Jindal Steel and Power (JSP) reported Q2FY17 earnings below our expectation due to lower than estimated earnings in steel operations. JSP would be best placed to exploit the benefit of steep increase in steel prices as 70% of its production comes through non-coking coal route. Earnings outlook for FY18 remains strong on the back of better outlook on steel prices, commissioning of BF in Angul and signing of PPA with UPSEB. We reiterate BUY with TP of Rs 100, valuing steel operations at 6x EV/EBITDA FY18E and JPL (3400MW) at Rs 45m/MW.
Lower realisations in domestic/Shadeed ops drove the miss:
EBITDA of standalone ops fell 24% QoQ/31% YoY at Rs4.3bn, below PLe of Rs5.4bn. Loss of standalone ops expanded to Rs4.1bn (PLe:Rs2.9bn) against loss of Rs2.8bn/Rs3.1bn in Q1FY17/Q2FY16. Shadeed posted 60% QoQ/25% YoY drop in EBITDA to US$13m (PLe:US$29m) due to sharp drop in realisations. Jindal Power (JPL) reported flat (+8% YoY) EBITDA to Rs1.8bn (PLe:Rs1.9bn). Consolidated EBITDA fell 23% QoQ (-17% YoY) to Rs6.7bn (PLe:Rs9.2bn). Loss expanded to Rs7.5bn (PLe:Rs5.4bn) against loss of Rs4.6bn/Rs5.5bn in Q1FY17/Q2FY16.
Key highlights of con-call:
1) Company expects 325MW of PPA to be signed with UP SEB by Q4FY17 2) Debt unchanged QoQ at Rs463bn 3) Australian coking coal mines commenced operations from end of September. Currently, operating at 65-70kt/month with further scale up to 85-100kt Feb onwards 4) Mozambique coal mine commenced production from 1st October with run-rate of 100kt/month. Would reach run-rate of 250kt by March 5) Spent Rs7.8bn on capex in H1 against budget of Rs22bn for FY17 6) Plans to commission the 4mtpa BF in Angul by Mar-17.
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