Jindal Steel and Power - Awaiting triggers; Hold - Anand Rathi

Jindal Steel and Power's (JSPL) earnings were in line with expectations due to higher steel sales, offsetting weakness in power due to subdued realisations. Management has guided for timely expansion, but profitability of investments requires further clarity for input sourcing. Also, the present mining regulatory scenario constrains rerating. We maintain our SOTP target price of Rs.418 and Hold rating to factor in the uncertainty on expansion of power projects.

Steel business delivers volumes. JSPL's standalone steel business delivered steel sales volume growth of 7% yoy. This led to revenue growth of 4% in steel, to Rs.33.1bn, offsetting weakness in realisation. Standalone revenue growth of 8% was aided by power segment revenues.

Margin expansion driven by lower costs. Flexibility in business model to alter the product mix as per maximisation of the contribution led to controlling the expenses in raw material and EBITDA growth of 16%YoY to Rs.12.6bn with an margin of 35.1%. EBITDA growth and control on interest and depreciation delivered 47% yoy standalone PAT growth, to Rs.5.8bn.

Power segment suffers realisation dip. Power segment realisation dipped to Rs.3.3 per unit due to weak sales mix. Lower PLF of 85%, due to longer maintenance schedule, led to generation loss of 17% yoy to Rs.1.9bn units. However, standalone power segment offset weakness in merchant power to deliver consolidated power EBIT growth of 4% yoy to Rs.6.3bn.

Valuation. JSPL is trading at 6.4xEV/EBITDA, but re-rating will be constrained until there is clarity on raw material availability for expansion projects. Risks. Fall in iron ore and coal prices will impact earnings while higher power tariffs will improve expansion project IRR.

Source : Equity Bulls

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