Jindal Steel & Power: TP: INR729 Buy: Motilal Oswal

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The best performer
Strong project pipeline though challenges remain
Despite its below-average RoIC, Jindal Steel and Power (JSP) has been the
best performing stock among the metals companies under our coverage due
to better capital allocation in high RoI business and timely execution.
 Strong volume growth in steel and power, healthy cash-flow. Challenges
now lies in deploying it with equal speed.
 Strong project pipeline, but execution has been suffering due to issues
such as land acquisition and regulatory permissions.
 Though there are some delays, we like JSP's due to its well planned
expansion projects and rich mineral resources. Maintain Buy.
Strong volume growth in steel and power businesses
Steel sales will grow from 1.9mt in FY11 to 2.4mt in FY12 due to a ramp-up of
production at Raigarh and 2.7mt in FY13 on account of contribution from Angul projects
during the second half. Pellet production is expected to ramp up from 2.8mt in FY11 to
4.4mt FY12 and FY13. The sale of pellets will decline in FY13 due to increase in
internal consumption at the Angul sponge iron unit.
Power volume will increase as the remaining seven units of a 135MW captive power
plant will be commissioned at Angul and Raigarh. Margins, however, will be under
pressure because of low rates offered by SEBs to captive power plants and high cost
of purchase of third-party coal.


Earnings growth to pick up in FY13; maintain Buy
Earnings growth will slow in FY12 due to shrinking margins in the power business. However,
earnings are expected to grow stronger in FY13 due to expectation of improvement in
power rates and the start of the Angul coal mine.
Unlike other steel stocks, JSP has begun to trade at a premium to replacement costs due
to significant growth in the share of earnings from power sales.
We like the stock due to its strong pipeline of projects and cash flow. The stock trades at
a PE of 9.2x FY13E. Maintain Buy, with an SOTP-based target price of INR729.

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