Jindal Steel & Power - Multiple growth levers, downside limited:: Credit Suisse,

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● JSPL has underperformed all its metals peers and its own
historical trading range. Its P/E has contracted by 25% since Nov-
10, and it is trading at a 63% discount to its five-year average P/B.
● Slow ramp-up on 1350MW has been one of the main concerns.
But usage of linkage coal at Orissa (blended with middlings) has
shown very good PLF. Even with Rs0.9/unit pre-EBITDA cost and
95% long-term PLF, Rs110/share is justified. These units also
have coal security due to middlings and availability of linkage. The
2400MW plant has all but one clearance, and equipment ordering
has started. We assume full capacities in FY15, and only 40% of
fair value in our valuations (based on the CARV methodology).
● 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 – 1000MW is a strong
source of cash, and downside on other projects in terms of
valuations is low. (3) Overseas mining assets are not valued yet.
● We reduce our target price to Rs635, primarily as we take only
40% of fair value for the 2400MW plant. Maintain OUTPERFORM.


Highest underperformance in metals sector
JSPL has underperformed the most, compared with metal peers as
well as with its own historical trading performance. On P/E, it has
contracted by 25% since November 2010, and is trading at 63%
discount to its five-year average P/B.
Investor concerns on power higher than justified
Slow ramp-up on the 1350MW 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
1000MW plant) and a slow ramp in PLF (52–85% in first two years,
95% long term), fair value comes to Rs110/share. These units also
have coal security due to the utilisation of middlings and the
availability of linkage. The 2400MW plant has all but one clearance,
and equipment ordering has started. We assume full capacities only in
FY15, and take only 40% of the fair value in our valuations (based on
the CARV methodology).


Multiple growth levers present
Multiple levers of growth are present, which are not being fully valued:
● Steel – Vertical integration on iron ore, 50% steel production not
dependent on coking coal and highly lucrative pellet sales.
● Power – 1000MW is a strong source of cash generation for
inorganic/organic expansion, and downside on other projects in
terms of valuations is low, in our view.
● Overseas mining assets are not valued yet. Production in Bolivia
has already started, and we have assumed the realisation of only
$60/T post FY14, versus current price of $170/T. Indonesian Coal
is expected to start production this year, and thermal coal is one
commodity where prices have not corrected much, especially as it
is exposed to consumption demand in China and India.
Attractive valuations, maintain OUTPERFORM rating
We reduce our target price to Rs635, primarily as we take only 40% of
fair value for the 2400MW plant. With 21% upside to current price, we
maintain our OUTPERFORM rating on JSPL.