Jindal Steel and Power - Lowering estimates, maintain REDUCE:: Kotak Sec

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Jindal Steel and Power (JSP)
Metals
Lowering estimates, maintain REDUCE on expensive valuations. We lower JSPL’s
consolidated estimates for FY2011E while marginally increase it for FY2012E. We lower
estimates for Jindal Power (JPL) on the back of continued pressure on merchant tariffs.
We incorporate production of Shadeed Iron and Steel acquisition, resulting in upward
revision in our earnings estimates for FY2012E and FY2013E for the steel business. We
like JSPL’s strong execution, ability to spot right opportunities and strong resource base.
However, expensive valuations drive our REDUCE rating. TP of Rs625 is unchanged.


Expensive valuations drive our REDUCE rating
We retain our TP of Rs625 on JSPL based on end-FY2012E financials. We value the steel business
at Rs264, based on 6.5X FY2012E EBITDA. We do not assign any value to new steel projects
except Shadeed Iron, instead we (1) assume continuity of pellet sales beyond what will be captive
requirement based on existing capacity and (2) value 810 MW captive power plant in Orissa and
540 MW power plant in Chhattisgarh entirely on merchant power sales. We value power business
at Rs360/share (Rs335 bn) based on end-FY2012E financials comprising (1) Rs180/share (Rs167 bn)
for the 1,000 MW merchant power plant (Tamnar I), (2) Rs89/share (Rs83 bn) as value
enhancement from the proposed 2,400 MW merchant power plant in Raigarh and (3) Rs90/share
(Rs84 bn) for the 1,350 MW captive power plant being built in Angul and Raigarh. Retain REDUCE.


Lower earnings estimates for FY2011E, upward revision for FY2012E and FY2013E
We lower consolidated EPS by 10.3% for FY2011E to Rs45.3 while marginally increasing estimates
for FY2012E to Rs56.2. Earnings growth in FY2012E will likely be driven by (1) commissioning of a
1,350 MW (10X135 MW) power plant; (2) increase pellet sales and (3) commissioning of the 1.5
mtpa capacity Shadeed Iron gas-based DRI plant. We have raised our steel business estimates but
lower EPS estimates for Jindal Power to Rs23/share (previously Rs25/share) in FY2011E and
Rs28/share in FY2012E (previously Rs31/share). Change in JPL’s estimates is on account of
reduction in near-term realization assumption to Rs4.8/KwH from Rs5.0/KwH. Our power business
valuation implies a P/E of 12.1X on FY2012E EPS.


TOR for Tamnar II restored, few more steps to go for environmental clearance
We note that the MOEF, in June 2010, had cancelled the Terms of Reference (TOR) granted earlier
with respect to environmental clearance of the 2,400 MW power plant at Tamnar II on grounds of
reduction in the total project land requirement. Upon review by the EAC, TOR has been restored
and environmental clearance is awaited. We highlight that lack of further traction on Tamnar II is a
key risk to our valuation; it currently contributes Rs90/share to our SOTP. Progress on other
development projects has been lukewarm so far and we accordingly do not ascribe value to them.