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Multiple growth levers, downside limited
■ Valuations corrected materially: JSPL has underperformed all its metal
peers and is much lower than its own historical trading range. Its P/E has
contracted by 26% since November 2010, and the stock is now at a 63%
discount to its own five-year average P/B.
■ Concerns overstated: Slow ramp-up on the 1,350 MW captive power
capacity has been one of the main concerns. But now JSPL has started to
use linkage coal at Orissa (blended with middlings) and this has shown very
good PLF. Even with Rs0.9/unit pre-EBITDA cost (double the cost of the
1,000 MW plant) and a slow ramp in PLF (52-85% in first two years, 95%
long term), fair value for this capacity comes to Rs110/share. These units
also have coal security due to utilisation of middlings and availability of
linkage. The 2400 MW plant has all but 1 clearance, and equipment ordering
has started. We assume full capacities only in FY15, and take only 40% of
the Fair Value in our valuations (this is based on the CARV methodology).
■ Multiple growth levers: There are multiple levers for JSPL 1) Steel –
vertical integration on iron ore, 50% steel production not dependent on
Coking Coal and highly lucrative pellet sales; 2) Power – 1000 MW is a
strong source of cash generation for inorganic/organic expansion, and
downside on other projects in terms of valuations is low, in our opinion. 3)
Overseas mining assets are not valued yet. Production in Bolivia has already
started, and we have assumed realisation of only $60/T post FY14, versus
the current price of $170/T. Indonesian Coal is expected to start production
this year, and thermal coal is one commodity where prices haven't corrected
much, especially as it is exposed to consumption demand in China and India.
■ Attractive valuations: We reduce our target price to Rs635, primarily as we
take only 40% of fair value for 2400 MW plant. With 22% upside to the
current price, we maintain our OUTPERFORM rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Multiple growth levers, downside limited
■ Valuations corrected materially: JSPL has underperformed all its metal
peers and is much lower than its own historical trading range. Its P/E has
contracted by 26% since November 2010, and the stock is now at a 63%
discount to its own five-year average P/B.
■ Concerns overstated: Slow ramp-up on the 1,350 MW captive power
capacity has been one of the main concerns. But now JSPL has started to
use linkage coal at Orissa (blended with middlings) and this has shown very
good PLF. Even with Rs0.9/unit pre-EBITDA cost (double the cost of the
1,000 MW plant) and a slow ramp in PLF (52-85% in first two years, 95%
long term), fair value for this capacity comes to Rs110/share. These units
also have coal security due to utilisation of middlings and availability of
linkage. The 2400 MW plant has all but 1 clearance, and equipment ordering
has started. We assume full capacities only in FY15, and take only 40% of
the Fair Value in our valuations (this is based on the CARV methodology).
■ Multiple growth levers: There are multiple levers for JSPL 1) Steel –
vertical integration on iron ore, 50% steel production not dependent on
Coking Coal and highly lucrative pellet sales; 2) Power – 1000 MW is a
strong source of cash generation for inorganic/organic expansion, and
downside on other projects in terms of valuations is low, in our opinion. 3)
Overseas mining assets are not valued yet. Production in Bolivia has already
started, and we have assumed realisation of only $60/T post FY14, versus
the current price of $170/T. Indonesian Coal is expected to start production
this year, and thermal coal is one commodity where prices haven't corrected
much, especially as it is exposed to consumption demand in China and India.
■ Attractive valuations: We reduce our target price to Rs635, primarily as we
take only 40% of fair value for 2400 MW plant. With 22% upside to the
current price, we maintain our OUTPERFORM rating.
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