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Jindal Steel and Power (JNSP.BO)
Buy: Fundamentally Still Robust
Near-term execution delays are surmountable — JSPL’s stock has fallen ~11% over
the past week due to weak 1QFY12 results (lower than expected steel volumes) and
delays in commissioning/stabilization of power projects. We believe that the issues
facing the company are temporary – we assume a decline in FY12 steel volumes, but
a surge in FY13. JSPL has guided to 945MW being commissioned by March12.
Maintain Buy — Given (1) the upside to our target price of Rs650, which factors in
project delays; (2) access to large reserves of captive thermal coal and iron ore; (3)
diversified business model with 60% value from power and 40% from steel/iron ore –
which reduces risk; (4) the company is on track to commission ~945MW of power by
March12 and 2mtpa sponge iron by June12; (5) long execution and disciplined capital
allocation track record.
TP cut to Rs650 — Mainly driven by a (1) 25% discount to Tamnar 2 (2400MW) project
as execution of ph2 (1200MW) is dependent on receiving environmental clearance,
which is in turn dependent on coal linkage; (2) delays in power projects by 2-22
months; (3) Reduction in steel volumes; (4) rollover of EV/EBITDA and P/E multiples to
Sep12 from June12 and Power DCF value to Dec11 from Sep11.
FY12/FY13 EPS reduced by 13%/11% — Mainly on delays in commissioning of
945MW captive power. We also factor in lower PLFs at 60% for 1350MW (10x135MW)
captive capacity over FY12 and FY13 in line with observed PLFs in initial three units.
Overseas ventures provide optionality — Iron ore mining has started in Bolivia and
the company has placed orders for DRI plant. Its coal mines in Indonesia (250mt) and
Mozambique (700mt) should start mining by Mar12 which we do not value currently.
Risks and Catalysts — Lower steel demand/prices and lower merchant prices are
key downside risk. More clarity on Tamnar 2 (ph2) execution is key catalyst.
JSPL’s stock price has fallen over the past week due to disappointing 1QFY12
results mainly due to lower than expected steel volumes. Jindal Power’s 1QFY12
results were inline with estimates.
The company also has seen some delay in the commissioning of 945MW of
power capacity in the parent (delayed by 2-6 months) and Jindal Power’s
capacity (delayed by 8-22 months).
Tamnar 2 (ph2 – 1200MW) project’s construction work is yet to start as
Environmental Clearance (EC) has been made contingent on the company
getting coal linkage. The construction work on the project cannot start in the
absence of EC. The company is close to starting construction work on Tamnar 2
(ph1 – 1200MW) as EC has been awarded.
Despite execution related delays caused mainly by delays in EC and land
acquisition, we maintain Buy (1L) given JSPL’s strong position in steel
manufacturing, power generation and mining industries, strong execution and
disciplined long-term capital allocation. Moreover our target price now factors in
these delays adequately.
JSPL’s strategy of owning captive raw material (coal, iron ore) makes it one of
the lowest-cost producers of electricity and steel in the country – a major
advantage in any commodity business. JSPL has captive thermal coal required
for 4,680MW (out of 7,080MW) capacity (parent and JPL both). The company
has 50-60% of iron ore required for its steel operations, 100% thermal coal for its
sponge iron plant and captive power plants and 0.8mtpa of coke capacity.
Power/Steel constitute 60%/40% of our target price of Rs650. Diversified
business model and low production costs reduce its sensitivity to the steel cycle.
Largely captive coal reduces earnings risk of power business and JSPL will
benefit more if merchant prices rise due to higher price of imported coal in the
country.
Access to captive raw materials also ensures that earnings of the company are
less volatile and more predictable than lesser integrated steel and power
companies. The earnings growth depends largely on timely execution of projects
and prices of steel and power. The added volatility from sharp fluctuations in spot
prices of iron ore and thermal coal is largely not a factor affecting earnings,
though the company is exposed to coking coal prices.
JSPL’s steel business enjoys flexibility of production. JSPL can vary its steel
product mix based on market conditions and pricing trends. It has the flexibility of
selling surplus iron ore fines, lumps and pellets externally.
JSPL’s international forays are geared toward securing underdeveloped sources
of raw material rather than buying fully developed assets – a sensible approach
in our view. The company has secured iron ore mining rights in Bolivia
(potentially 25mtpa when fully ramped up), has a mining concession for a coal
block in Mozambique and is in the process of acquiring Rockland Richfield in
Australia which has coking coal deposits.
JSPL is also to starting mining in its Indonesia and Mozambique coal mines by
March 2012. Indonesia and Mozambique mines have resources estimated at
500mt and 700mt respectively. We currently do not value these mines due to lack
of details on cost structures, etc.
The company has achieved significant progress on execution of 1,350MW of
captive power capacity and 2mtpa sponge iron capacity. Expansion projects
remain more or less on track despite controversies surrounding environmental
clearance issues. JSPL has commissioned Units 1&2 (270MW) at Chhattisgarh
and unit 1 (135MW) at Angul (Orissa). The 2mtpa sponge iron plant in Orissa is
expected to be commissioned by June12 and the steel melting shop by Dec12.
Environmental clearance for phase 1 of 1,200MW of Tamnar 2 project has been
received and the company is close to restarting work on the ground.
JSPL is likely to sell ~500kt of iron ore from Bolivia in FY12. The company
dispatched its first shipment in July 2011.
Management’s track record of capital allocation has been excellent, which is
evident from the fact that the company has not had any major equity dilution over
the past 10 years. The company has grown PAT to Rs37.5bn in FY11 from
Rs460mn in FY1999 implying a CAGR of 44% over the past 12 years. JSPL has
also been able to achieve attractive RoEs of 30%-57% over FY04-FY11.
JSPL’s stock has underperformed the BSE Sensex by 9% over the past year
TP cut to Rs650 (Rs726 earlier)
We reduce JSPL’s target price to Rs650 from Rs726 earlier
We cut Jindal Power’s value from Rs331/share to Rs265/share. We now give a
25% discount to the 2400MW Tamnar 2 project as phase 2 of the project
(1200MW) can start work only after getting EC, which is contingent on the
company getting coal linkage. We believe JSPL has enough captive coal
reserves to meet requirement of Tamnar2 - ph2. However the company will have
to get government approval for the same. But now, as construction has become
dependent on receipt of coal linkage, we give a 25% discount to the value of the
2400MW project.
We cut JSPL’s captive projects values to Rs74 from Rs84 to factor in delays in
commissioning and lower PLFs in FY12 and FY13.
Roll forward DCF value of all power projects to December 2011 from September
2011.
Roll forward EV/EBITDA multiple of 7x for steel business to September12E from
June12E earlier and cut the value of the steel business to Rs234 (from Rs244
earlier) as we 1) reduce volumes based on 1QFY12 and trends in the domestic
steel industry and 2) raise coking coal prices.
Roll forward P/E multiple of 8x for JSPL Bolivia to September12E from June 12E
earlier.
Roll forward EV/EBITDA multiple of 6x for Shadeed (Oman) to September12E
from June 12E earlier.
Build in delays in commissioning of Tamnar 2, Dumka, Godda and captive power
projects.
We reduce PLF of 135MW units (JSPL capacity = 10x135MW) being
commissioned in FY11-FY13 to 60% in FY12 and FY13 from 90% earlier to factor
in lower PLFs due to stabilization period required, as observed in the case of 3
units which have been commissioned.
Project Status Update
Impact of Mining Bill on Profits
Though details are still not clear yet, JSPL expects a hit of 7-12% on its profits if
the 100% royalty sharing by iron ore mines and 26% profit sharing by coal mines
are implemented. Since coal mining is captive, these calculations assume the
transfer price of coal at Coal India’s notified prices.
Jindal Power (JPL)
JPL IPO – Recent press reports suggest that JPL’s IPO process has been
revived and the company expects to file the new DRHP soon. Timeline of the
IPO, according to press reports, is October-November 2011. However,
management has not commented on these press reports. We believe that even if
the IPO process is revived, an October-November 2011 timeline may be
aggressive as company is yet to file DRHP and it could take more time.
Tamnar 1 (1000MW) – This is currently operational and the company expects to
get realizations of Rs3.75-4.25/kwh in FY12. The company also plans to take
maintenance shutdowns of all four units (250MW) in 2QFY12 for 15-20 days.
Tamnar 2 (Phase 1) (1200MW) – Management has maintained CoD date of
March 2013. The company is yet to start work on ground after it obtained
clearance from the Ministry of Environment and Forest (MoEF) as some
approvals from state pollution control department are pending. The project has
coal linkage for 1200MW. JPL has placed orders for 2400MW BTG (Tamnar 1 &
2) with BHEL and is making prompt payments to all suppliers including BHEL to
continue work on equipment in their respective factories. However work on the
ground still needs to commence. We believe if the start of work is delayed further,
the CoD date of March 2013 may be delayed by few months.
Tamnar 2 (Phase 2) (1200MW) – The project does not have coal linkage.
According to environmental clearance (EC) by MoEF for Tamnar 1, Tamnar 2 will
get EC after it gets coal linkage. However, the EC process will be relatively quick
as the process of environmental impact analysis is complete for both Tamnar 1
and Tamnar 2. Though the company has not started work on the contingency
plan in case coal linkage for the project gets delayed further, there are few
options available – 1) The company may use coal from its Indonesia mines; 2)
Tamnar 1 mines have enough coal reserves which may be used for Tamnar 2.
However, the mining plan will need to be reworked and the company will have to
seek approval from the government for the same. Management has maintained
CoD of March 2014.
Dumka (1320MW) – The project is likely to achieve CoD by 2HCY15. Land
acquisition is under process and equipment order is yet to be placed. The project
has captive coal.
Godda (660MW) – The project is likely to achieve CoD by 2HCY15 (CIRA est.
Sep 2014). Land acquisition is under process and equipment order is yet to be
placed. The project has captive coal. On August 04, 2011, a high-level committee
of government of Jharkhand has approved 1,320 acre land for JSPL’s Godda
project.
Jindal Steel and Power – Parent (JSPL)
Rockland acquisition – JSPL has increased its stake to ~27.3% from ~14.5% in
the recent round of open offer for ~AU$10mn. The company has exploration and
prospecting licenses for ~480mt reserves of coking coal reserves in Australia.
Chhattisgarh captive power project (540MW) – 270MW capacity has been
commissioned in 2010. However the PLF has been low at 50%-60% due to
problems with refractory linings etc. The company has received EC for the
remaining 270MW and expects to commission it by December 2011. The
company has sufficient middlings for captive power capacity.
Angul captive power project (810MW) – JSPL has commissioned 135MW of
power. Initially the company bought coal through the e-auction route but now has
started receiving coal from tapering linkage. The remaining 675MW is likely to be
commissioned by March 2012. This will also enable the company to benefit from
section 80IA. Utkal B1 mines will start mining from January 2012 and the
company has acquired land and has received all the approvals.
Angul steel project – JSPL is set to commission a 2mtpa DRI plant by June
2012 along with the coal gasification plant and plate mill. The steel melting shop
is likely to be commissioned by Dec 2012. The project will receive iron ore from
third party mines which currently supplies to the company’s Chhattisgarh project.
The output of the mines can be increased to ~10mtpa.
Foreign Ventures
Bolivia – The company started shipping iron ore from Bolivia in July 2011 and
expects to sell ~0.5mt in FY12; 1mt in FY13. JSPL has also placed orders for a
2.5mtpa DRI plant which is likely to be commissioned by CY15. Currently, the
company is selling iron ore to China and the total FOB cost at the Argentina port
is US$60-70/t (US$15-20 mining/royalty + US$10-15 freight to river port +
US$35 barge trip to Argentina port) for 63% Fe grade.
Indonesian coal mines – Its coal mine in Indonesia (250mt reserves, 500mt
resources) is expected to start production by FY12 end. The production schedule
in FY13/FY14/FY15 is 1/3/5 mtpa. Estimated cost of production is US$25-30/t
and GCV is 4500kcal. However currently there is no clarity on Indonesian mining
taxes and royalties and actual cost to company will depend on same.
Mozambique coal mines - Coal resources are estimated at 700mt including
coking coal. The company signed a mining agreement in January 2011and the
mine is expected to start operations by March 2012. The company expects to
invest US$200m in 5 years.
Jindal Steel and Power
Company description
Jindal Steel and Power (JSPL) came into existence in 1998 after the demerger of
Jindal Strips Limited. Over the past ten years, JSPL has transformed itself from
being a producer of sponge iron to a diversified conglomerate having a presence in
steel manufacturing, power generation and mining a wide range of minerals, from
iron ore and coal to diamonds and limestone. The company also has presence in
the oil, gas and infrastructure sectors.
JSPL owns ~180m tonnes of domestic iron ore, ~2.56bn tonnes of domestic thermal
coal and ~20bn tonnes of iron ore in Bolivia. The company has ~2.4mtpa steel and
~1622MW power capacity currently operational which will increase to ~7000MW by
FY16.
JSPL is a part of O.P. Jindal Group and has ~15,000 employees.
Investment strategy
JSPL, with its strong execution, cash generation and balance sheet management,
has emerged as one of the most integrated steel and power companies in India.
Access to captive raw material supplies for steel and power, flexibility to vary steel
product mix,10 years of timely execution without dilution and low cost of power
generation give JSPL an edge over its peers in both power and steel.
We have Buy (1l) rating on JSPL given strong business fundamentals, attractive
valuations, healthy earnings growth and RoEs, stock underperformance and on
track execution
Valuation
We value JSPL's power business using a discounted cash flow approach as power
plants generate largely predictable cash flows for fixed time periods. While applying
DCF one can choose free cash flow to the firm (FCF) or free cash flow to equity
(FCFE). We prefer FCFE as individual projects are highly geared and gearing
changes as debt is rapidly paid off.
We value JSPL's steel business at 7x September12 EV/EBITDA - at a discount to
Tata Steel India's target EV/EBITDA multiple of 7.5x. We use a discount given (1)
Tata Steel India's scale of operations at 6.8mtpa vs 2.4mtpa for JSPL, (2) Tata Steel
India's 100% captive iron ore vs. 50-60% for JSPL and 3) Tata Steel's product mix
being largely high end relative to JSPL. Both companies have ~55-60% of captive
coal. Tata Steel has 55-60% coking coal. JSPL has 100% thermal coal, but no
coking coal.
If we assume JSPL executes all its power projects in line with our assumptions, we
arrive at a value of Rs650/share. This includes Rs234 for the steel business, Rs10
for Bolivia, Rs283 for Jindal Power, Rs74 for 1,350MW captive power plants and
Rs38 for excess power purchased from JPL at fixed prices. At our target price the
stock would trade at a P/E of 14x and EV/EBITDA of 10x FY12E
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Low Risk rating to JSPL.
Downside risks include: fuel supply risk from Coal India, coal mining risk, execution
risk, merchant tariff risks, financial closure risk, receivables risk, regulatory risk,
R&R, land acquisition and environmental clearance risk and lower-than-expected
operating parameters. Upside risks include: better-than-expected operating
parameters; faster-than-expected execution and additional project wins; higherthan-expected merchant tariffs; higher steel prices and rupee depreciation. These
upside and downside risks could impede the stock from achieving our target price
India Equity Research Reports, IPO and Stock News
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Jindal Steel and Power (JNSP.BO)
Buy: Fundamentally Still Robust
Near-term execution delays are surmountable — JSPL’s stock has fallen ~11% over
the past week due to weak 1QFY12 results (lower than expected steel volumes) and
delays in commissioning/stabilization of power projects. We believe that the issues
facing the company are temporary – we assume a decline in FY12 steel volumes, but
a surge in FY13. JSPL has guided to 945MW being commissioned by March12.
Maintain Buy — Given (1) the upside to our target price of Rs650, which factors in
project delays; (2) access to large reserves of captive thermal coal and iron ore; (3)
diversified business model with 60% value from power and 40% from steel/iron ore –
which reduces risk; (4) the company is on track to commission ~945MW of power by
March12 and 2mtpa sponge iron by June12; (5) long execution and disciplined capital
allocation track record.
TP cut to Rs650 — Mainly driven by a (1) 25% discount to Tamnar 2 (2400MW) project
as execution of ph2 (1200MW) is dependent on receiving environmental clearance,
which is in turn dependent on coal linkage; (2) delays in power projects by 2-22
months; (3) Reduction in steel volumes; (4) rollover of EV/EBITDA and P/E multiples to
Sep12 from June12 and Power DCF value to Dec11 from Sep11.
FY12/FY13 EPS reduced by 13%/11% — Mainly on delays in commissioning of
945MW captive power. We also factor in lower PLFs at 60% for 1350MW (10x135MW)
captive capacity over FY12 and FY13 in line with observed PLFs in initial three units.
Overseas ventures provide optionality — Iron ore mining has started in Bolivia and
the company has placed orders for DRI plant. Its coal mines in Indonesia (250mt) and
Mozambique (700mt) should start mining by Mar12 which we do not value currently.
Risks and Catalysts — Lower steel demand/prices and lower merchant prices are
key downside risk. More clarity on Tamnar 2 (ph2) execution is key catalyst.
JSPL’s stock price has fallen over the past week due to disappointing 1QFY12
results mainly due to lower than expected steel volumes. Jindal Power’s 1QFY12
results were inline with estimates.
The company also has seen some delay in the commissioning of 945MW of
power capacity in the parent (delayed by 2-6 months) and Jindal Power’s
capacity (delayed by 8-22 months).
Tamnar 2 (ph2 – 1200MW) project’s construction work is yet to start as
Environmental Clearance (EC) has been made contingent on the company
getting coal linkage. The construction work on the project cannot start in the
absence of EC. The company is close to starting construction work on Tamnar 2
(ph1 – 1200MW) as EC has been awarded.
Despite execution related delays caused mainly by delays in EC and land
acquisition, we maintain Buy (1L) given JSPL’s strong position in steel
manufacturing, power generation and mining industries, strong execution and
disciplined long-term capital allocation. Moreover our target price now factors in
these delays adequately.
JSPL’s strategy of owning captive raw material (coal, iron ore) makes it one of
the lowest-cost producers of electricity and steel in the country – a major
advantage in any commodity business. JSPL has captive thermal coal required
for 4,680MW (out of 7,080MW) capacity (parent and JPL both). The company
has 50-60% of iron ore required for its steel operations, 100% thermal coal for its
sponge iron plant and captive power plants and 0.8mtpa of coke capacity.
Power/Steel constitute 60%/40% of our target price of Rs650. Diversified
business model and low production costs reduce its sensitivity to the steel cycle.
Largely captive coal reduces earnings risk of power business and JSPL will
benefit more if merchant prices rise due to higher price of imported coal in the
country.
Access to captive raw materials also ensures that earnings of the company are
less volatile and more predictable than lesser integrated steel and power
companies. The earnings growth depends largely on timely execution of projects
and prices of steel and power. The added volatility from sharp fluctuations in spot
prices of iron ore and thermal coal is largely not a factor affecting earnings,
though the company is exposed to coking coal prices.
JSPL’s steel business enjoys flexibility of production. JSPL can vary its steel
product mix based on market conditions and pricing trends. It has the flexibility of
selling surplus iron ore fines, lumps and pellets externally.
JSPL’s international forays are geared toward securing underdeveloped sources
of raw material rather than buying fully developed assets – a sensible approach
in our view. The company has secured iron ore mining rights in Bolivia
(potentially 25mtpa when fully ramped up), has a mining concession for a coal
block in Mozambique and is in the process of acquiring Rockland Richfield in
Australia which has coking coal deposits.
JSPL is also to starting mining in its Indonesia and Mozambique coal mines by
March 2012. Indonesia and Mozambique mines have resources estimated at
500mt and 700mt respectively. We currently do not value these mines due to lack
of details on cost structures, etc.
The company has achieved significant progress on execution of 1,350MW of
captive power capacity and 2mtpa sponge iron capacity. Expansion projects
remain more or less on track despite controversies surrounding environmental
clearance issues. JSPL has commissioned Units 1&2 (270MW) at Chhattisgarh
and unit 1 (135MW) at Angul (Orissa). The 2mtpa sponge iron plant in Orissa is
expected to be commissioned by June12 and the steel melting shop by Dec12.
Environmental clearance for phase 1 of 1,200MW of Tamnar 2 project has been
received and the company is close to restarting work on the ground.
JSPL is likely to sell ~500kt of iron ore from Bolivia in FY12. The company
dispatched its first shipment in July 2011.
Management’s track record of capital allocation has been excellent, which is
evident from the fact that the company has not had any major equity dilution over
the past 10 years. The company has grown PAT to Rs37.5bn in FY11 from
Rs460mn in FY1999 implying a CAGR of 44% over the past 12 years. JSPL has
also been able to achieve attractive RoEs of 30%-57% over FY04-FY11.
JSPL’s stock has underperformed the BSE Sensex by 9% over the past year
TP cut to Rs650 (Rs726 earlier)
We reduce JSPL’s target price to Rs650 from Rs726 earlier
We cut Jindal Power’s value from Rs331/share to Rs265/share. We now give a
25% discount to the 2400MW Tamnar 2 project as phase 2 of the project
(1200MW) can start work only after getting EC, which is contingent on the
company getting coal linkage. We believe JSPL has enough captive coal
reserves to meet requirement of Tamnar2 - ph2. However the company will have
to get government approval for the same. But now, as construction has become
dependent on receipt of coal linkage, we give a 25% discount to the value of the
2400MW project.
We cut JSPL’s captive projects values to Rs74 from Rs84 to factor in delays in
commissioning and lower PLFs in FY12 and FY13.
Roll forward DCF value of all power projects to December 2011 from September
2011.
Roll forward EV/EBITDA multiple of 7x for steel business to September12E from
June12E earlier and cut the value of the steel business to Rs234 (from Rs244
earlier) as we 1) reduce volumes based on 1QFY12 and trends in the domestic
steel industry and 2) raise coking coal prices.
Roll forward P/E multiple of 8x for JSPL Bolivia to September12E from June 12E
earlier.
Roll forward EV/EBITDA multiple of 6x for Shadeed (Oman) to September12E
from June 12E earlier.
Build in delays in commissioning of Tamnar 2, Dumka, Godda and captive power
projects.
We reduce PLF of 135MW units (JSPL capacity = 10x135MW) being
commissioned in FY11-FY13 to 60% in FY12 and FY13 from 90% earlier to factor
in lower PLFs due to stabilization period required, as observed in the case of 3
units which have been commissioned.
Project Status Update
Impact of Mining Bill on Profits
Though details are still not clear yet, JSPL expects a hit of 7-12% on its profits if
the 100% royalty sharing by iron ore mines and 26% profit sharing by coal mines
are implemented. Since coal mining is captive, these calculations assume the
transfer price of coal at Coal India’s notified prices.
Jindal Power (JPL)
JPL IPO – Recent press reports suggest that JPL’s IPO process has been
revived and the company expects to file the new DRHP soon. Timeline of the
IPO, according to press reports, is October-November 2011. However,
management has not commented on these press reports. We believe that even if
the IPO process is revived, an October-November 2011 timeline may be
aggressive as company is yet to file DRHP and it could take more time.
Tamnar 1 (1000MW) – This is currently operational and the company expects to
get realizations of Rs3.75-4.25/kwh in FY12. The company also plans to take
maintenance shutdowns of all four units (250MW) in 2QFY12 for 15-20 days.
Tamnar 2 (Phase 1) (1200MW) – Management has maintained CoD date of
March 2013. The company is yet to start work on ground after it obtained
clearance from the Ministry of Environment and Forest (MoEF) as some
approvals from state pollution control department are pending. The project has
coal linkage for 1200MW. JPL has placed orders for 2400MW BTG (Tamnar 1 &
2) with BHEL and is making prompt payments to all suppliers including BHEL to
continue work on equipment in their respective factories. However work on the
ground still needs to commence. We believe if the start of work is delayed further,
the CoD date of March 2013 may be delayed by few months.
Tamnar 2 (Phase 2) (1200MW) – The project does not have coal linkage.
According to environmental clearance (EC) by MoEF for Tamnar 1, Tamnar 2 will
get EC after it gets coal linkage. However, the EC process will be relatively quick
as the process of environmental impact analysis is complete for both Tamnar 1
and Tamnar 2. Though the company has not started work on the contingency
plan in case coal linkage for the project gets delayed further, there are few
options available – 1) The company may use coal from its Indonesia mines; 2)
Tamnar 1 mines have enough coal reserves which may be used for Tamnar 2.
However, the mining plan will need to be reworked and the company will have to
seek approval from the government for the same. Management has maintained
CoD of March 2014.
Dumka (1320MW) – The project is likely to achieve CoD by 2HCY15. Land
acquisition is under process and equipment order is yet to be placed. The project
has captive coal.
Godda (660MW) – The project is likely to achieve CoD by 2HCY15 (CIRA est.
Sep 2014). Land acquisition is under process and equipment order is yet to be
placed. The project has captive coal. On August 04, 2011, a high-level committee
of government of Jharkhand has approved 1,320 acre land for JSPL’s Godda
project.
Jindal Steel and Power – Parent (JSPL)
Rockland acquisition – JSPL has increased its stake to ~27.3% from ~14.5% in
the recent round of open offer for ~AU$10mn. The company has exploration and
prospecting licenses for ~480mt reserves of coking coal reserves in Australia.
Chhattisgarh captive power project (540MW) – 270MW capacity has been
commissioned in 2010. However the PLF has been low at 50%-60% due to
problems with refractory linings etc. The company has received EC for the
remaining 270MW and expects to commission it by December 2011. The
company has sufficient middlings for captive power capacity.
Angul captive power project (810MW) – JSPL has commissioned 135MW of
power. Initially the company bought coal through the e-auction route but now has
started receiving coal from tapering linkage. The remaining 675MW is likely to be
commissioned by March 2012. This will also enable the company to benefit from
section 80IA. Utkal B1 mines will start mining from January 2012 and the
company has acquired land and has received all the approvals.
Angul steel project – JSPL is set to commission a 2mtpa DRI plant by June
2012 along with the coal gasification plant and plate mill. The steel melting shop
is likely to be commissioned by Dec 2012. The project will receive iron ore from
third party mines which currently supplies to the company’s Chhattisgarh project.
The output of the mines can be increased to ~10mtpa.
Foreign Ventures
Bolivia – The company started shipping iron ore from Bolivia in July 2011 and
expects to sell ~0.5mt in FY12; 1mt in FY13. JSPL has also placed orders for a
2.5mtpa DRI plant which is likely to be commissioned by CY15. Currently, the
company is selling iron ore to China and the total FOB cost at the Argentina port
is US$60-70/t (US$15-20 mining/royalty + US$10-15 freight to river port +
US$35 barge trip to Argentina port) for 63% Fe grade.
Indonesian coal mines – Its coal mine in Indonesia (250mt reserves, 500mt
resources) is expected to start production by FY12 end. The production schedule
in FY13/FY14/FY15 is 1/3/5 mtpa. Estimated cost of production is US$25-30/t
and GCV is 4500kcal. However currently there is no clarity on Indonesian mining
taxes and royalties and actual cost to company will depend on same.
Mozambique coal mines - Coal resources are estimated at 700mt including
coking coal. The company signed a mining agreement in January 2011and the
mine is expected to start operations by March 2012. The company expects to
invest US$200m in 5 years.
Jindal Steel and Power
Company description
Jindal Steel and Power (JSPL) came into existence in 1998 after the demerger of
Jindal Strips Limited. Over the past ten years, JSPL has transformed itself from
being a producer of sponge iron to a diversified conglomerate having a presence in
steel manufacturing, power generation and mining a wide range of minerals, from
iron ore and coal to diamonds and limestone. The company also has presence in
the oil, gas and infrastructure sectors.
JSPL owns ~180m tonnes of domestic iron ore, ~2.56bn tonnes of domestic thermal
coal and ~20bn tonnes of iron ore in Bolivia. The company has ~2.4mtpa steel and
~1622MW power capacity currently operational which will increase to ~7000MW by
FY16.
JSPL is a part of O.P. Jindal Group and has ~15,000 employees.
Investment strategy
JSPL, with its strong execution, cash generation and balance sheet management,
has emerged as one of the most integrated steel and power companies in India.
Access to captive raw material supplies for steel and power, flexibility to vary steel
product mix,10 years of timely execution without dilution and low cost of power
generation give JSPL an edge over its peers in both power and steel.
We have Buy (1l) rating on JSPL given strong business fundamentals, attractive
valuations, healthy earnings growth and RoEs, stock underperformance and on
track execution
Valuation
We value JSPL's power business using a discounted cash flow approach as power
plants generate largely predictable cash flows for fixed time periods. While applying
DCF one can choose free cash flow to the firm (FCF) or free cash flow to equity
(FCFE). We prefer FCFE as individual projects are highly geared and gearing
changes as debt is rapidly paid off.
We value JSPL's steel business at 7x September12 EV/EBITDA - at a discount to
Tata Steel India's target EV/EBITDA multiple of 7.5x. We use a discount given (1)
Tata Steel India's scale of operations at 6.8mtpa vs 2.4mtpa for JSPL, (2) Tata Steel
India's 100% captive iron ore vs. 50-60% for JSPL and 3) Tata Steel's product mix
being largely high end relative to JSPL. Both companies have ~55-60% of captive
coal. Tata Steel has 55-60% coking coal. JSPL has 100% thermal coal, but no
coking coal.
If we assume JSPL executes all its power projects in line with our assumptions, we
arrive at a value of Rs650/share. This includes Rs234 for the steel business, Rs10
for Bolivia, Rs283 for Jindal Power, Rs74 for 1,350MW captive power plants and
Rs38 for excess power purchased from JPL at fixed prices. At our target price the
stock would trade at a P/E of 14x and EV/EBITDA of 10x FY12E
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Low Risk rating to JSPL.
Downside risks include: fuel supply risk from Coal India, coal mining risk, execution
risk, merchant tariff risks, financial closure risk, receivables risk, regulatory risk,
R&R, land acquisition and environmental clearance risk and lower-than-expected
operating parameters. Upside risks include: better-than-expected operating
parameters; faster-than-expected execution and additional project wins; higherthan-expected merchant tariffs; higher steel prices and rupee depreciation. These
upside and downside risks could impede the stock from achieving our target price
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