Jindal Steel and Power’s (JSPL) moves to buy iron ore and coking coal mining assets may result in higher debt as it will also have to spend on exploration and expansion of these assets, but importantly, it will help secure key raw materials like iron ore and coal that go into steel making.
The company already has mines with significant reserves that support most its existing capacities. The recent acquisitions, including the 52% stake in Gujarat NRE Coking Coal (the Australian subsidiary of Kolkata-based Gujarat NRE Coke) and securing of exploration licences for iron ore mining in some African countries, help improve availability and ensure integration.
Although recent reports suggest that the Coal Ministry has set up a probe panel to review the status of JSPL’s two coal blocks in Chhattisgarh, analysts are not worried as these are still not operational with relatively less reserves. Analysts had earlier assigned a value of Rs 20-30 per share of JSPL.
Put together, the acquisitions and that too at attractive valuation are long-term positives. This week, JSPL and other steel makers also raised product prices. Though demand is muted in India, this move will prop up margins in the interim given that input costs remain benign.
Says Kamlesh Bagmar, who tracks the company at Prabhudas Lilladher, "We reiterate our accumulate rating on the back of better earnings quality, judicious capital allocation and attractive valuations. In the near term, share buy-back (of Rs 1,000 crore) would lend support to stock”.
The two acquisitions in Australia and Africa will provide further integration and supply of raw material to JSPL’s upcoming facilities in the domestic as well as international markets. And these have come at good valuations.
"If you look at the valuations of these mines such as the one they recently bought (Gujarat NRE Coking Coal), they have bought it at very cheap valuations. Even if one does not read too much into the integration, these investments could give decent returns to the company in the coming years," said Rakesh Arora who tracks the company at Macquarie Capital Securities.
Currently, the company imports about 1.5 million tonne (MT) of coking coal and its requirements in the coming years will only increase with more steelmaking capacity going on the stream. A majority stake in Australia-based Gujarat NRE Coking Coal could help to a great extent in terms of securing coal supply and eliminate price risk.
Notably, Gujarat NRE Coking Coal has 650 MT of coal reserves whereas its current production is just about 1.5 MT. JSPL expects Gujarat NRE Coking Coal to ramp up the production to 5 MT by FY16, which is good considering that part of it will be reflected in JSPL’s consolidated financials. Iron ore mines in Africa have a similar story to tell.
JSP is currently having 5.5 MT capacity in India and 2 MT in Oman. It intends to increase its total capacity to 11.5 MT per annum by FY16. Of this, 2 MT of sponge iron capacity at Angul will be fully commissioned by October 2013. Further, the pelletisation facility of 4.5 MT at Barbil will be commissioned by November 2013. In Oman as well it is expecting to commission 2 MT capacity by November this year. Part of the iron ore needs will be met from the African mines. In this context, the acquisitions form a corner-stone to JSPL’s growth plans.
"One should also look the acquisition of these iron ore and coal mines from the fact that in India it’s difficult to get mines. There are no fresh allocations," said Rakesh Arora.
While there have been some apprehensions about funding and JSPL’s relatively high debt, it should not be an issue. Says Bagmar of Prabhudas Lilladher, “Funding should not be an issue. JSPL makes a quarterly cash profit of around Rs 1,000 crore; and this year, the capex will peak. In fact, the company will turn cash positive. So, there is a cash and further room for raising funds, especially in the light of debt to equity coming at comfortable levels."
JSPL’s net debt-to-equity stands at around 1.1 times and interest cover stands at about 4 times. With the cash flows from the operations expected to increase because of steel capacity going on-stream and commissioning of the 3 units (600mw each) of its 2,400 mw power plant in current fiscal year, expect the debt-equity ratio to inch lower in the next two years.
