our merchant prices for FY12E/FY13E to Rs4.00/Rs3.75 from Rs4.5/Rs4
per kwh respectively. We maintain our long-term merchant price assumption of
Rs3.5/kwh from FY14 onwards.
Build in some delays (3-6 months) in commissioning of Tamnar 2, Dumka and
Godda Projects.
Jindal Steel and Power
Company description
Jindal Steel and Power (JSPL) came into existence in 1998 after the demerger of
Jindal Strips Limited. Over the past ten years, JSPL has transformed itself from
being a producer of sponge iron to a diversified conglomerate having a presence in
steel manufacturing, power generation and mining a wide range of minerals, from
iron ore and coal to diamonds and limestone. The company also has a presence in
the oil, gas and infrastructure sectors.
JSPL owns ~180m tonnes of domestic iron ore, ~2.56bn tonnes of domestic thermal
coal and ~20bn tonnes of iron ore in Bolivia. The company has ~2.4mtpa steel and
~1622MW power capacity currently operational.
JSPL is a part of O.P. Jindal Group and has ~15,000 employees.
Investment strategy
JSPL, with its strong execution, cash generation and balance-sheet management,
has emerged as one of the most integrated steel and power companies in India.
Access to captive raw material supplies for steel and power, flexibility to vary steel
product mix, ten years of timely execution without dilution and low cost of power
generation give JSPL an edge over its peers in both power and steel.
We have a Buy (1l) rating on JSPL given strong business fundamentals, attractive
valuations, healthy earnings growth and RoEs, stock underperformance and ontrack execution.
Valuation
We value JSPL's power business using a discounted cash flow approach as power
plants generate largely predictable cash flows for fixed time periods. While applying
DCF one can choose free cash flow to the firm (FCF) or free cash flow to equity
(FCFE). We prefer FCFE as individual projects are highly geared and gearing
changes as debt is rapidly paid off.
We value JSPL's steel business at 7x June12 EV/EBITDA - at a discount to Tata
Steel India's target EV/EBITDA multiple of 7.5x. We use a discount given (1) Tata
Steel India's scale of operations at 6.8mtpa vs 2.4mtpa for JSPL, (2) Tata Steel
India's 100% captive iron ore vs. 50-60% for JSPL and 3) Tata Steel's product mix
being largely high end relative to JSPL. Both companies have ~55-60% of captive
coal. Tata Steel has 55-60% coking coal. JSPL has 100% thermal coal, but no
coking coal.
If we assume JSPL executes all its power projects in line with our assumptions, we
arrive at a value of Rs726/share. This includes Rs244 for the steel business, Rs10
for Bolivia, Rs331 for Jindal Power, Rs84 for 1,350MW captive power plants and
Rs45 for excess power purchased from JPL at fixed prices. At our target price the
stock would trade at a P/E of 13.5x and EV/EBITDA of 11x FY12E.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Low Risk rating to JSPL.
Downside risks include: fuel supply risk from Coal India, coal mining risk, execution
risk, merchant tariff risks, financial closure risk, receivables risk, regulatory risk,
R&R, land acquisition and environmental clearance risk and lower-than-expected
operating parameters. Upside risks include: better-than-expected operating
parameters; faster-than-expected execution and additional project wins; higherthan-expected merchant tariffs; higher steel prices and rupee depreciation. These
upside and downside risks could impede the stock from achieving our target price.
Adani Enterprises
(ADEL.BO; Rs606.70; 2L)
Valuation
We have a target price of Rs661 for Adani Enterprises, which is derived using a
sum of the parts (SOTP) methodology given the conglomerate nature of the
business. By far the biggest constituents of our fair value at 35% and 28% are the
group's ports and power divisions respectively, which we value using a DCF model
in which FCFE is discounted at a cost of equity of 12-13%. The next biggest
contributors to the "value pie" at respective weightings of 18% and 12% are Coal
Mining (valued using a DCF and CoE discount rate of 13%) and Trading (FY12E
EV/EBITDA of 6x). Real Estate (5%), Agri (1%) and City Gas also contribute to an
overall fair value of Rs661/share (excluding net debt).
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Low Risk rating to Adani Enterprises.
Key downside risks to our target price lie in: (1) poor project execution; (2)
commodity trading; (3) financial closure; (4) environmental and legal clearance; (5)
coal license in Bunyu; (6) real estate volumes; (7) resource estimation risk; and (8)
inadequate coal in Bunyu to fire the Mundra project.
Key upside risks to our target price lie in: (1) better-than-expected project execution;
(2) more project wins in coal mining, ports and power; and (3) higher cash
generation in trading businesses.
Jaiprakash
(JAIA.BO; Rs84.40; 1M)
Valuation
Our Rs114 target price for JPA is based on a sum-of-the-parts valuation,
specifically: 1) Construction business valued using 7x Sep-12E EV/EBITDA; 2)
Cement at 7x Sep-12E EV/EBITDA; 3) Hotels valued at 8x Sep-12E EV/EBITDA -
all in line with sector averages. Additionally, in the interest of conservatism, 4) JPVL
is valued at a 10% discount to the CIRA target price of Rs65; and 5) Jaypee
Infratech is valued at a 10% discount to the current price.
Risks
We rate JPA Medium Risk, in line with our quantitative risk-rating system, which
tracks 260-day historical share price volatility. We believe Medium Risk is
appropriate given that real estate forms a significant part of the business. Key
downside risks, which could prevent the shares from reaching our target price,
include: 1) The construction business is subject to project risks and is sensitive to
economic variables; 2) The cement business is subject to demand-supply
dynamics; 3) Further delays in the Yamuna Expressway project; 4) Slowing
hydroelectric power capex; 5) Development and commercial risks in developing and
selling land associated with the Yamuna Expressway project; and 6) Substantial
declines in real estate prices in the northern parts of India.
Reliance Infrastructure
(RLIN.BO; Rs616.60; 1H)
Valuation
Our Rs902 12-month SOTP target price for R-Infra is composed of: 1) EPC + Power
business using an EV/EBITDA multiple of 6x Mar12E; 2) We value infrastructure
projects in R-Infra using a discounted cash flow (DCF) methodology as of Mar-11E
with a cost of equity of 13% and use a 25% discount to NAV; 3) We value the Delhi
distribution business at a P/Equity Base of 1.5x; and 4) We value the stake in RPower at 20% discount to its current market price.
Risks
We rate R-Infra High Risk even while our quantitative risk rating system, which
tracks the 260-day share price volatility of the stock, suggests Medium Risk. We
believe the High Risk rating is justified on account of the conglomerate nature of the
company with multiple moving parts and the recent SEBI consent order. Key
downside risks to our target price are: 1) Execution risks on its infrastructure
projects leading to delayed commissioning; 2) Failure to secure fuel supply for
incremental power projects; 3) Failure to financially close incremental infrastructure
projects; 4) Higher interest rates and market risk premium leading to lower
valuations for various infrastructure projects; 5) Right of way and clearance risks; 6)
Change in regulatory mechanism; and 7) Hydrology-related risks for the hydel
power projects.
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