Jindal Steel & Power - Growth ahead; visit note; Buy: Edelweiss

Jindal Steel & Power (JSPL) expects the Orissa government to revise favorably the free power supply clause from captive coal fuelled CPP's from 33% to 13%. This should create ground for start of UtkalB1 coal mine operations by end FY13. We estimate the mine's DCF valuation at INR51/share. Phase‐II of Angul steel plant (5.5mtpa capacity) is ready for launch and part of the iron ore requirement is secured. While benefits of this expansion will be back‐ended, JSPL's consolidated D:E of 1.0 will comfortably absorb the increased debt in the interim. We retain estimates and maintain 'BUY' with a target price of INR648.

Resolution of UtkalB1 coal mine issues expected shortly

JSPL expects a new policy from the Orissa government shortly, permitting 13% free power from CPPs with captive coal mines (instead of 33% currently proposed). Post this, the company expects to commence operations at its UtkalB1 coal mine (production capacity: 6mtpa, reserves: 228mt) to be used in the 2mtpa DRI plant and 810MW power plant. All approvals are in place. While we estimate the mine's DCF valuation at INR 51/share, we are not assuming the benefit in our target price.

Angul Phase‐II expansion of 5.5mtpa steel capacity proposed

Phase‐I project of 1.6mtpa is on track for completion by end FY13. JSPL is proposing launch of Phase‐II of 5.5mtpa steel capacity and pellet plant of 6mtpa (total capex: INR160bn). Iron ore sourcing will be through: (i) additional quasi‐captive mining of 7mtpa for which approvals are in place; and (i) tie‐ups with private miners.

Outlook and valuations: Key triggers ahead; maintain 'BUY'

Successful commencement of UtkalB1 coal mine will enable viability of the Angul project. Though Phase‐II expansion at Angul will increase debt, but consolidated D:E will remain below 1.0. We remain positive on JSPL and retain our forward estimates. Maintain 'BUY/SO' with TP of INR648/share with upside risk from benefits of the UtkalB1 coal block. The stock is trading at 6.1x FY14E EV/EBITDA.

Source : Equity Bulls

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