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Jindal Steel & Power
On solid ground
We believe strong drivers are in place for JSP given its robust expansion plans in
both steel and power. Continued high raw material integration should help it
maintain margins at elevated levels. We forecast an earnings CAGR of 17% for
FY11-13 and initiate coverage at Buy with a target price of Rs820.
Oman Shadeed and Angul expansion set to drive steel volumes…
Jindal Steel & Power (JSP) currently operates a 3Mt steel plant in Orissa, which is backed by
captive iron ore and coal and enjoys among the highest margins in the industry globally. It
recently set up a 5Mt pellet plant at its existing facility in Barbil, Orissa, which is now
operating at full capacity. The company expects to be able to sell about 1.5Mt in the spot
market, with the remainder being used for captive consumption. It also commenced
production at the 1.5Mt Oman Shadeed facility in January 2011, three months ahead of
schedule. In addition, JSP is setting up a 2Mt DRI-EAF based integrated steel plant in Angul,
Orissa, which it expects to commission by March 2012.
… while power volumes should also continue to rise
JSP’s 1,000MW merchant power plant has now been running at full capacity for several
quarters. The company expects to start work on a new 2,400MW power plant in the next few
months and to commission its first unit by December 2012. Coal linkage has already been
acquired for the first 1,200MW and the rest is in the process of being tied up. It recently
commissioned two units of its 135MW captive power plant (CPP) at Raigarh and expects to
commission the remaining 270MW and 135MWx6 CPP units at Angul by March 2012.
With these strong drivers in place, we initiate coverage at Buy and a Rs820 TP
We expect JSP’s robust expansion plans in both steel and power to see it achieve top-line
growth of 21% CAGR over FY12-13F. Strong backward integration should keep EBITDA
margins at elevated levels: we forecast an EBITDA CAGR of 16% over FY12-13F. We value
JSP using the a sum-of-the-parts approach, valuing the steel business at 7.5x FY13F
EV/EBITDA and the power business using a free cash flow to equity (FCFE) approach to
arrive at a target price of Rs820. JSP is our top pick in the Indian steel space. Key downside
risks include: 1) delays in implementing expansion plans; 2) a failure to receive approvals or
environmental clearances for captive coal blocks on a timely basis – key to achieving a low cost
of production; and 3) implementation of the draft MMDR bill, which could affect profitability.
The basics
Catalysts for share price performance
1) We would expect timely commissioning of JSP’s 2Mt greenfield capacity at Angul by March
2012 to be a key trigger for the stock. 2) The proposed IPO of JSP’s wholly owned subsidiary
Jindal Power Limited (JPL), which the company expects to take place in 1QFY12, and financial
closure of the 660MW Godda and 1320MW Dumka power projects could be key catalysts, in our
view. 3) The company expects to start iron ore exports from Bolivia soon and a quick ramp-up
would likely be positive for the stock. 4) Environment and regulatory approval of iron ore and coal
blocks could be a key trigger for the stock, in our view.
Earnings momentum
We forecast consolidated earnings growing at a 17% CAGR over FY12-13. We expect this to be
driven by: 1) steel volume growth of 41%/6% in FY12F/13F (driven by Oman Shadeed); 2) highmargin
pellet volumes of 1.1Mt in FY12 and 1.3Mt in FY13 and Bolivian iron ore exports of 0.5Mt
in both years; 3) a surge in external power sales from CPP as we expect all units of 540MW
Raigarh CPP and 810MW Angul CPP to be commissioned by FY12; and 4) robust earnings from
Jindal Power’s 1,000MW plant at Rs18bn in FY12F and Rs17bn in FY13F.
Valuation and target price
We value JSP using a SOTP approach. We value JSP’s existing steel business (3Mt Raigarh +
1.5Mt Oman Shadeed) using an EV/EBITDA approach with a multiple of 7.5x (Rs383/share). We
value the 2Mt Angul, Orissa Greenfield plant at 2x book value (Rs60/share). We value the power
capacities using the FCFE approach, assuming a cost of equity of 13% (1,000MW Tamnar I at
Rs187/share; 2,400MW Tamnar II at Rs113/share) and 1,350MW CPP (540MW Chattisgarh +
810MW Angul) at Rs74/share. We arrive at a SOTP-based target price of Rs820/share.
How we differ from consensus
Our earnings estimates for FY12/13 are 1% higher/12% lower than Bloomberg consensus
estimates. We note that earnings forecasts can vary significantly due to differences in estimation
of timelines for completion of the projects. Given our expectation of possible delays for the 2Mt
Angul steel plant, we do not factor in its volumes in our FY13 forecasts.
Risks to central scenario
The major downside risks to our target price are: 1) delay in commissioning of the 2Mt Angul steel
plant; 2) delay in financial closure/commissioning of Jindal’s 1,350MW CPP, 2,400MW and
1,980MW power plants; 3) failure to receive environmental and other clearances on its captive
iron ore and coal blocks, leading to captive supply shortages, which could in turn significantly
weigh on its margins, in our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jindal Steel & Power
On solid ground
We believe strong drivers are in place for JSP given its robust expansion plans in
both steel and power. Continued high raw material integration should help it
maintain margins at elevated levels. We forecast an earnings CAGR of 17% for
FY11-13 and initiate coverage at Buy with a target price of Rs820.
Oman Shadeed and Angul expansion set to drive steel volumes…
Jindal Steel & Power (JSP) currently operates a 3Mt steel plant in Orissa, which is backed by
captive iron ore and coal and enjoys among the highest margins in the industry globally. It
recently set up a 5Mt pellet plant at its existing facility in Barbil, Orissa, which is now
operating at full capacity. The company expects to be able to sell about 1.5Mt in the spot
market, with the remainder being used for captive consumption. It also commenced
production at the 1.5Mt Oman Shadeed facility in January 2011, three months ahead of
schedule. In addition, JSP is setting up a 2Mt DRI-EAF based integrated steel plant in Angul,
Orissa, which it expects to commission by March 2012.
… while power volumes should also continue to rise
JSP’s 1,000MW merchant power plant has now been running at full capacity for several
quarters. The company expects to start work on a new 2,400MW power plant in the next few
months and to commission its first unit by December 2012. Coal linkage has already been
acquired for the first 1,200MW and the rest is in the process of being tied up. It recently
commissioned two units of its 135MW captive power plant (CPP) at Raigarh and expects to
commission the remaining 270MW and 135MWx6 CPP units at Angul by March 2012.
With these strong drivers in place, we initiate coverage at Buy and a Rs820 TP
We expect JSP’s robust expansion plans in both steel and power to see it achieve top-line
growth of 21% CAGR over FY12-13F. Strong backward integration should keep EBITDA
margins at elevated levels: we forecast an EBITDA CAGR of 16% over FY12-13F. We value
JSP using the a sum-of-the-parts approach, valuing the steel business at 7.5x FY13F
EV/EBITDA and the power business using a free cash flow to equity (FCFE) approach to
arrive at a target price of Rs820. JSP is our top pick in the Indian steel space. Key downside
risks include: 1) delays in implementing expansion plans; 2) a failure to receive approvals or
environmental clearances for captive coal blocks on a timely basis – key to achieving a low cost
of production; and 3) implementation of the draft MMDR bill, which could affect profitability.
The basics
Catalysts for share price performance
1) We would expect timely commissioning of JSP’s 2Mt greenfield capacity at Angul by March
2012 to be a key trigger for the stock. 2) The proposed IPO of JSP’s wholly owned subsidiary
Jindal Power Limited (JPL), which the company expects to take place in 1QFY12, and financial
closure of the 660MW Godda and 1320MW Dumka power projects could be key catalysts, in our
view. 3) The company expects to start iron ore exports from Bolivia soon and a quick ramp-up
would likely be positive for the stock. 4) Environment and regulatory approval of iron ore and coal
blocks could be a key trigger for the stock, in our view.
Earnings momentum
We forecast consolidated earnings growing at a 17% CAGR over FY12-13. We expect this to be
driven by: 1) steel volume growth of 41%/6% in FY12F/13F (driven by Oman Shadeed); 2) highmargin
pellet volumes of 1.1Mt in FY12 and 1.3Mt in FY13 and Bolivian iron ore exports of 0.5Mt
in both years; 3) a surge in external power sales from CPP as we expect all units of 540MW
Raigarh CPP and 810MW Angul CPP to be commissioned by FY12; and 4) robust earnings from
Jindal Power’s 1,000MW plant at Rs18bn in FY12F and Rs17bn in FY13F.
Valuation and target price
We value JSP using a SOTP approach. We value JSP’s existing steel business (3Mt Raigarh +
1.5Mt Oman Shadeed) using an EV/EBITDA approach with a multiple of 7.5x (Rs383/share). We
value the 2Mt Angul, Orissa Greenfield plant at 2x book value (Rs60/share). We value the power
capacities using the FCFE approach, assuming a cost of equity of 13% (1,000MW Tamnar I at
Rs187/share; 2,400MW Tamnar II at Rs113/share) and 1,350MW CPP (540MW Chattisgarh +
810MW Angul) at Rs74/share. We arrive at a SOTP-based target price of Rs820/share.
How we differ from consensus
Our earnings estimates for FY12/13 are 1% higher/12% lower than Bloomberg consensus
estimates. We note that earnings forecasts can vary significantly due to differences in estimation
of timelines for completion of the projects. Given our expectation of possible delays for the 2Mt
Angul steel plant, we do not factor in its volumes in our FY13 forecasts.
Risks to central scenario
The major downside risks to our target price are: 1) delay in commissioning of the 2Mt Angul steel
plant; 2) delay in financial closure/commissioning of Jindal’s 1,350MW CPP, 2,400MW and
1,980MW power plants; 3) failure to receive environmental and other clearances on its captive
iron ore and coal blocks, leading to captive supply shortages, which could in turn significantly
weigh on its margins, in our view.
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