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JSPL (JSP IN; Last Price: INR494; DB Rec: Buy)
Stock down 24% in past three months. Fears over timely commissioning appear
overdone. JSPL’s stock is down 24% in the last three months v/s market decline of
11%, driven in good part by investor's heightened concerns over timely commissioning
of upcoming projects - especially that of 10x135MW captive power plants supplied by
Chinese equipment suppliers. In addition, we believe that given the continuation of
strong power demand, the consensus spot tariffs could move up to 3.75 to 4.2/unit
while the current price seem to be factoring in a power tariff of INR3.5/unit.
Steel and Power business trading at levels seen during Lehman crisis. The stock
currently trades at 11x FY12e headline EPS and 8x FY12e cash EPS. Attributing INR 90-
100/share to the international mining reserves (ex-Bolivian mines) in Australia, Indonesia
and South Africa, implies that ex-international mining reserves, the stock is trading at 8x
FY12 EPS – levels similar to those seen during Lehman crisis.
At a stock price of INR 490/sh - and assuming the value of mines at INR 90/sh the value
for power and steel business is INR 400/sh. Assuming a stressed case steel valuations at
7xFY12 P/E we find that residual power business is trading at 6x FY12EPS. This is 70%
cheaper than PSU utility companies such as Power Grid/NTPC and also cheaper than
Adani Power. Assuming that company is not able to set up any additional power assets
beyond ongoing captive power plants- we find the valuations of the residual steel
business at 6xFY12 EPS.
Current stock price seems to suggest that steel profits/tonne would drop to less than
INR 8000/t –which is lower than the average profits from the steel business seen during
FY2008/09. Over the last two years the company’s reliance on imported coking coal has
come down from 30% to less than 18%.
We find the current stock price and valuations very attractive given that JSPL’s balance
sheet is relatively less encumbered by leverage and cash generation is far higher than
reported earnings. We forecast that the next 6-7 quarters the company would be able to
meet our EBIT growth expectations of 15-25% yoy
Catalysts to trigger near term outperformance: News-flow on commissioning of captive
power plant will help clear the risk perception over the execution abilities of the
company. We expect that company will be able to meet our expectations of 650 MW of
commissioning by March FY12 and another 650MW by MarchFY13. In addition, stock
will also take direction from any near term uptick in long steel demand. Long steel prices
have risen by 3-5% and seem set for additional increases as inventory levels are
negligible. With continued demand in power sector - we estimate that the consensus
tariffs for spots would move up to 3.75 to 4.2/unit v/s a current expectations of INR
3.5/unit. This could lead to 5-8% higher earnings for H2Fy12.
JSPL is among best placed to capitalize on the power reforms being carried out by six
large power-consuming states. Power demand has grown by 7-8% for the past six
months (a record high over last five years) while spot merchant rates at INR 4.5/unit in
slack season is a surprise (up 30% yoy). With most of the peers facing rising fuel costwe
find integrated energy model of JSPL, a big direct beneficiary.
Key Risks: Company-specific risks include a slowdown in project implementation,
thereby missing the capacity addition targets, a reduction in the utilization levels, and a
delay in the development of captive mines and obtaining fuel linkages, and also
regulatory intervention in the form of capping merchant tariffs. A 10% lower-thanexpected
steel realization could decrease FY12E, FY13E and FY14E earnings by 12%,
10% and 9% respectively.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSPL (JSP IN; Last Price: INR494; DB Rec: Buy)
Stock down 24% in past three months. Fears over timely commissioning appear
overdone. JSPL’s stock is down 24% in the last three months v/s market decline of
11%, driven in good part by investor's heightened concerns over timely commissioning
of upcoming projects - especially that of 10x135MW captive power plants supplied by
Chinese equipment suppliers. In addition, we believe that given the continuation of
strong power demand, the consensus spot tariffs could move up to 3.75 to 4.2/unit
while the current price seem to be factoring in a power tariff of INR3.5/unit.
Steel and Power business trading at levels seen during Lehman crisis. The stock
currently trades at 11x FY12e headline EPS and 8x FY12e cash EPS. Attributing INR 90-
100/share to the international mining reserves (ex-Bolivian mines) in Australia, Indonesia
and South Africa, implies that ex-international mining reserves, the stock is trading at 8x
FY12 EPS – levels similar to those seen during Lehman crisis.
At a stock price of INR 490/sh - and assuming the value of mines at INR 90/sh the value
for power and steel business is INR 400/sh. Assuming a stressed case steel valuations at
7xFY12 P/E we find that residual power business is trading at 6x FY12EPS. This is 70%
cheaper than PSU utility companies such as Power Grid/NTPC and also cheaper than
Adani Power. Assuming that company is not able to set up any additional power assets
beyond ongoing captive power plants- we find the valuations of the residual steel
business at 6xFY12 EPS.
Current stock price seems to suggest that steel profits/tonne would drop to less than
INR 8000/t –which is lower than the average profits from the steel business seen during
FY2008/09. Over the last two years the company’s reliance on imported coking coal has
come down from 30% to less than 18%.
We find the current stock price and valuations very attractive given that JSPL’s balance
sheet is relatively less encumbered by leverage and cash generation is far higher than
reported earnings. We forecast that the next 6-7 quarters the company would be able to
meet our EBIT growth expectations of 15-25% yoy
Catalysts to trigger near term outperformance: News-flow on commissioning of captive
power plant will help clear the risk perception over the execution abilities of the
company. We expect that company will be able to meet our expectations of 650 MW of
commissioning by March FY12 and another 650MW by MarchFY13. In addition, stock
will also take direction from any near term uptick in long steel demand. Long steel prices
have risen by 3-5% and seem set for additional increases as inventory levels are
negligible. With continued demand in power sector - we estimate that the consensus
tariffs for spots would move up to 3.75 to 4.2/unit v/s a current expectations of INR
3.5/unit. This could lead to 5-8% higher earnings for H2Fy12.
JSPL is among best placed to capitalize on the power reforms being carried out by six
large power-consuming states. Power demand has grown by 7-8% for the past six
months (a record high over last five years) while spot merchant rates at INR 4.5/unit in
slack season is a surprise (up 30% yoy). With most of the peers facing rising fuel costwe
find integrated energy model of JSPL, a big direct beneficiary.
Key Risks: Company-specific risks include a slowdown in project implementation,
thereby missing the capacity addition targets, a reduction in the utilization levels, and a
delay in the development of captive mines and obtaining fuel linkages, and also
regulatory intervention in the form of capping merchant tariffs. A 10% lower-thanexpected
steel realization could decrease FY12E, FY13E and FY14E earnings by 12%,
10% and 9% respectively.
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