Jindal Steel and Power - Volume growth to continue; Buy - Anand Rathi

Improving steel segment. Steel sales volumes of Jindal Steel and Power are likely to have improved in 3QFY14, to 0.75m tons. On the changing business and client mix, prices are likely to have been better. For 3QFY14 we have assumed a US$10 drop per ton in pellet realisations, in line with lower NMDC lump prices and 1% higher steel realizations. Export opportunities in the quarter due to favourable currency could have offset the impact of iron ore realizations and would have improved EBITDA, aided by stable costs. The Shadeed Oman HBI business, iron ore and coking coal mine are likely to have been stable.

Power segment stabilizing. With a steady performance and power sales to the TN SEB in 2QFY14 (200 MW at Rs. 4.5/kWh), the PLF in 3QFY14 would have held at ~100%, helping maintain realizations. Capped realizations and the power-surplus situation would have posed downside risks to earnings.

Balance sheet at inflection point. In the past three years, US$3bn has been spent on expansion, and a further US$6bn will be expended in the next three years. The expansion has been supported by the strong business cash flows. However, the net-debt-to-EBITDA level has hit 3.7x due to delayed cash flows, though the leverage ratio is likely to have peaked.

Our take. The company has embarked on expansion projects of US$9bn in steel and power, backed by resource availability and steady cash flows. Improving free-cash-flows and volumes would be visible from end-FY15. Profitability is geared to iron ore and coal, which, against the present backdrop of improving iron-ore prices and higher coal consumption, would drive a re-rating. The stock quotes at 7.2x FY15e EV/EBITDA. We maintain our sum-of-parts target at Rs. 309 a share to factor in the improving steel business, and upgrade the stock to a Buy. Risks. Better coal production in India, rise in resource taxation.

Source : Equity Bulls

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