The Inter Ministerial Group (IMG) reviewing non-performing coal blocks has recommended deduction of bank guarantees given for Jindal Steel & Power’s (JSPL) Jitpur block (81 million tonnes of geological reserves), allocated in February 2007. While none can predict how things will eventually shape up, given the public interest litigation filed in the Supreme Court regarding these allocations, for now this latest bit of news is positive for JSPL, as it removes one of the key overhangs on the stock, feel analysts.
Says Atul Tiwari, analyst, Citi Research, “JSPL can now focus on the development of the coal block, which will supply coal to half of the 1,320 Mw Godda project. JSPL, no doubt, will have to pay the bank guarantee but the amount involved is not large.” While a few analysts are still sceptical, the Street has welcomed the move. Since Monday’s closing, JSPL’s stock is up 8.3 per cent to Rs 403, taking the total gains to 27 per cent from a three-year low of Rs 324 on September 12.
What’s also giving confidence to analysts is the company’s business model and strategy of having captive resources for both the steel and power business, which helps it earn high operating profit margins of a little over 35 per cent. Notably, unlike most steel companies, JSPL has low debt on its books (debt-equity ratio of 0.6 times). Says Chirag Shah, analyst, Barclays Equity Research, “We believe JSPL offers a relatively superior business model, both in the steel and power business.” With a valuation of nine times FY14 estimated consolidated earnings, even after the recent rally from its three year lows, the stock is seen as attractive. However, given the near-term uncertainties, investors could consider the stock but from a long-term perspective.
| RECOVERY IN FY14 | |||
| In Rs crore | FY12 | FY13E | FY14E |
| Net sales | 18,209 | 19,486 | 23,435 |
| % change y-o-y | 38.9 | 7.0 | 20.3 |
| Operating profit | 6,987 | 7,251 | 8,507 |
| % change y-o-y | 9.3 | 3.8 | 17.3 |
| Net profit | 4,013 | 3,912 | 4,217 |
| % change y-o-y | 6.9 | -2.5 | 7.8 |
| EPS (Rs ) | 42.9 | 41.8 | 45.1 |
| P/E (x) | 9.6 | 9.9 | 9.2 |
| E: Estimates; Consolidated financials Source: Company, Analysts Estimates | |||
Hurdles
While the fate of the company’s remaining three coal blocks — Amarkonda (205 mt reserves), Gare Palma IV/6 (156 mt) and Ramchandi (1,500 mt) — remains uncertain, any positive outcome will boost sentiments and improve visibility. The Utkal B1 block (allocated in September 2003), however, has still not got the mining lease, despite procuring land and obtaining all approvals. This mine is critical for the integrated Angul project (Odisha), wherein JSPL is setting up 12.5 mt per annum of steel capacity. In the first phase of six mtpa, comprising a two mtpa steel plate mill and six power units of 135 Mw each, three units and the plate mill are already operational. The company has completed 75-80 per cent of capex on the first phase, seen as the next growth driver.
However, analysts see some delays. Says Harshvardhan Dole, analyst, IIFL Research, “Delays in signing mining leases will push back cash flows from this integrated steel complex.” Adds Jigar Mistry, analyst, HSBC Global Research, in his September 13 report, “For the time being, we remove all potential upsides from the commissioning of Angul steel project.”
Further, there is uncertainty about whether the company will have to sign power purchase agreements for the operational merchant-based Tamnar-1 project (1,000 Mw) after the coal ministry order to power companies with captive blocks, instead of selling power in the lucrative short-term merchant markets. In the immediate term, the outlook for steel prices is not positive due to weak demand. This will affect the steel business that contributes 74 per cent to consolidated revenues and 63 per cent to profits.
Invest but for long term
Despite the uncertainties and negative news surrounding the stock, analysts continue to remain positive on the company from a one to three year perspective. Says Ritesh Shah, analyst, Espirito Santo Investment Bank, “We think investors should look at JSPL with a longer investment horizon. The stock is not for the faint-hearted.” The year FY14 will mark the inflection point in earnings, as its Angul expansion and mining projects in Indonesia and Mozambique (likely commissioning by FY13-end) starts contributing, he adds. Mistry from HSBC remains overweight as he feels even a bad case scenario still points to upsides from the current ruling prices.
In early September, JSPL completed the acquisition of CIC Energy for around Rs 650 crore. This will help in diversifying power revenues in the long run, besides assuring coal supply. CIC provides JSPL access to 2.4 billion tonnes of proven coal resources in Bostwana. The coal produced will be used for a power plant to be set up there (initially, 300 Mw to be commissioned in three years), though JSPL has not ruled out exporting coal to India. If done, this will require JSPL to spend on setting up infrastructure for evacuation.