Citi
We reiterate our ?buy? rating on Jindal Steel & Power (JSPL) given its strong business fundamentals, attractive valuations, RoEs, and execution track record. The company has successfully resolved numerous controversies that have impacted the stock price over the past year and it has demonstrated a good execution track record. However, there are marginal adjustments to our estimates and target price. We cut FY13-FY15 EPS by 4-6% to reflect lower steel realisations and slightly lower PLFs at captive power units (70% versus 75% earlier). Our target price reduces marginally to R567 (R574 earlier).
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 6.5x FY15e EV/ebitda and discount steel equity value to FY14 using 13% COE to fully factor in impact of Angul ebitda and net debt in valuations.
If we assume JSPL executes all its power projects in line with our assumptions, we arrive at a value of R567 per share. This includes R187 for the steel business, R289 for Jindal Power, R24 for 1,350 MW captive power plants and R45 for excess power purchased from JPL at fixed prices. At our target price the stock would trade at a P/E of 13x, and EV/ebitda of 9.5x FY14e. 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 more or less timely execution without dilution and low cost of power generation give JSPL an edge over its peers in both power and steel.
JSPL?s Q3FY13 net profit at R940 crore (down 4% y-o-y, and up13% q-o-q) was marginally ahead of our estimates at R920 crore. Third quarter was impacted by lower PLF (81%) at the Tamnar1 (1,000 MW) project due to transmission constraints. Q3FY13 reported PAT at R870 crore was lower due to ~R9 crore mark-to-market foreign exchange losses.
However, the company was ahead in terms of operation performance, with strong steel volumes. Q3FY13 ebit at R141 crore was flat y-o-y, but up 13% q-o-q as well as 8% ahead of our estimates of R130.4 crore. Steel sales volume grew 19% (y-o-y), 10% q-o-q, and was 8% ahead of estimates. Pellet sales volume rose 34% y-o-y and 43% q-o-q. Blended steel realisations fell 6% q-o-q against Citi?s estimates of -3% sequentially.
Jindal Power?s Q3FY13 PAT R260 crore was in line with our estimates of R250 crore. PLF at 81% was low due to transmission constraints. The transmission constraint issue has been resolved and PLF has reverted back to ~99-100% range.
Signing Utkal-B1 mining lease is the key. Angul project is close to completion, while Orissa has restarted signing mining leases after a gap of 1.5 years. Given clear legal status of Utkal-B1 mines, chances of signing of mining lease are high. However, inordinate delays in signing of the mining lease remain an overhang on stock price for now.
