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MOSL: JSPL (Neutral) - Completed major capex - shutdown affected operating performance




Motilal Oswal Securities Ltd.


02 May 2014





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JINDAL STEEL & POWER 4QFY14: Completed major capex; shutdown affected operating performance (JSP IN, Mkt Cap USD3.8b, CMP INR253, TP INR291, 15% Upside, Neutral) Jindal Steel & Power’s (JSP) consolidated adjusted 4QFY14 PAT declined 28% QoQ to INR4b (v/s est. of INR4.5b) due to lower steel production for modernization of Raigarh facilities, decline in power rates at Jindal Power, absence of profit from sale of machineries from Raipur unit and losses at overseas coking coal assets. JSP has mostly completed the projects undertaken in the last two to three years in both steel and power segment, with commissioning of second 4.5mtpa pellet plant, Angul steel project, three units of 600mw each at Jindal Power’s Tamnar-II, and 2mtpa forward integration in Oman. Capex for FY14 at INR115b is ahead of INR90b guidance. Tamnar-II capex was expedited for tax benefit, expected change in coal linkage policy and to be able to bid in upcoming tenders for PPA. FY15 capex guidance too is raised from INR30b to INR50-60b to factor additional expenses for Wollongong and Raigarh modernization etc. Net debt has increased correspondingly. Despite challenges of slowing domestic steel demand, JSP is trying to manage its steel business by raising retail and export sales. Recently commissioned Angul is likely to add to steel production, while growth in sales of CPP power is contingent on merchant market. Pending Supreme Court order on iron ore mining in Odisha is a source of uncertainty regarding availability and costs. Overseas mining operations are expected to reduce losses with the benefit of expected investment and operating leverage. Contribution of Shadeed steel plant will increase due to stronger local and regional steel demand and low costs. We believe JSP has made significant investments to drive long term earnings growth. There are some near term challenges in both power and steel segments. We expect EPS to grow 16% to INR28 in FY15E. Stock is trading at PE of 9.1x and P/BV of 1x. We value JSP at INR291/share and maintain Neutral.

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