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Jindal Steel & Power (JNSP.BO, CL-Buy): defensive play
What's changed
We are incorporating lower commodity price assumptions for Jindal
Steel & Power on the back of domestic/global macro concerns, coupled
with lower global growth forecasts. We lower our FY12E-14E EPS
estimates by 5%-10%. We reiterate our CL-Buy on JSPL for its earnings
resilience, strong growth trajectory and attractive valuations.
Implications
In our view, JSPL is best positioned to benefit from a potential hard
landing relative to our coverage universe. The company’s 100% captive
supply of iron ore and only 50% dependence on imported coking coal
(Exhibit 27) make its earnings and cash flows most insulated from
changes in commodity prices.
We also do a scenario analysis to see the potential downside to current
market price by applying trough multiples to companies in our coverage
universe (Exhibit 34). The results show that even if multiples contract
to recent cycle trough levels, there is a potential 4% downside to
current market price for JSPL, the least of our coverage group.
We believe this is due to: 1) the diverse business mix of the company; 2)
resilience to deliver high margins across economic cycles (the only steel
company in our global coverage universe to deliver an average EBITDA
margin of ~40% over the last 12 years with trough margins at 34%); 3)
best-in-class resource ownership (for steel and power); 4) strong
pipeline of growth projects; 5) a robust balance sheet.
The company has a strong earnings trajectory (we expect 31% FY12-
FY14 CAGR) and attractive valuation (trading below mid-cycle on both a
P/B and a P/E basis.
Valuation
The stock is trading at 2.6x FY12E P/B (close to trough of 2.2x in June
2004), with FY12E ROE of 25.3%. Our revised 12-month SOTP-based
target price of Rs 745 (vs Rs 771 previously) implies FY12E P/B of 3.7x
and FY12E P/E of 16.5x, below mid-cycle levels.
Key risks
Delays in growth projects; weaker-than-expected demand and pricing.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jindal Steel & Power (JNSP.BO, CL-Buy): defensive play
What's changed
We are incorporating lower commodity price assumptions for Jindal
Steel & Power on the back of domestic/global macro concerns, coupled
with lower global growth forecasts. We lower our FY12E-14E EPS
estimates by 5%-10%. We reiterate our CL-Buy on JSPL for its earnings
resilience, strong growth trajectory and attractive valuations.
Implications
In our view, JSPL is best positioned to benefit from a potential hard
landing relative to our coverage universe. The company’s 100% captive
supply of iron ore and only 50% dependence on imported coking coal
(Exhibit 27) make its earnings and cash flows most insulated from
changes in commodity prices.
We also do a scenario analysis to see the potential downside to current
market price by applying trough multiples to companies in our coverage
universe (Exhibit 34). The results show that even if multiples contract
to recent cycle trough levels, there is a potential 4% downside to
current market price for JSPL, the least of our coverage group.
We believe this is due to: 1) the diverse business mix of the company; 2)
resilience to deliver high margins across economic cycles (the only steel
company in our global coverage universe to deliver an average EBITDA
margin of ~40% over the last 12 years with trough margins at 34%); 3)
best-in-class resource ownership (for steel and power); 4) strong
pipeline of growth projects; 5) a robust balance sheet.
The company has a strong earnings trajectory (we expect 31% FY12-
FY14 CAGR) and attractive valuation (trading below mid-cycle on both a
P/B and a P/E basis.
Valuation
The stock is trading at 2.6x FY12E P/B (close to trough of 2.2x in June
2004), with FY12E ROE of 25.3%. Our revised 12-month SOTP-based
target price of Rs 745 (vs Rs 771 previously) implies FY12E P/B of 3.7x
and FY12E P/E of 16.5x, below mid-cycle levels.
Key risks
Delays in growth projects; weaker-than-expected demand and pricing.
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