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Jindal Steel and Power (JSP)
Metals & Mining
Growth pushed out. We cut our FY2012E and FY2013E earnings estimates by 17.2%
and 11.1% and target price by 7.1% to Rs650. FY2012E growth story hinges on (1)
commissioning of captive units, (2) sale of pellets and (3) growth from Shadeed.
However, delays in commissioning of CPPs and likely lower profitability from existing
merchant capacities will lead to lower earnings growth than envisaged earlier. We
broadly retain our steel segment estimates and cut earnings from the power segment.
Execution hiccups to constrain earnings growth in the near term
JSPL has a strong pipeline of projects that can drive growth for the next few years. However,
execution hiccups will likely lead to lower earnings growth from captive power capacities. Weak
merchant tariffs will further impact earnings growth contribution from the operational 1,000 MW
merchant capacity at Tamnar 1. Even in the steel segment, the company has delayed
commissioning of gas-based DRI plant in Angul by 3-6 months. We now expect moderate earnings
growth over the next two years; growth will be primarily driven by (1) higher pellet sales and (2)
growth from Shadeed project in Oman.
Captive units at Chhattisgarh and Orissa run into losses
We note that the three captive units of 135 MW (at Chhattisgarh and Orissa) operated at a ~50%
PLFs in 1QFY12 and registered losses (due to interest and depreciation charges) during the quarter.
Management had indicated that the units are still in a stabilization phase and hence are operating
at a lower PLFs though expects the units to stabilize and generation to improve in 2QFY11E. We
note that JSPL used almost the entire power generated from these units for captive purpose
though management has indicated that all incremental generation will be sold externally.
Cut estimates and revise target price to Rs650 from Rs700 earlier
We revise our target price on JSPL to Rs650 from Rs700 earlier on the back (1) lower multiple for
the steel business to 6.25X versus 6.7X in view of potential imposition of mining tax; we value
steel business at Rs315 and (2) lower power business valuations to Rs336 from Rs354 earlier.
Power business valuations comprise (1) Rs191/share (Rs178 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) Rs67/share (Rs63 bn) for the 1,350 MW captive power plant being
built in Angul and Raigarh—we assume that power generated from eight of these units will be
sold entirely on a merchant basis (while one unit will be used for captive consumption). We lower
EPS estimate for FY2012E and FY2013E by 17.2% and 11.1% to Rs45.2 and Rs55.2, respectively.
Further details on earnings revision
We have revised our earnings EPS for power business to Rs19/share in FY2012E (previously
Rs22/share) and to Rs23/share in FY2013E (previously Rs26/share) as we adjust for (1) lower
merchant realizations in FY2012E, (2) lower realizations at captive units at Orissa as part of it
would be sold to Orissa GRIDCO and (3) factor minor delays in commissioning of captive
units. Our estimates factor the following commissioning schedule – (1) balance two units of
Chhattisgarh (4x135 MW) to commission in 2HFY12E, (2) incremental commissioning of 1
unit in FY2012E and four units in FY2013E at Orissa (6x135 MW) and (3) commissioning of
first unit at Tamnar II by 1QFY14E and commissioning of the full plant by FY2015E.
Key takeaways from 1QFY12 earnings call
JSPL expects pellet production of 4-4.5 mn tonnes. While around half of this would be
captively consumed, the balance would be sold in the domestic market. JSPL produced
and sold 829K tonnes and 347K tonnes of pellets in 1QFY12. The average realization of
pellets in 1QFY12 was around Rs7,500/tonne.
JSPL has commenced shipments of iron ore from Bolivian mines in 1QFY12. The company
though has refrained from providing a formal guidance on shipments for FY2012E. JSPL is
currently developing infrastructure facilities linking the mine to the port.
The management expects merchant power realizations to move in a narrow band of
Rs3.75 - Rs4.25 in FY2012E.
The management also highlighted that implementation of the mining bill in its current
draft form would result in a hit of around 9-12% to the bottom line.
Inventory increased in 1QFY12 by 22% sequentially to around 0.3mn tonnes. JSPL
attributed inventory increase to sluggish demand for steel products.
The overseas subsidiaries generated a net profit of around Rs110 mn in the quarter. The
1.5 mtpa DRI plant of Shadeed Iron and Steel produced around 300 kt of sponge iron in
1QFY12 and generated net profit of Rs370 mn. The South African coal business produced
around 3 mtpa of coal and generated net profits of around Rs30 mn.
The company outlined commissioning of the first phase of its Angul project by around
1QFY13E. However, we feel that this is aggressive and it would be reasonable to assume
further commissioning delays.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jindal Steel and Power (JSP)
Metals & Mining
Growth pushed out. We cut our FY2012E and FY2013E earnings estimates by 17.2%
and 11.1% and target price by 7.1% to Rs650. FY2012E growth story hinges on (1)
commissioning of captive units, (2) sale of pellets and (3) growth from Shadeed.
However, delays in commissioning of CPPs and likely lower profitability from existing
merchant capacities will lead to lower earnings growth than envisaged earlier. We
broadly retain our steel segment estimates and cut earnings from the power segment.
Execution hiccups to constrain earnings growth in the near term
JSPL has a strong pipeline of projects that can drive growth for the next few years. However,
execution hiccups will likely lead to lower earnings growth from captive power capacities. Weak
merchant tariffs will further impact earnings growth contribution from the operational 1,000 MW
merchant capacity at Tamnar 1. Even in the steel segment, the company has delayed
commissioning of gas-based DRI plant in Angul by 3-6 months. We now expect moderate earnings
growth over the next two years; growth will be primarily driven by (1) higher pellet sales and (2)
growth from Shadeed project in Oman.
Captive units at Chhattisgarh and Orissa run into losses
We note that the three captive units of 135 MW (at Chhattisgarh and Orissa) operated at a ~50%
PLFs in 1QFY12 and registered losses (due to interest and depreciation charges) during the quarter.
Management had indicated that the units are still in a stabilization phase and hence are operating
at a lower PLFs though expects the units to stabilize and generation to improve in 2QFY11E. We
note that JSPL used almost the entire power generated from these units for captive purpose
though management has indicated that all incremental generation will be sold externally.
Cut estimates and revise target price to Rs650 from Rs700 earlier
We revise our target price on JSPL to Rs650 from Rs700 earlier on the back (1) lower multiple for
the steel business to 6.25X versus 6.7X in view of potential imposition of mining tax; we value
steel business at Rs315 and (2) lower power business valuations to Rs336 from Rs354 earlier.
Power business valuations comprise (1) Rs191/share (Rs178 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) Rs67/share (Rs63 bn) for the 1,350 MW captive power plant being
built in Angul and Raigarh—we assume that power generated from eight of these units will be
sold entirely on a merchant basis (while one unit will be used for captive consumption). We lower
EPS estimate for FY2012E and FY2013E by 17.2% and 11.1% to Rs45.2 and Rs55.2, respectively.
Further details on earnings revision
We have revised our earnings EPS for power business to Rs19/share in FY2012E (previously
Rs22/share) and to Rs23/share in FY2013E (previously Rs26/share) as we adjust for (1) lower
merchant realizations in FY2012E, (2) lower realizations at captive units at Orissa as part of it
would be sold to Orissa GRIDCO and (3) factor minor delays in commissioning of captive
units. Our estimates factor the following commissioning schedule – (1) balance two units of
Chhattisgarh (4x135 MW) to commission in 2HFY12E, (2) incremental commissioning of 1
unit in FY2012E and four units in FY2013E at Orissa (6x135 MW) and (3) commissioning of
first unit at Tamnar II by 1QFY14E and commissioning of the full plant by FY2015E.
Key takeaways from 1QFY12 earnings call
JSPL expects pellet production of 4-4.5 mn tonnes. While around half of this would be
captively consumed, the balance would be sold in the domestic market. JSPL produced
and sold 829K tonnes and 347K tonnes of pellets in 1QFY12. The average realization of
pellets in 1QFY12 was around Rs7,500/tonne.
JSPL has commenced shipments of iron ore from Bolivian mines in 1QFY12. The company
though has refrained from providing a formal guidance on shipments for FY2012E. JSPL is
currently developing infrastructure facilities linking the mine to the port.
The management expects merchant power realizations to move in a narrow band of
Rs3.75 - Rs4.25 in FY2012E.
The management also highlighted that implementation of the mining bill in its current
draft form would result in a hit of around 9-12% to the bottom line.
Inventory increased in 1QFY12 by 22% sequentially to around 0.3mn tonnes. JSPL
attributed inventory increase to sluggish demand for steel products.
The overseas subsidiaries generated a net profit of around Rs110 mn in the quarter. The
1.5 mtpa DRI plant of Shadeed Iron and Steel produced around 300 kt of sponge iron in
1QFY12 and generated net profit of Rs370 mn. The South African coal business produced
around 3 mtpa of coal and generated net profits of around Rs30 mn.
The company outlined commissioning of the first phase of its Angul project by around
1QFY13E. However, we feel that this is aggressive and it would be reasonable to assume
further commissioning delays.
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