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Jindal Steel and Power (JSP)
Metals & Mining
Execution pitfalls may mar growth expectations. We continue to maintain our
cautious stance on Jindal Steel and Power (JSPL), as the CMP does not factor potential
execution pitfalls in both the steel and power business. Earnings growth in FY2013E
hinges largely on timely execution of the captive power capacities, while the residual
growth drivers from capacity expansions at Tamnar (Power) and Angul (Steel) will at
best boost FY2014E earnings. Maintain REDUCE with a revised PT of Rs565.
Look for a more opportune price point that sufficiently factors execution risks
We do see lower earnings risks to the extant integrated operations of JSPL with resource
ownership in both the steel and power segments. However, the CMP factors a meaningful
contribution from future growth projects, which are susceptible to execution pitfalls, in our view.
Our target price factors Rs105/share for future projects in the power business (CPP and Tamnar II)
and earnings contribution from gas-based DRI plant at Angul. We would wait for a more
opportune entry point that does not ascribe significant value to future projects and hence offers a
more favorable risk-reward balance. We note that at 11.1X P/E and 8.3X EV/EBITDA on FY2013E,
JSPL remains amongst the most expensive names under our metal coverage universe.
Execution across segments remains tepid, large projects likely to contribute only by FY2014E
We continue to remain concerned about the slow pace of execution of JSPL’s expansion projects.
In the steel segment, commissioning of the Angul steel plant is expected to contribute
meaningfully to earnings only by FY2014E. Earnings growth over the next two years from the steel
segment would be restricted to the sale of pellets with no incremental steel capacity coming on
stream.
In the power segment, construction activity at Tamnar II is still awaiting certain last mile clearances,
and is less likely to meet the aggressive commissioning guidance provided by the management.
Exhibit 3 below highlights the status of JPL’s projects as well as capex incurred as of March 2011.
JSPL has so far commissioned just three out of 10 units planned between Orissa and Chattisgarh
sites (the last one being declared commercial in March 2011). We factor a more conservative
commissioning schedule of two units in FY2012E and balance five units in FY2013E.
Earnings revision and valuation
We have made marginal changes to our estimates and accordingly lower our consolidated
FY2012-14E EPS estimates by 4.5%, 9.3% and 1.7% to Rs41.5, Rs47.9 and Rs57.8, respectively.
We lower our target price to Rs565 (Rs595 earlier) based on end-FY2013E financials.
We revise our fair value on steel business to Rs266, based on 6.25X FY2013E EBITDA. We
now value JSPL’s power business at Rs299/share (Rs278 bn) based on our March 2013 SOTP.
Our valuation comprises (1) Rs194/share (Rs180 bn) for the 1,000 MW merchant power
plant (Tamnar I), (2) Rs38/share (Rs35 bn) as value from the proposed 1,200 MW merchant
power plant at Raigarh and (3) Rs67/share (Rs63 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 13.4X on FY2013E power earnings.
Spike in spot merchant tariffs may be temporary and not necessarily accrue
better realizations
We note that the shortage of power (due to cramped coal supply) had led to a sharp spike
in merchant tariffs in the spot market. In our view, the sharp spike in the spot markets will
likely be short-lived and, more importantly, may not translate into higher realizations for JPL,
which typically trades in the bilateral market (see Exhibit 5) with contracts of a longer
duration. We note that the spot exchange market is less liquid and exhibits higher volatility
while JPL’s realizations are more aligned with rates prevalent in bilateral market (see Exhibit
4).
Key takeaways from 2QFY12 earnings call
The company reiterated its target of finished steel production at 2.5mn tonnes for
FY2012E, which seems reasonable, in our view.
JSPL expects pellet production of 4-4.5 mn tonnes. During the quarter, around 30% of
the pellets were captively consumed while the balance was sold externally. JSPL produced
and sold 898K tonnes and 526K tonnes of pellets in Q2FY12. The average realization of
pellets in 2QFY12 was around Rs7,600/tonne.
The company currently has an inventory of 13-14mn tonnes of iron ore fines which will
be periodically converted to more value-added pellets.
The company reaffirmed its target for commissioning of the first phase of its Angul
project by around Sep’12. However, we feel this is aggressive and it would be reasonable
to assume further commissioning delays.
The 1.5mtpa DRI plant of Shadeed Iron and Steel produced around 300kt of sponge iron
in Q2FY12 and generated net profit of US$10 mn. This plant is currently operating at a
run rate of 1.2mtpa with the rest of the capacity rise to take place in Q4FY12.
The company has also received environmental clearance for mining iron ore in Indonesia
and expects commercial production to commence in April next year with a targeted
annual production of 0.5-1mtpa.
The company is currently holding steel inventory to the tune of a month’s production.
The management expects merchant power realizations to move in a narrow band of
Rs3.75 - Rs4.25 in FY2012E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jindal Steel and Power (JSP)
Metals & Mining
Execution pitfalls may mar growth expectations. We continue to maintain our
cautious stance on Jindal Steel and Power (JSPL), as the CMP does not factor potential
execution pitfalls in both the steel and power business. Earnings growth in FY2013E
hinges largely on timely execution of the captive power capacities, while the residual
growth drivers from capacity expansions at Tamnar (Power) and Angul (Steel) will at
best boost FY2014E earnings. Maintain REDUCE with a revised PT of Rs565.
Look for a more opportune price point that sufficiently factors execution risks
We do see lower earnings risks to the extant integrated operations of JSPL with resource
ownership in both the steel and power segments. However, the CMP factors a meaningful
contribution from future growth projects, which are susceptible to execution pitfalls, in our view.
Our target price factors Rs105/share for future projects in the power business (CPP and Tamnar II)
and earnings contribution from gas-based DRI plant at Angul. We would wait for a more
opportune entry point that does not ascribe significant value to future projects and hence offers a
more favorable risk-reward balance. We note that at 11.1X P/E and 8.3X EV/EBITDA on FY2013E,
JSPL remains amongst the most expensive names under our metal coverage universe.
Execution across segments remains tepid, large projects likely to contribute only by FY2014E
We continue to remain concerned about the slow pace of execution of JSPL’s expansion projects.
In the steel segment, commissioning of the Angul steel plant is expected to contribute
meaningfully to earnings only by FY2014E. Earnings growth over the next two years from the steel
segment would be restricted to the sale of pellets with no incremental steel capacity coming on
stream.
In the power segment, construction activity at Tamnar II is still awaiting certain last mile clearances,
and is less likely to meet the aggressive commissioning guidance provided by the management.
Exhibit 3 below highlights the status of JPL’s projects as well as capex incurred as of March 2011.
JSPL has so far commissioned just three out of 10 units planned between Orissa and Chattisgarh
sites (the last one being declared commercial in March 2011). We factor a more conservative
commissioning schedule of two units in FY2012E and balance five units in FY2013E.
Earnings revision and valuation
We have made marginal changes to our estimates and accordingly lower our consolidated
FY2012-14E EPS estimates by 4.5%, 9.3% and 1.7% to Rs41.5, Rs47.9 and Rs57.8, respectively.
We lower our target price to Rs565 (Rs595 earlier) based on end-FY2013E financials.
We revise our fair value on steel business to Rs266, based on 6.25X FY2013E EBITDA. We
now value JSPL’s power business at Rs299/share (Rs278 bn) based on our March 2013 SOTP.
Our valuation comprises (1) Rs194/share (Rs180 bn) for the 1,000 MW merchant power
plant (Tamnar I), (2) Rs38/share (Rs35 bn) as value from the proposed 1,200 MW merchant
power plant at Raigarh and (3) Rs67/share (Rs63 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 13.4X on FY2013E power earnings.
Spike in spot merchant tariffs may be temporary and not necessarily accrue
better realizations
We note that the shortage of power (due to cramped coal supply) had led to a sharp spike
in merchant tariffs in the spot market. In our view, the sharp spike in the spot markets will
likely be short-lived and, more importantly, may not translate into higher realizations for JPL,
which typically trades in the bilateral market (see Exhibit 5) with contracts of a longer
duration. We note that the spot exchange market is less liquid and exhibits higher volatility
while JPL’s realizations are more aligned with rates prevalent in bilateral market (see Exhibit
4).
Key takeaways from 2QFY12 earnings call
The company reiterated its target of finished steel production at 2.5mn tonnes for
FY2012E, which seems reasonable, in our view.
JSPL expects pellet production of 4-4.5 mn tonnes. During the quarter, around 30% of
the pellets were captively consumed while the balance was sold externally. JSPL produced
and sold 898K tonnes and 526K tonnes of pellets in Q2FY12. The average realization of
pellets in 2QFY12 was around Rs7,600/tonne.
The company currently has an inventory of 13-14mn tonnes of iron ore fines which will
be periodically converted to more value-added pellets.
The company reaffirmed its target for commissioning of the first phase of its Angul
project by around Sep’12. However, we feel this is aggressive and it would be reasonable
to assume further commissioning delays.
The 1.5mtpa DRI plant of Shadeed Iron and Steel produced around 300kt of sponge iron
in Q2FY12 and generated net profit of US$10 mn. This plant is currently operating at a
run rate of 1.2mtpa with the rest of the capacity rise to take place in Q4FY12.
The company has also received environmental clearance for mining iron ore in Indonesia
and expects commercial production to commence in April next year with a targeted
annual production of 0.5-1mtpa.
The company is currently holding steel inventory to the tune of a month’s production.
The management expects merchant power realizations to move in a narrow band of
Rs3.75 - Rs4.25 in FY2012E.
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