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Jindal Steel and Power (JSPL) has commenced trial production of hot briquetted iron (HBI) at Shadeed Iron and Steel (Shadeed) four months ahead of schedule.
n Potential upside to our FY11 EBITDA
The 1.5 mtpa HBI plant was scheduled to commission by March 2011. However, JSPL has already fired the kilns and started trial production of HBI. We have not factored the same in our FY11 numbers, though for FY12, we have assumed 1 mt production and EBITDA of INR 6.3 bn (EBITDA/t of INR 6,298). Assuming commercial production within FY11, we estimate the company can potentially add ~INR 1 bn to our FY11 EBITDA estimates.
The company benefits from cheap gas supply at USD 1/ mmbtu at this plant.
n Will cater to the 12 mtpa deficit in MENA markets
As per JSPL, the supply shortfall in the Middle East and North African (MENA) steel market is an estimated 12 mtpa. The first phase of the expansion consists of a 1.5 mtpa DRI plant. The second phase will incorporate a 1 mtpa billet facility while the third phase includes 0.5 mtpa of seamless tubes and 0.5 mtpa of section/ bar mill facility. We assume JSPL would sell intermediate products in the interim till the downstream facilities get commissioned. The seamless tube facility would be targeted towards the oil and gas sector for the MENA markets and the bar mill would target the construction/ infrastructure space.
n Precursor to the 2 mtpa gas based DRI plant in Orissa
The under trial production of gas based HBI at Shadeed uses technology supplied by Kobe Steel of Japan and Midrex of USA. The upcoming gas based 2 mtpa DRI (expected commissioning in March 2012) facility in Orissa is expected to use the same technology and hence JSPL can draw experience from Shadeed operations in operating India’s first gas based DRI facility.
n Positive on the steel business
We are positive on the steel business of JSPL with its raw material integration (100% iron ore, 50% coal), volume growth from existing operations and the upcoming Angel steel plant of 1.6 mtpa by March 2012. We are relatively cautious on the power tariff outlook. Overall, this makes us neutral on the stock; we currently have a HOLD/SP recommendation on JSPL with a fair valuation of INR 752/share.
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