Jindal Steel & Power - Power to drive earnings; visit note; Buy ::Edelweiss

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Jindal Steel & Power (JSP IN, INR 534, Buy)

We recently met the management of Jindal Steel & Power (JSPL). The key takeaways are: a) delay in commissioning of 7x135 MW power units, awaiting commencement of captive coal mine in Angul by March 2012; b) Power tariff hiked by INR0.7/unit in Raigarh; hike expected at Angul in Mar’ 12; c) Steel volume guidance of 2.0-2.2 mt for FY12; 10% growth in FY13; d) Shadeed and South African coal business to continue contributing positively to PAT. We are marginally tweaking our earnings estimates for both FY12 & FY13 and maintain ‘BUY’ with a target price of INR661/share.     

INR0.7/unit uptick in tariffs likely

JSPL expects merchant power tariff to rise from INR3.6–3.75/unit to INR4.5/unit in FY13. In Chhattisgarh, regulated tariff rose in October 2011 by INR 0.7/unit. Orissa tariffs are up for revision in March 2012 and management expects a hike here as well.

1,350 MW power units likely to operate at 90% PLF in FY13E

The company is unlikely to commission more than 1 unit of the remaining 7x135 MW power plants awaiting commencement of captive coal mine in Angul. Management expects the mine to start operations by March 2012 post which all the 10 power units can operate at 90% PLF in FY13.

Steel sales volume at 2.0-2.2mt for FY12E; 10% growth in FY13E

JSPL has guided for 2.0-2.2mt steel sales volume in FY12 and 2.4mt in FY13.

Outlook and valuations: Upside from power; maintain ‘BUY’

While we have lowered our steel volumes for both FY12 & FY13 by ~7% each (to bring in-line with the management guidance), it is being off-set by higher pellet sales. We are revising our earnings estimates upwards by a marginal 3.8% for FY12 while have kept FY13 earnings nearly unchanged. With our price target remaining unchanged at INR 661/share, we maintain‘BUY/Sector Outperformer’ recommendation/rating on JSPL.