Jindal Steel & Power - Growth ahead; visit note; Buy :: Edelweiss PDF link

Jindal Steel & Power (JSP IN, INR 437, Buy)

Jindal Steel & Power (JSPL) expects the Orissa government to revise favorably the free power supply clause from captive coal fuelled CPP’s from 33% to 13%. This should create ground for start of UtkalB1 coal mine operations by end FY13. We estimate the mine’s DCF valuation at INR51/share. Phase-II of Angul steel plant (5.5mtpa capacity) is ready for launch and part of the iron ore requirement is secured. While benefits of this expansion will be back-ended, JSPL’s consolidated D:E of 1.0 will comfortably absorb the increased debt in the interim. We retain estimates and maintain ‘BUY’with a target price of INR648.

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Resolution of UtkalB1 coal mine issues expected shortly

JSPL expects a new policy from the Orissa government shortly, permitting 13% free power from CPPs with captive coal mines (instead of 33% currently proposed). Post this, the company expects to commence operations at its UtkalB1 coal mine (production capacity: 6mtpa, reserves: 228mt) to be used in the 2mtpa DRI plant and 810MW power plant. All approvals are in place. While we estimate the mine’s DCF valuation at INR 51/share, we are not assuming the benefit in our target price.

Angul Phase-II expansion of 5.5mtpa steel capacity proposed

Phase-I project of 1.6mtpa is on track for completion by end FY13. JSPL is proposing launch of Phase-II of 5.5mtpa steel capacity and pellet plant of 6mtpa (total capex: INR160bn). Iron ore sourcing will be through: (i) additional quasi-captive mining of 7mtpa for which approvals are in place; and (i) tie-ups with private miners.

Outlook and valuations: Key triggers ahead; maintain ‘BUY’

Successful commencement of UtkalB1 coal mine will enable viability of the Angul project. Though Phase-II expansion at Angul will increase debt, but consolidated D:E will remain below 1.0. We remain positive on JSPL and retain our forward estimates. Maintain‘BUY/SO’ with TP of INR648/share with upside risk from benefits of the UtkalB1 coal block. The stock is trading at 6.1x FY14E EV/EBITDA.

Jindal Steel & Power - Growth ahead; visit note; Buy

Regards,