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MOSL: JINDAL STEEL & POWER (Buy) - Steel & power margins expanded - global ventures are drag




Motilal Oswal Securities Ltd.


07 Aug 2014





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JINDAL STEEL & POWER 1QFY15: Steel & power margins expanded; global ventures are drag (JSP IN, Mkt. Cap USD4.1b, CMP INR274, TP INR379, 38% Upside, Buy) Jindal Steel & Power’s (JSP) consolidated adjusted 1QFY15 PAT increased 4% QoQ to INR4.2b (v/s est. of INR5.7b) due to strong operating performance of standalone steel business & Jindal power, dragged down by higher depreciation charge for Angul and Tamnar-2. Standalone steel EBITDA increased 23% QoQ to INR11.9b due to stronger steel pricing (+~4% QoQ), production growth (+16% QoQ), lower raw material costs and improved performance at Dongamuha CPP. Coking coal prices have been on declining trend. Average iron ore cost too was lower because 3rd party purchase of iron ore reduced on poor availability. Jindal Power’s cash flows are improving on growth in power generation (1st 600MW of Tamnar-2 started commercial operation) and improvement in EBITDA per Kwh. Generation increased 30% QoQ to 2,446 M kwh. EBITDA per kwh increased 9% QoQ to INR2. Higher depreciation charge dragged PAT by 11% QoQ (-39% YoY) to INR1.95b. The performance of Global venture remains drag in spite of earnings growth at Shadeed steel plant on benefit of forward integration. A major restructuring at Wollongong dragged down the performance. We expect consolidated EBITDA to grow at CAGR of 14% over FY14-17 as a benefit of new capacity addition in both steel & Power. Iron ore availability in Odisha, e-auction coal pricing, bottlenecks in power evacuation, availability of coal for CPPs, coal gasification, and Tamnar-2 are key variables which need to be monitored. A large capital allocation to the Global Ventures is drag on equity value. Nearly half of INR185b addition to fixed assets was in assets overseas during FY14. Stock is trading at FY16 PE of 8.8x and P/BV of 0.9x. We value JSP at INR379/share based on SOTP and maintain Buy.

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