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JINDAL STEEL AND POWER (1-OVERWEIGHT; PT RS609; +15%): WILL RISE ABOVE
OUR TOP PICK
JSPL is our top pick in the Metals and Mining space. We believe the company is
extremely well-placed amongst its peers in both steel and power businesses. A high
level of backward integration, large captive coal reserves (c1.4bn tonnes),
differentiated product mix and unique technology adoption places the company at a
distinct advantage over its peers. Execution challenges for expansion projects have
persisted in the recent past, but we are not overtly concerned now as regulatory hurdles
for two of its biggest projects appear behind. Nevertheless, its growth story has been
pushed back by a year (to FY14). Our SOTP PT implies 15% upside on FY13E earnings,
but we believe the stock offers significant upside potential once the market starts
discounting FY14E earnings. Considering its low-risk profile and an exciting long-term
story, we expect the stock to outperform its peers.
Set to attain significant scale …: With capacities both in steel and power slated to go up
about 5x over FY16, the long-term story for JSPL remains intact. The steel business enjoys
the benefits of high integration, production flexibility, a differentiated product mix and,
more importantly, unique technology. Jindal Power (JPL, a 96.5%-owned subsidiary)
continues to benefit from the strategic location of its plants and captive coal mines.
Execution challenges are now well-recognised: Project execution will take centre stage for
JSPL, in our view, as c54% of its Mar’12E balance sheet would be locked into construction
projects. While execution delays have persisted in the recent past, we believe most
regulatory hurdles at two of its biggest projects (Angul steel plant and 2400MW power
project in JPL) are behind. While most issues are now well-recognised (listed in Figure 91),
we believe the consensus is yet to completely build the same in numbers. Our FY13E EPS is
10% below consensus estimates. Despite this, we expect JSPL to report the fastest EBITDA
CAGR of 24% over FY11-14E – the highest amongst our coverage universe.
See value in the overseas mineral assets: JSPL has significant overseas mining resources –
iron ore mines in Bolivia and coal mines in Africa, Indonesia and Australia. The
commencement of mining/receipt of requisite regulatory clearances would act as a catalyst
for value unlocking in these subsidiaries, we believe. We value the iron ore mining assets in
Bolivia and African coal block at Rs16/share and Rs5/share, respectively. We have not
assigned any value to the Indonesian and Mozambique coal block.
Initiate with 1-Overweight rating and Rs609 PT: Although the growth has been pushed
back by a year, due to execution issues, we see significant potential for share price
performance based on FY14E earnings. Our price target though is based on FY13E earnings.
Considering a relatively low risk profile and an exciting long-term growth story in JSPL, we
see the stock outperforming its peers. We initiate coverage with a 1-Overweight rating and
see value in significant weakness in the share price on near-term concerns.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JINDAL STEEL AND POWER (1-OVERWEIGHT; PT RS609; +15%): WILL RISE ABOVE
OUR TOP PICK
JSPL is our top pick in the Metals and Mining space. We believe the company is
extremely well-placed amongst its peers in both steel and power businesses. A high
level of backward integration, large captive coal reserves (c1.4bn tonnes),
differentiated product mix and unique technology adoption places the company at a
distinct advantage over its peers. Execution challenges for expansion projects have
persisted in the recent past, but we are not overtly concerned now as regulatory hurdles
for two of its biggest projects appear behind. Nevertheless, its growth story has been
pushed back by a year (to FY14). Our SOTP PT implies 15% upside on FY13E earnings,
but we believe the stock offers significant upside potential once the market starts
discounting FY14E earnings. Considering its low-risk profile and an exciting long-term
story, we expect the stock to outperform its peers.
Set to attain significant scale …: With capacities both in steel and power slated to go up
about 5x over FY16, the long-term story for JSPL remains intact. The steel business enjoys
the benefits of high integration, production flexibility, a differentiated product mix and,
more importantly, unique technology. Jindal Power (JPL, a 96.5%-owned subsidiary)
continues to benefit from the strategic location of its plants and captive coal mines.
Execution challenges are now well-recognised: Project execution will take centre stage for
JSPL, in our view, as c54% of its Mar’12E balance sheet would be locked into construction
projects. While execution delays have persisted in the recent past, we believe most
regulatory hurdles at two of its biggest projects (Angul steel plant and 2400MW power
project in JPL) are behind. While most issues are now well-recognised (listed in Figure 91),
we believe the consensus is yet to completely build the same in numbers. Our FY13E EPS is
10% below consensus estimates. Despite this, we expect JSPL to report the fastest EBITDA
CAGR of 24% over FY11-14E – the highest amongst our coverage universe.
See value in the overseas mineral assets: JSPL has significant overseas mining resources –
iron ore mines in Bolivia and coal mines in Africa, Indonesia and Australia. The
commencement of mining/receipt of requisite regulatory clearances would act as a catalyst
for value unlocking in these subsidiaries, we believe. We value the iron ore mining assets in
Bolivia and African coal block at Rs16/share and Rs5/share, respectively. We have not
assigned any value to the Indonesian and Mozambique coal block.
Initiate with 1-Overweight rating and Rs609 PT: Although the growth has been pushed
back by a year, due to execution issues, we see significant potential for share price
performance based on FY14E earnings. Our price target though is based on FY13E earnings.
Considering a relatively low risk profile and an exciting long-term growth story in JSPL, we
see the stock outperforming its peers. We initiate coverage with a 1-Overweight rating and
see value in significant weakness in the share price on near-term concerns.
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