Jindal Steel and Power: Still not attractive enough:: Kotak Sec,

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Jindal Steel and Power (JSP)
Metals & Mining
Still not attractive enough. We maintain our long-standing REDUCE rating despite
recent 16% correction in the stock price. Slow pace of execution in expansion projects
in the steel and power segment will likely lead to downgrade in consensus earnings
expectations. We lower our FY2013E and FY2014E EBITDA by 3.3% and 3.5%,
respectively. We lower end-FY2013E fair value to Rs595 from Rs650 earlier; cut is
evenly distributed between power and steel segment.


Near-term growth to be constrained by slow pace of execution
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 in the
near tem. Lack of open access (for external sale) and interim operations based on raw coal (instead
of middlings) for CPPs in Angul could further hurt earnings. Even in the steel segment, the
company has delayed commissioning of gas-based DRI plant in Angul by 3-6 months; it is
unreasonable to expect any contribution from the Angul steel plant in FY2013E. We expect
modest 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.
Limited visibility on Tamnar expansion and other coal-based projects
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 (though only for 1,200
MW), the construction at site is yet to gain traction. Management guidance for commissioning of
first unit by March 2013 appears aggressive. Further, on account of limited visibility on fuel
availability for second phase of 1,200 MW and no environmental clearance, we have excluded the
second phase from our fair value estimate of JSPL’s power business. Further, we do not see any
traction on the 1,980 MW of additional capacities (and their associated captive blocks) planned to
be built in Jharkhand, across two locations—Gudda and Dumka (see Exhibit 3).
Retain REDUCE rating, target price cut to Rs595
Our long-standing REDUCE rating was based on (1) execution risks to expansion projects and
(2) expensive valuations. While the recent stock price correction largely addresses the valuation
concern, delays in project execution still does not appear priced in. We cut FY2012/13E earnings
estimate by 3.7%/4.2% to Rs43.5/52.9. Cut in estimate is on the back of (1) delay in
commissioning of CPPs of JSPL and (2) marginal adjustments after updation of FY2011 annual
report. We cut end-FY2013E-based fair value to Rs595 from Rs650 earlier. We value steel business
at Rs292, Jindal Power at Rs236 and CPP at Rs67.


Further details on earnings revision and valuation
We value JSPL’s power business at Rs304/share (Rs282 bn) based on March 2013 SOTP. Our
valuation comprises (1) Rs191/share (Rs178 bn) for the 1,000 MW merchant power plant
(Tamnar I), (2) Rs45/share (Rs42 bn) as value from the proposed 1,200 MW merchant power
plant at Raigarh (only the first phase) and (3) Rs67/share (Rs62 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 two units will be used for
captive consumption). Our valuation implies a P/E of 16.6X FY2012E EPS and 13.6X on
FY2013E EPS.
We value steel business at Rs292, valuing the business at 6.25X FY2013E EBITDA. We adjust
CWIP from steel business expansion in Orissa to arrive at the adjusted debt number for
valuing steel business.