Jindal Steel & Power - The unthinkable now obvious: 5x Debt/EBITDA by FY14—end ::Credit Suisse

● JSPL’s consolidated net debt increased from Rs224 bn at endFY13 to Rs250 bn in 1Q. This was despite only Rs12 bn of the
Rs90 bn planned capex for FY14 getting spent in 1Q. JSPL
estimates end-FY14 debt at Rs300 bn, a level we had anticipated
for end-FY15. By FY14 end, JSPL will thus be 5x Debt/EBITDA.
● CPP disappointments continue, with JSPL for the first time stating
that power sales from Angul (810MW) were unviable without
captive coal. With contingency plans on for the DRI unit (i.e. no
Utkal B1), utilisations are likely to stay low for a while. Raigarh
technical and evacuation challenges continue.
● Tamnar I realisations may remain suppressed for longer than
earlier estimated, and Tamnar II utilisations may remain low for
several years. The 400MW 15-year PPA with TN SEB (we believe
at Rs4.7/kwh) is encouraging, but utilisation is the problem.
● As we cut our estimates for CPP, steel business and Tamnar II, our
FY14/15 EPS falls by 20%/6%, and target price reduces to Rs218/sh
(Figure 1). Maintain NEUTRAL. The buyback (details to be clear post
lender approvals) is likely to provide some support to the stock.

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Balance sheet worsened much faster than expected
During the quarter, JSPL's consolidated net debt rose from Rs224 bn
at end-FY13 to Rs250 bn. This was despite only Rs12 bn of the Rs90
bn planned capex for FY14 getting spent in 1Q. Company estimates
end-FY14 debt at Rs300 bn, a level we had anticipated for end-FY15.
By FY14 end, JSPL will thus be 5x Debt/EBITDA.
As a minor comfort, the company has cut its ambition, and brought
down FY14+15 capex plans from Rs200 bn to Rs120 bn. Any lower
capex would be impractical, as slowing ongoing projects may not be
wise. Thus, debt levels are likely to keep rising till 1HFY15, and
remain an overhang on the stock.
CPP disappointments continue
We continue to be disappointed by the performance of Captive Power
Plants (CPP): recall that this 1350MW capacity is 10 X 135MW, with
six units (810MW) at Angul, and four units (540MW) at Raigarh. Over
the past year or so, as we have kept waiting for the promised
improvement in PLFs and profitability at these units, there have been
a series of disappointments.
Now, for the first time, the management categorically stated that without
captive coal, the Angul units are unlikely to profitably sell power. Given
that JSPL is now preparing for life without Utkal B1 and building coal
inventories, one can assume low utilisations for several years.
Further, in Raigarh, profitability is not as much an issue (low-cost
middlings are the fuel) as evacuation. Though we fear peak utilisation
at these units is likely to be 50% for the forecast period, and not 80%.
These cuts bring fair value for the CPPs down to zero.
Tamnar I pricing and Tamnar II utilisations still remain concerns
Tamnar I showed a strong recovery in 1Q14, reporting 100% PLF,
realisations though remained at Rs3.2/kwh. Even the 200MW
short/medium-term PPA with Tamil Nadu SEB seems to be much
lower priced (Rs3–4/kwh) than we earlier estimated. It remains to be
seen what pricing for this plant is likely to be going forward, given that
it was in the eye of the storm for selling power at high rates despite full
vertical integration on coal. There is no regulatory restriction yet, but
the company may be voluntarily curtailing profitability in the near-term.
Tamnar II commissioning is slightly later than earlier announced, but
nevertheless we remain concerned on utilisation, given lack of fuel
security, in particular for the third and fourth units. JSPL participated
on a 400MW long-term (15-year) PPA with Tamil Nadu: to start from
October 2013. Considering the transmission constraints, it may start
towards the end of the current financial year. No confirmation on tariffs
yet, but we believe these could be as high as Rs4.7/kwh.
Other takeaways from the call
● International operations: Shadeed was weaker (plant shut for 20
days), but expansions (new SMS) are on track to complete by
end-CY13. Mozambique (coal) and South Africa (coal) offset
some of the weakness.
● As debt levels keep rising, and in particular as depreciation and
interest increase post commissioning of various plants in the next
three quarters, leverage below the line will rise sharply.
We cut EPS by 20%/6%, and TP to Rs218/share. Maintain Neutral.