Jindal Steel: Steel sales suffered due to weak demand
- Jindal Steel and Power's (JSPL) adjusted consolidated profit after tax (CPAT) for 1QFY13 grew 4.4% y-o-y to Rs9.6b, 9% below estimate due to lower sales volumes in the steel business, higher costs in Jindal Power, and higher interest costs. Reported CPAT of Rs3.85b included Rs5.7b on account of impairment in value of investment in Bolivia.
- Production of steel and pellets remained strong, but sales volumes disappointed, as demand and prices deteriorated sharply in June 2012. The accumulated inventory will yield lower profits in the subsequent quarter because of lower steel prices.
- Jindal Power continues to maintain superior plant load factor (PLF) of 99%. Power rates and PAT have been on a declining trend. Cost of production (EBIT level) remains high at Rs1.6/kwh. A disputed Rs 1b of accumulated electricity duty imposed by Chhattisgarh has now been fully provided thereby inflating the cost of power generation. The timing of change in accounting policy is unconvincing.
- Jindal Power will continue to sell power through short to medium term contacts in competitive bidding and will participate in long-term bidding, if there are opportunities. Margins will remain strong because the cost of power generation is high for marginal producers, who depend on high cost imported coal. Unless a separate window is created for such power plants to transfer the benefit of low cost coal to the end user, margins will remain firm, provided no excessive provisioning is done.
Outlook: Motilal Oswal cuts down EPS estimates for FY13/FY14 by 15%/20% to Rs39.4/Rs37 to factor margin compression in the steel business and higher provisioning in Jindal Power. Maintain Neutral with an SOTP-based target price of Rs382.
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Motilal Oswal was founded in 1987 as a small sub-broking unit, with just two people running the show. Today it has a 2000 member team with a networth of Rs7 bn and market capitalization as of March 31, 2008 at Rs19 bn.
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