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You are here : IndiaNotes >> Research & Analysis >> Companies >> Jindal Steel & Power Ltd. >> Research

Jindal Steel & Power: Buy for target implying upside potential of ~204.5% in next 21 months

Ventura Securities | 02 Aug, 2017  | Follow Author | Add to my Favourites 
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We believe that the steel industry is headed for a cyclical upturn given that China has undertaken initiatives to cut excess capacities citing environmental issues. Following this we have seen a rebound in global steel prices. In India too the government measures to check dumping have resulted in prices firming up. With prices set to rally there is always the threat of imports increasing, especially flat products. However given the fact that JSPL is primarily into long products it should remain unaffected.

Post capex completion at Angul, we expect JSPL to near double its revenues by FY20. This coupled with the fact that coal linkages with Coal India have been firmed up for five years and the domestic iron ore prices are quoting at lows, the steel business is expected to do well. The power business is also expected to perform well given that FSA & PPAs are in place. Further with the sale of its power asset Tamnar I (1,000 MW) already inked the company should be able to leverage its gearing to a certain extent.

We expect revenues to grow at a CAGR of 22.7% to Rs. 39,184 crores while EBITDA is expected to grow at a faster clip of 27% CAGR to Rs. 9,615 crores by FY20. Net earnings are expected to turn the corner in FY18 and should scale to Rs.1,954 crores by FY20. We initiate with a BUY for a price target of Rs. 472 (target 7.0X FY20 EV/EBITDA) representing an upside of 204.5% from the CMP of Rs.155 over the next 21 months.

We are optimistic given that :

  • Completion of capex at Angul should enhance crude steel-making capacity to 8.9 million tonnes from 6 million tonnes in FY17. Steel volumes are expected to grow at a CAGR of 21% to 8.4 million tonnes in FY20. On the back of improving realisations, revenues from the steel business are expected to grow at a CAGR of 25% from Rs. 16,280 crores in FY17 to Rs. 31,574 crores by FY20.
  • With signing of PPAs & FSAS (barring Tamnar I) visibility of power business should improve. We expect overall PLF utilizations to improve to 70% by FY20 from the current 35%. In line with this revenues are expected to grow at a CAGR of 17% to Rs. 5,063 crores by FY20 from the current Rs. 3120 crores.
  • JSPL skipped its debt repayment schedule in FY16 as it was cash strapped. To overcome this the company has inked an agreement to sell its 1,000 MW power generating asset (Tamnar I) to JSW energy for a consideration of Rs. 4,000 crores in FY19. This should help the company deleverage. Further improving business fundamentals should help lower debt gearing to 1.0X by FY20 from 1.3X reported in FY17. This compares very favourably with that of peers JSW and Tata Steel.


We initiate coverage on JSPL as a BUY with a price objective of Rs. 472 (7.0X EV/EBIDTA) representing a potential upside of ~204.5% from the CMP of Rs. 155. At present, the stock is trading at 4.6X and 4.0X its estimated EV/EBIDTA for FY19 and FY20. Although our valuation is aggressive, we believe that the following factors warrant a premium:

  1. Robust outlook of the Steel sector, not only on the domestic front but globally too, augurs well for JSPL.
  2. Commissioning of the 3.2 MTPA blast furnace at Angul to bolster the steel segment’s revenue at a CAGR of 24% from Rs.16,280 crores in FY17 to Rs. 31,574 crores by FY20.
  3. Improving outlook on Power business, revenues are going to grow at a CAGR of 17.5% to Rs. 5,063 crores by FY20.
  4. Mining operations to get a fillip, therefore revenues are going to grow at a CAGR of 27% to Rs. 1,890 crores by FY20.
  5. Sale of 1000 MW Tamnar-I asset to create liquidity which in turn would aid in bringing down debt and improve the solvency position of the company


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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.


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