No respite in the near term for Jindal Steel and Power

Analysts cut FY14 profit estimates on operational issues in power business, lower realisations in steel segment

The Jindal Steel and Power Ltd (JSPL) stock hit a four-year low last week, after posting disappointing results for the March quarter and on weak demand concerns. Though the stock has bounced back since, in line with the other metal stocks and is trading at attractive valuations, investors need to be cautious due to near-term headwinds in the power and steel segments.

The power segment continues to see weak realisations. The company in its March quarter investor conference call indicated evacuation problems (supply to the grid) had been only partly resolved. This resulted in JSPL selling 30 per cent of its volume to power exchanges, which fetches a lower rate compared to the normal market. Barclays Research analyst Chirag Talati says a 4.3 per cent sequential drop in power production volumes in the standalone business suggests the 1,350-Mw Raigarh project could be facing further stabilisation issues. The segment's profitability also remained affected by the non-availability of captive coal. The company expects Indonesian coal to be available in the September quarter.

Realisations and demand in the steel sector also remain weak. The company produced 7,90,000 tonnes of steel, while it sold 9,10,000 tonnes of steel liquidating excess inventory. Its earnings before interest and tax for the steel division were down 23 per cent sequentially even on higher volumes, reflecting sharp drop in realisations. The management said the reduction in steel inventory led to a sharp drop in prices, in the range of three-seven per cent. However, the company believes steel prices have started showing a marginal uptrend since the beginning of April. Nirmal Bang analyst Giriraj Daga notes the company sold an additional 200,000 tonnes over the normal run-rate and such a sharp price fall shows the extremely weak nature of the Indian steel market.

Though in the power segment the company is expanding its capacity by commissioning its 2.4 Gw power project in stages by Q2 FY15, there have been delays. The first unit of 600 Mw, to be commissioned in the June 2012 quarter, is now expected to be commissioned in the September 2013 quarter, while the second unit is expected to come up by the December 2013 quarter. Thus, the benefits of the expansion are likely to take some time to accrue. Analysts at Religare add with most of JSPL's expansion projects coming online only in the second half of the financial year, a lacklustre FY14 is expected for the company. Also, dependence on imported/e-auction coal in the near term and a rising debt profile remain causes of concern. The project has been funded on the basis of 75:25 debt to equity ratio.

The company has also announced expansion at Jharkhand (Patratu & Godda) by an additional fourth unit of 660 Mw planned now vs. three units of 660 Mw planned earlier. These units are expected to be commissioned in phases by FY16.

Given no immediate term triggers, analysts have trimmed their FY14 estimates. Daga of Nirmal Bang has revised his FY14 Ebitda estimates downwards by eight per cent following a subdued performance, while the net profit estimate too has been revised downwards by 10 per cent, primarily due to an around five per cent cut in steel realisation. Analysts at Religare have also cut their earnings estimates and maintain a hold rating, with a revised target price of Rs 330 after valuing the business at seven times FY15E EV/Ebitda estimates.