Jindal Steel and Power Starting woes, inflection point near :: Macquarie Research,

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Jindal Steel and Power
Starting woes, inflection point near
Event
 JSPL results below estimate but largely timing issues: JSPL results fell short
of our expectation, largely due to timing issues and partly starting problems at its
135MW x 3 power plants which contributed to the shortfall. We have accounted
for the slow start here and reduced our FY12E by 9% and adjusted our TP to
Rs924 from Rs938. JSP is on the cusp of the next phase of growth and any dips
here should be utilised to enter our top pick and Marquee idea.
Impact
 Steel business – lower sales hurts: Slower demand in April forced JSP to
accumulate almost 150kt of inventory. Net sales Rs25bn driven by a 5% increase
in realisation and 13% in volume. EBIT stood at Rs7.7bn up 29%. Management
indicated that sales have picked up and they are confident in reaching our sales
volume of 2.5mnt (this quarter prod is at 0.6mnt and sales 0.45mnt).
 135MW x 3 power plants seeing starting issues: JSP has started 3 units of
135MW out of total 10 coming online this year. The first 2 units at Raigarh
have been having issues with stabilisation; the 3rd unit at Angul had selling
issues. It does appear that some of these issues have since been sorted out
and we should see the full benefits by Q3. We have cut our estimates to
account for this delay.
 JPL – business as usual: JPL reported average power realisation of
Rs3.92/unit and maintained its net profit at Rs2.37/unit. We have slightly
reduced volumes as the company plans to take a 20-day shutdown for
maintenance this quarter.
 Overseas business starts contributing: For the first time, we see profits
from overseas operations and this should be on an upward trajectory. As
compared to a Rs380mn loss in Q1FY11, this quarter JSP has posted a profit
of Rs100mn. Shadeed contributed Rs350mn of profits and with Bolivia and
South African coal mines starting, we expect this number to be higher in Q2.
Earnings and target price revision
 We have reduced FY12E by 9% driven by 1) lower production from power
plants; 2) slightly lower iron ore pellet sales and we have slightly reduced TP.
Price catalyst
 12-month price target: Rs924.00 based on a DCF methodology.
 Catalyst: Stabilisation of its power plants.
Action and recommendation
 Maintain Outperform: We believe that JSP is one of the best stocks to own
in the material space. Its domestic as well as overseas operations are finally
seeing sharp growth. We expect a step-up in earnings from Q3 to drive the
stock upwards. At an 11x PER on FY12E with 25% CAGR earnings growth,
we believe the stock looks extremely attractive.