Higher inventory, slow demand hits profitability, power surprises positively.
Slowing demand for steel products has affected the earnings of Jindal Steel and Power Ltd (JSPL) in the third quarter, but higher generation in the power business has positively surprised the Street.
Demand for steel products fell by seven per cent in the third quarter, as sales of long products remained weak. Pellet sales also came in below expectations of most analysts, at 464,000 tonnes. The company’s standalone Ebitda grew 6.7 per cent toRs 992 crore, marginally below consensus estimates. According to Barclays Capital, qualitatively though, profitability in the steel division is much better, as it is driven by improvement in the product mix versus higher pellet sales in Q2 of FY12.
A build-up in inventory levels affected performance in the third quarter notably. According to Kotak Institutional Equities, “Steel production of 757,000 tonnes (up 20.2 per cent sequentially and 30 per cent year-on-year) was at an all-time high. However, deliveries at 591,000 tonnes fell 1.2 per cent sequentially, was muted on account of significant increase in inventory.”
Going forward, steel volumes are expected to pick up and realisations to improve. Citi believes the company expects strong volumes and higher prices in the fourth quarter, as inventory built up in the third quarter has been unwound and prices are up three-five per cent, compared to third quarter.
The power business has shown good growth in the quarter. The Q3 profit after tax (Rs 48 crore) has come in eight per cent ahead of Citi’s estimates of Rs 450 crore, due to higher generation.
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The company had plans to commission 1,350 Mw of power generation, of which 810 Mw is already operational. The company plans to commission the rest by June. Average realisation improved nine per cent sequentially to Rs 3.9/unit, thanks to rising merchant rates, after some weakness during the monsoon period.
Given that the company is trading at a price/earnings multiple of 12.3 times and 11.8 times its expected FY12 and FY13 earnings, most analysts believe the stock is attractively priced.
Citi has a target price of Rs 645 on the stock. At that price, it would trade at a price/earnings multiple of 14.7 times the enterprise value/Ebitda of 10.4 times in FY12.
Analysts are valuing the steel business at a discount to Tata Steel due to the latter’s scale of production and the captive iron ore supplies. However, Kotak Institutional Equities believes all the positives have been factored in the current market price.