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Downgrading earnings
JSPL’s growth trajectory is getting impacted by continuing delays in its
expansion projects as well as ramp-up issues in its recently commissioned
power capacities. We cut FY12-13 earnings by 9-12% to factor in these delays
and lower merchant tariffs. Valuations at 9x FY13 P/E are reasonable post
recent correction and we believe that JSPL offers a lower risk profile than both
its power and steel peers with limited downside from current levels. We
maintain O-PF with a revised target price of Rs565.
Project delays have impacted JSPL’s growth story
JSPL’s earnings have grown at a 52% cagr over the last five years. This was
driven by the near-quintupling of steel sales and addition of the first merchant
power plant in the country. Even now, the company has a good pipeline of
projects in both steel and power to continue on its growth trajectory. However, the
continuing delays in the projects as well as ramp-up problems in recently
commissioned power capacities have impacted JSPL’s growth profile. The upside
from the projects has now been pushed further away into the future.
CPPs not stabilized yet; Angul expansion pushed to FY14 now
Three captive power units of 135MW of the total 1,350MW (540MW at Raigarh;
840MW at Angul) planned have been commissioned so far. These three units are
yet to stabilize and are making losses currently. The balance seven units are also
delayed significantly from their earlier stated commissioning schedules. Angul
project (2mt DRI, 1.6mt Steel, 1.5mt plate mill) will most likely see the start of
commercial production only in FY14 – 12m delay from earlier schedule.
Earnings cut by 9-12% for FY12-13; target price cut to Rs565/sh.
We are cutting FY12-13 earnings by 9-12% to factor in 1) Lower utilization rate in
captive power plants 2) Lower merchant realizations 3) Delays in commissioning
of the balance captive units and Angul steel project. The earnings cut, higher
discounting rate in power and lower target multiples in steel result in a lower
SOTP based target price of Rs565/sh (Rs700/sh previously).
Relatively better placed than peers in steel and power; maintain O-PF
JSPL enjoys a higher degree of control over resources than peers in both
businesses, which is reflected in its higher return ratios. Low cost advantages and
higher fuel security makes us prefer JSPL over its power peers. Relatively lesser
risk to earnings from lower steel prices in a slowing world (given that 41-47% of
earnings come from power business) makes us prefer JSPL over its steel peers.
We also see limited downside to current stock price even in a distress case
scenario. This makes us retain O-PF rating despite relatively modest upside at
10%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Downgrading earnings
JSPL’s growth trajectory is getting impacted by continuing delays in its
expansion projects as well as ramp-up issues in its recently commissioned
power capacities. We cut FY12-13 earnings by 9-12% to factor in these delays
and lower merchant tariffs. Valuations at 9x FY13 P/E are reasonable post
recent correction and we believe that JSPL offers a lower risk profile than both
its power and steel peers with limited downside from current levels. We
maintain O-PF with a revised target price of Rs565.
Project delays have impacted JSPL’s growth story
JSPL’s earnings have grown at a 52% cagr over the last five years. This was
driven by the near-quintupling of steel sales and addition of the first merchant
power plant in the country. Even now, the company has a good pipeline of
projects in both steel and power to continue on its growth trajectory. However, the
continuing delays in the projects as well as ramp-up problems in recently
commissioned power capacities have impacted JSPL’s growth profile. The upside
from the projects has now been pushed further away into the future.
CPPs not stabilized yet; Angul expansion pushed to FY14 now
Three captive power units of 135MW of the total 1,350MW (540MW at Raigarh;
840MW at Angul) planned have been commissioned so far. These three units are
yet to stabilize and are making losses currently. The balance seven units are also
delayed significantly from their earlier stated commissioning schedules. Angul
project (2mt DRI, 1.6mt Steel, 1.5mt plate mill) will most likely see the start of
commercial production only in FY14 – 12m delay from earlier schedule.
Earnings cut by 9-12% for FY12-13; target price cut to Rs565/sh.
We are cutting FY12-13 earnings by 9-12% to factor in 1) Lower utilization rate in
captive power plants 2) Lower merchant realizations 3) Delays in commissioning
of the balance captive units and Angul steel project. The earnings cut, higher
discounting rate in power and lower target multiples in steel result in a lower
SOTP based target price of Rs565/sh (Rs700/sh previously).
Relatively better placed than peers in steel and power; maintain O-PF
JSPL enjoys a higher degree of control over resources than peers in both
businesses, which is reflected in its higher return ratios. Low cost advantages and
higher fuel security makes us prefer JSPL over its power peers. Relatively lesser
risk to earnings from lower steel prices in a slowing world (given that 41-47% of
earnings come from power business) makes us prefer JSPL over its steel peers.
We also see limited downside to current stock price even in a distress case
scenario. This makes us retain O-PF rating despite relatively modest upside at
10%.
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