Apart from the potential of a delay in projects, analysts say the stock’s valuation too is not cheap.
While these developments are viewed positively, analysts are concerned about the decline in merchant power tariffs and possible execution delays in JSPL’s steel and power projects in the near-term. Recently, global research firm UBS Investment Research issued a report on the company with a sell rating stating that capacity expansion faces execution challenges and regulatory overhang on mining operations in India, while valuations look stretched. This is also one of the reasons that JSPL’s share price could remain under pressure in the near-term. At the current levels of Rs 500, the stock is down 20 per cent since July-end and is trading at about 10 times its earnings and eight times its enterprise value to operating profit based on estimated FY13 numbers.
| STEADY GROWTH | |||
| In Rs crore | FY11 | FY12E | FY13E |
| Revenue | 13,112 | 16,986 | 20,011 |
| Net profit | 3,754 | 4,004 | 4,948 |
| EPS (Rs) | 40.1 | 42.8 | 52.9 |
| P/E (x) | 12.6 | 11.8 | 9.5 |
| EV/Ebitda (x) | 9.6 | 9.3 | 8.0 |
| RoE (%) | 30.6 | 25.0 | 24.4 |
| Source: Motilal Oswal Securities E: Estimates EPS: Earnings per share | |||
While the company’s immediate outlook is not so bright, some analysts see an opportunity in it. They believe the recent correction in the stock also provides a long-term opportunity to invest in a company which has strong projects in steel and power sectors in the pipeline, good execution capabilities, backward integration benefits, relatively better margins, healthy return on equity and strong cash flows. “We have a buy on the stock from the long-term perspective, given its relatively less risky business and growth visibility,” says Jatin Damania, who tracks the metals sector at SBICAP Securities.
NEAR-TERM ISSUES
The large part of its valuations and more than half of its consolidated earnings before interest and tax is on account of its power subsidiary, Jindal Power, where JSPL holds 96.43 per cent stake. Jindal Power has an operational capacity of 1,000 mw, wherein almost 80 per cent of the output is sold in the spot market.
The decline in merchant power tariffs have compelled analysts to cut down their earnings for the company. Average spot power tariffs have fallen from Rs 5.17 per unit in FY10 to Rs 3.6 in FY11, though they have shown some positive trend recently. Analysts believe there is not much room for further correction and are assuming tariffs of Rs 3.5-4 per unit over the next two years, while arriving at the projections for the company. Based on their sensitivity analysis, they say that if the tariffs deviate by 10 per cent, the consolidated earnings of JSPL could be affected by 7-8 per cent.
GOOD LONG-TERM VISIBILITY
Execution has been the biggest challenge for JSPL, which is also the case with many companies across sectors. The company has a huge pipeline of projects in the steel and power segments. In fact, the company recently said it has plans to invest in various projects worth Rs 100,000 crore in Jharkhand. It intends to set up two steel plants with a total capacity of 11 million tonnes in addition to 6,600 Mw of power capacity. As part of the plans, a steel bar mill of 1.2 million tonne per annum capacity in Patratu (Jharkhand) was commissioned on September 28, adding to an already operational steel plate mill of 0.6 million tonne per annum. JSPL intends to set up an integrated steel mill of six million-tonne capacity at Patratu by the second half of 2015 and another five million-tonne plant at Asanboni by 2016. In the near-term, however, analysts believe there is execution risk to the projects. “We believe there are concerns in the short-term, but we remain positive on the long-term growth outlook as JSPL is augmenting its steel capacity four times over next four years and power generation capacity 10 times in next 10 years. Also, only one-third of its planned steel capacity will be exposed to coking coal imports,” says Sanjay Jain of Motilal Oswal Securities in his note on the company.
Analysts expect major power capacities to come in 2013-14 (1,200 Mw) and 2014-15 (3,800 Mw), adding about 5,000 mw to its power portfolio. Moreover, better operating cash flows from the existing businesses and captive coal mines make the company’s profile and growth more sustainable. The company has huge mining assets in Bolivia, Indonesia, South Africa and Australia. Iron ore mines in Bolivia are slated to start from the current year with a production target of about 0.2 million tonnes and one million tonnes (Rs 150 crore to net profit) in the next financial year.