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Jindal Steel and Power (JSP)
Metals & Mining
Potential pitfalls remain. We push out benefits of start of the captive coal block in
Orissa and fine-tune estimates for rest of businesses resulting in 5.6%/2.6% cut in
FY2012/13E EBITDA estimates. We continue to maintain our cautious stance on JSPL, as
the CMP does not factor potential execution pitfalls in both the steel and power
businesses. Maintain REDUCE rating with a revised target price of Rs530.
Cut EBITDA estimates on change to CPP realizations and costs
We cut FY2012/13E EBITDA by 5.6%/2.6% to Rs69.7 bn/Rs77 bn. This reduction is on the back of
24%/7% cut in FY2012/13E EBITDA of 10X135 captive power plants in Angul and Raigarh. Key
changes to our estimates for CPP are (1) push-out of benefits of Utkal B1 captive coal block to
2HFY13E. In the interim, we assume that the company will run Angul CPP with coal purchased
from e-auction, and (2) realignment of realization as per the rates of CSEB and Orissa grid versus
our earlier assumption of entire merchant sales.
Our estimates may have potential downside risks from any delay in execution of mining lease for
Utkal B1 coal block. Our consolidated EBITDA can decline by 3% in case the company is unable to
start the coal block in FY2013E. We have also updated FY2012E estimates for the steel business
for earnings miss in 3QFY12; we retain steel segment estimates for FY2013/14E.
Look for a better price point that fully factors in execution risks
While we see lesser earnings risks to the extant integrated operations of JSPL with resource
ownership in both the steel and power segments, the CMP factors in a meaningful contribution
from future growth projects—susceptible to execution pitfalls. Our target price factors Rs105/share
for future projects in the power business (CPP and Tamnar II) and earnings contribution from the
gas-based DRI plant at Angul. We would wait for a more opportune entry point that does not
ascribe significant value to future projects and hence offers a favorable risk-reward balance. We
note that at 11.2X P/E and 8.6X EV/EBITDA on FY2013E, JSPL remains among the most expensive
names under our metal coverage universe.
Maintain REDUCE with a revised TP of Rs530
We maintain our REDUCE rating with a revised target price of Rs530/share. We revise our fair
value on steel business to Rs230, based on 6X FY2013E EBITDA. We value JSPL’s power business
at Rs301/share (Rs279 bn) based on March 2013E SOTP. Our valuation comprises (1) Rs196/share
(Rs182 bn) for the 1,000 MW merchant power plant (Tamnar I), (2) Rs38/share (Rs35 bn) as value
from the proposed 1,200 MW merchant power plant at Raigarh, and (3) Rs67/share (Rs62 bn) for
the 1,350 MW captive power plant being built in Angul and Raigarh.
Operations stabilize in the first three captive units, commissioning of balance
units gathers momentum
JSPL commissioned three units (two in Raigarh and one in Angul) of its 1,350 MW (10 X 135
MW) captive power plant in January, thus taking the total number of commissioned units to
six (810 MW), and is confident of commissioning the balance units by the end of the current
financial year. The three units commissioned in the earlier quarters have now stabilized post
some teething troubles witnessed, especially at Raigarh units.
Captive power plant in Raigarh achieved net profit break-even at a PLF of 57% in 3Q; PLF
has improved since to 90. JSPL is using one unit for captive consumption, another one for
selling power to CSEB at Rs3.2/ kwh while the balance two units will sell power on a
merchant basis. Further, JSPL achieved tariff increase for power sale, from Angul CPP, to the
Orissa grid to Rs3/kwh from Rs2.7/kwh earlier. The management has indicated that currently
the Orissa Government does not allow open access though it expects this to change owing
to mounting pressure of making open access compulsory.
Our estimates for CPP factor commissioning of one more unit at Angul by March 2012E
while balance three units are assumed to commence commercial operation in FY2013E. We
factor in a fuel cost of Rs1.7/kwh in FY2012E and Rs0.9/kwh in FY2013E at Angul, assuming
that the benefits of captive coal will flow in from 2HFY13E.
Key takeaways from 3QFY12 earnings call
The company achieved a record steel production run-rate of around 3,084K tonnes in
3QFY12, assisted by purchasing around 150K tonnes of HBI from Shadeed iron (given its
current limited HBI and hot metal capacity). The company will be tactical and will choose
the more profitable route of either margin benefit of selling finished steel products in
India produced by importing HBI from Shadeed or that of direct sale of HBI by Shadeed to
third parties. The company reiterated its efforts to achieve a production target of around
3 mn tonnes in FY2013E.
The company highlighted that margins in standalone business were down for the current
quarter due to (1) purchase of150K tonnes of HBI from Shadeed iron (50K tonnes in
2QFY12) at high rate of US$475/tonne, (2) increased consumption of coking coal during
the quarter including the impact of Rupee depreciation on sourcing the same, and (3)
MTM losses to the tune of Rs0.5 bn on account of Rupee depreciation.
The company is currently holding steel inventory to the tune of around Rs15 bn as against
Rs10 bn in 2QFY12 and Rs8.9 bn in 3QFY11. Inventory levels increased primarily due to
some sluggishness in demand for structurals, plates and bars and other logistical issues.
However, the company is confident of selling the excess inventory taking into account a
seasonal pick-up in demand in the last quarter of the fiscal and expects inventory to
return to normal levels in a couple of quarters.
Variable cost of CPP includes Rs0.15/ kwh of charges paid to Jindal Power for managing
the power plant.
Utkal B1 block production, once started, may not be enough to meet requirements of
Angul power plants and steel units. Coal production from Utkal block will likely be 6
mtpa—JSP may require 2.5 mtpa for DRI plant. CPPs will require 6.5 mtpa of coal. This
leaves 3 mtpa of coal which has to be either secured from linkages or e-auctions.
The company continues to search for coal assets overseas to secure coal for its existing
and planned steel and power projects. It now factors in some delays its coal mine in
Indonesia and expects commencing commercial operations of the same by 2QFY13E from
end-FY2012E estimated earlier. Production at its South African coal mine is underway and
it expects to produce around 1 mn tonnes of coal in FY2013E.
The company has outlined a capex of around Rs100 bn over the next couple of years. Of
this, Rs60 bn will be spent on standalone business capex and Rs40 bn on Jindal power
business capex.
The management expects merchant power realizations to move in a narrow band of Rs4-
Rs4.25 over the next couple of years.
The company sold around 150 kt of iron ore fines during 3QFY12.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jindal Steel and Power (JSP)
Metals & Mining
Potential pitfalls remain. We push out benefits of start of the captive coal block in
Orissa and fine-tune estimates for rest of businesses resulting in 5.6%/2.6% cut in
FY2012/13E EBITDA estimates. We continue to maintain our cautious stance on JSPL, as
the CMP does not factor potential execution pitfalls in both the steel and power
businesses. Maintain REDUCE rating with a revised target price of Rs530.
Cut EBITDA estimates on change to CPP realizations and costs
We cut FY2012/13E EBITDA by 5.6%/2.6% to Rs69.7 bn/Rs77 bn. This reduction is on the back of
24%/7% cut in FY2012/13E EBITDA of 10X135 captive power plants in Angul and Raigarh. Key
changes to our estimates for CPP are (1) push-out of benefits of Utkal B1 captive coal block to
2HFY13E. In the interim, we assume that the company will run Angul CPP with coal purchased
from e-auction, and (2) realignment of realization as per the rates of CSEB and Orissa grid versus
our earlier assumption of entire merchant sales.
Our estimates may have potential downside risks from any delay in execution of mining lease for
Utkal B1 coal block. Our consolidated EBITDA can decline by 3% in case the company is unable to
start the coal block in FY2013E. We have also updated FY2012E estimates for the steel business
for earnings miss in 3QFY12; we retain steel segment estimates for FY2013/14E.
Look for a better price point that fully factors in execution risks
While we see lesser earnings risks to the extant integrated operations of JSPL with resource
ownership in both the steel and power segments, the CMP factors in a meaningful contribution
from future growth projects—susceptible to execution pitfalls. Our target price factors Rs105/share
for future projects in the power business (CPP and Tamnar II) and earnings contribution from the
gas-based DRI plant at Angul. We would wait for a more opportune entry point that does not
ascribe significant value to future projects and hence offers a favorable risk-reward balance. We
note that at 11.2X P/E and 8.6X EV/EBITDA on FY2013E, JSPL remains among the most expensive
names under our metal coverage universe.
Maintain REDUCE with a revised TP of Rs530
We maintain our REDUCE rating with a revised target price of Rs530/share. We revise our fair
value on steel business to Rs230, based on 6X FY2013E EBITDA. We value JSPL’s power business
at Rs301/share (Rs279 bn) based on March 2013E SOTP. Our valuation comprises (1) Rs196/share
(Rs182 bn) for the 1,000 MW merchant power plant (Tamnar I), (2) Rs38/share (Rs35 bn) as value
from the proposed 1,200 MW merchant power plant at Raigarh, and (3) Rs67/share (Rs62 bn) for
the 1,350 MW captive power plant being built in Angul and Raigarh.
Operations stabilize in the first three captive units, commissioning of balance
units gathers momentum
JSPL commissioned three units (two in Raigarh and one in Angul) of its 1,350 MW (10 X 135
MW) captive power plant in January, thus taking the total number of commissioned units to
six (810 MW), and is confident of commissioning the balance units by the end of the current
financial year. The three units commissioned in the earlier quarters have now stabilized post
some teething troubles witnessed, especially at Raigarh units.
Captive power plant in Raigarh achieved net profit break-even at a PLF of 57% in 3Q; PLF
has improved since to 90. JSPL is using one unit for captive consumption, another one for
selling power to CSEB at Rs3.2/ kwh while the balance two units will sell power on a
merchant basis. Further, JSPL achieved tariff increase for power sale, from Angul CPP, to the
Orissa grid to Rs3/kwh from Rs2.7/kwh earlier. The management has indicated that currently
the Orissa Government does not allow open access though it expects this to change owing
to mounting pressure of making open access compulsory.
Our estimates for CPP factor commissioning of one more unit at Angul by March 2012E
while balance three units are assumed to commence commercial operation in FY2013E. We
factor in a fuel cost of Rs1.7/kwh in FY2012E and Rs0.9/kwh in FY2013E at Angul, assuming
that the benefits of captive coal will flow in from 2HFY13E.
Key takeaways from 3QFY12 earnings call
The company achieved a record steel production run-rate of around 3,084K tonnes in
3QFY12, assisted by purchasing around 150K tonnes of HBI from Shadeed iron (given its
current limited HBI and hot metal capacity). The company will be tactical and will choose
the more profitable route of either margin benefit of selling finished steel products in
India produced by importing HBI from Shadeed or that of direct sale of HBI by Shadeed to
third parties. The company reiterated its efforts to achieve a production target of around
3 mn tonnes in FY2013E.
The company highlighted that margins in standalone business were down for the current
quarter due to (1) purchase of150K tonnes of HBI from Shadeed iron (50K tonnes in
2QFY12) at high rate of US$475/tonne, (2) increased consumption of coking coal during
the quarter including the impact of Rupee depreciation on sourcing the same, and (3)
MTM losses to the tune of Rs0.5 bn on account of Rupee depreciation.
The company is currently holding steel inventory to the tune of around Rs15 bn as against
Rs10 bn in 2QFY12 and Rs8.9 bn in 3QFY11. Inventory levels increased primarily due to
some sluggishness in demand for structurals, plates and bars and other logistical issues.
However, the company is confident of selling the excess inventory taking into account a
seasonal pick-up in demand in the last quarter of the fiscal and expects inventory to
return to normal levels in a couple of quarters.
Variable cost of CPP includes Rs0.15/ kwh of charges paid to Jindal Power for managing
the power plant.
Utkal B1 block production, once started, may not be enough to meet requirements of
Angul power plants and steel units. Coal production from Utkal block will likely be 6
mtpa—JSP may require 2.5 mtpa for DRI plant. CPPs will require 6.5 mtpa of coal. This
leaves 3 mtpa of coal which has to be either secured from linkages or e-auctions.
The company continues to search for coal assets overseas to secure coal for its existing
and planned steel and power projects. It now factors in some delays its coal mine in
Indonesia and expects commencing commercial operations of the same by 2QFY13E from
end-FY2012E estimated earlier. Production at its South African coal mine is underway and
it expects to produce around 1 mn tonnes of coal in FY2013E.
The company has outlined a capex of around Rs100 bn over the next couple of years. Of
this, Rs60 bn will be spent on standalone business capex and Rs40 bn on Jindal power
business capex.
The management expects merchant power realizations to move in a narrow band of Rs4-
Rs4.25 over the next couple of years.
The company sold around 150 kt of iron ore fines during 3QFY12.
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