Jindal Steel & Power: Poised to grow; buy
Volume growth coupled with superior mix to enhance earnings: JSPL has consistently delivered double digit growth in sales volume over the last five years. IIFL expect this to continue, with the company estimated to deliver a volume CAGR of 22.6% over FY11-14. The share of semis and metallics would reduce from 40.8% in FY11 to 8.8% in FY13 and 7.1% in FY14 as it has commissioned a wire rod mill, a medium & light section mill and a wire rod mill. This coupled with the commissioning of the 1.5mtpa plate mill at Angul would reduce. IIFL estimate OPM to increase in FY13 on account its superior product mix, lower coking coal prices and higher consumption of sponge iron. Coking coal contracts for Q4 FY12 are settled at US$235/ton down US$50/ton qoq and US$95/ton from its peak of US$330/ton in Q1 FY12. Steel business operating profit is expected to increase from Rs35bn in FY11 to Rs49bn in FY13 and Rs73bn in FY14.
Captive power plants performance to improve from FY13E: JSPL commissioned 810MW out of its proposed 1,350MW power plant over the last one year. The plants performance has been below-par as the Raigarh plant has been affected with problems related to its refractory linings and that at Angul by the high rate of e-auction coal. The management has guided that the operations are stabilized and PLF for the plants has been gradually rising. At the Angul plant, the company is awaiting the commencement of the captive coal block at Utkal B-1 to commission the rest of the 4 plants. The management expects to commission the power plants at Angul by June ’12 as the coal block is estimated to be operational in mid-FY13. In FY13, output from the existing plants is expected to surge to 80% PLF and 50-60% PLF for the rest, before rising to 85% in FY14.
Strong earnings growth over FY11-14E; Maintain Buy: JSPL has been investing heavily in its business in the past two years. The standalone power capacities are expected to be operational by Q1 FY13, followed by the 1.6mtpa steel plant at Angul in H2 FY13. In FY13, earnings growth for the consolidated entity is expected to be 11.3% led by a jump in contribution from JSPL’s standalone power plants and superior product mix. The company’s earnings would surge 54.8% yoy in FY14E, led by contribution from the 1.6mtpa Angul steel plant, higher PLF’s for the standalone power capacities and higher consumption of sponge iron. IIFL use Sum-of-The-Parts (SoTP) valuation method to arrive at their 9-month price target of Rs671 and maintain their BUY rating on the stock.
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