Despite a subdued steel outlook, Jindal Steel & Power should do well on rising profits in power business and its presence in long products.
In the last one month, even as the BSE Metal and Sensex were up between 1-2 per cent, the share price of Jindal Steel & Power (JSPL) has risen by almost 30 per cent. This comes as a surprise given that during the quarter ended December 2009, almost every steel company has reported a drop in revenue and profits, which could be attributed to the fall in international and domestic steel prices and a simultaneous reduction in volumes due to demand slowdown. However, thanks to the growing contribution of power business, JSPL has reported better numbers on a consolidated basis. And, it looks apparent that even as the steel outlook remains relatively subdued, JSPL should do better on the back of higher contribution from its power business.
Among the large steel companies, JSPL is relatively better placed as it mainly produces long products (used in construction) which account for about 70 per cent of its total revenue from the steel business. The demand for the long steel products is relatively better and is expected to rise due to the increased expenditure on infrastructure projects.
JSPL manufactures sponge iron, steel, pig iron, and ferro-chrome products. With the steel manufacturing capacity of 2.9 million tonne and 1.4 million tonne of sponge iron, JSPL is the largest, and amongst the lowest cost, coal-based producer of sponge iron in India. The company sources all its raw material requirements for iron ore and coal through captive mines.
Soft prices
International steel prices have fallen by about 50 per cent from their highs to about $580 per tonne currently. This also resulted in steel companies reporting lower realisation along with falling volumes. JSPL’s numbers too reflect this. For Q3 FY09, the company reported a decline of 19.6 per cent in sales (quarter-on-quarter; q-o-q) and a 29 per cent fall in net profit on standalone basis (steel business). This was due to a 11 per cent fall in volumes and lower realisations on q-o-q basis. However, the company posted a higher consolidated net profit of Rs 900 crore in Q3 FY09 as against Rs 780 crore in Q2 FY09, primarily on account of Rs 575 crore net profits earned by the power business.
Meanwhile, for the rest of the year, given the downturn in the steel cycle, the company’s steel volumes could be lower at 1.5 million tonne as compared to earlier estimates of about 1.7 million tonne, but still higher than 1.3 million tonne in FY08.
Higher output
For FY10, the company’s production volumes are expected to increase to 1.7-1.8 million tonne on account of the increasing plant utilisation and higher capacity. A year later (by December 2010), the company is expected to commission the first phase (two million tonne) of the six million tonne per annum greenfield steel project in Angul, Orissa.
| VALUE CREATION | |||||
| in Rs crore | Q1FY09 | Q2FY09 | Q3FY09 | FY09E | FY10E |
| Jindal Power | |||||
| Capacity (MW) | - | 750 | 1000 | 1000 | 1000 |
| Sales (million unit) | 741 | 1490 | 1777 | 6108 | 7100 |
| Rate per unit (Rs) | 4.0 | 5.0 | 6.5 | 5.3 | 4.6 |
| Sales | 294 | 653 | 1160 | 3237 | 3266 |
| PAT | 41 | 314 | 575 | 1457 | 1796 |
| % of consolidated | |||||
| Sales | 13.4 | 22.8 | 39.4 | 30.4 | 32.4 |
| PAT | 9.3 | 41.1 | 63.9 | 46.9 | 54.5 |
The company’s plant utilisation was about 54 per cent in FY08, which could be further increased to 60-65 per cent with the increasing captive power capacity. Also, the average realisations, which would dip to about Rs 30,000 tonne in FY09, should revive (though marginally) to Rs 31,000-32,000 per tonne in FY10.
| POWER OF TWO | |||
| in Rs crore | FY08 | FY09E | FY10E |
| JSPL standalone | |||
| Sales | 5351 | 7400 | 6800 |
| EBIDTA | 2197 | 2780 | 2740 |
| PAT | 1236 | 1650 | 1500 |
| JSPL Consolidated | |||
| Sales | 5489 | 10637 | 10066 |
| PAT | 1281 | 3107 | 3296 |
| EPS (Rs) | 83 | 202 | 214 |
| PE (x) | 12.0 | 5.0 | 4.7 |
Powering ahead
JSPL also has big plans in merchant power with a targeted capacity of 12,000 mw over the next ten years. The company operates its power business through a subsidiary, Jindal Power (JPL). Currently, JPL has coal-based power generation capacity of 1,000 mw, including the 250 mw commissioned in September 2008. With the addition of new capacities and better realisations, the company was able to report higher revenue from the power business (see table: Value creation).
The company is currently selling its merchant power at about Rs 7 per unit. However, it has to supply a part of current power capacity to the grid at Rs 2.8 per unit, due to which, the average realisations works out to Rs 6-6.5 per unit. This, however, is still high as compared to the cost of production of about Rs 1.5 per unit.
Importantly, as the full capacity comes online, the surplus cash generated from the 1,000 mw power plant will be used for expansion of the power business. So far, for the nine months ended December 2008, JPL has generated cash profit of Rs 1,300 crore; taking into account Q4 performance, full year cash profit would be Rs 1,700 crore. This should provide for a part of its equity contribution of about Rs 3,600 crore (based on debt equity of 70-30) towards the new 2,400 mw power plant estimated to cost Rs 12,000 crore. The balance equity contribution will come from cash generation in FY10.
For the 2,400 mw, the company has already acquired the land and placed orders for equipment. It has also secured the coal mines with total reserves of 200 million tonne. However, since it will take 3-4 years for the plant to get commissioned, the real benefits will start flowing around FY2013.
Investment rationale
Overall, steel prices are seen stabilising and there are expectations of revival in demand for long products. However, the weak performance in the steel business should be offset by the growth prospects in the power business in FY10 and FY11. Given two different businesses, analysts assign separate values for each of them. They have estimated about Rs 900-1000 per share for JSPL’s power business, while its steel business is valued at Rs 350 per share, resulting in total value for the business in the range of Rs 1,250-1,350 per share. In this light, expect the stock to deliver 18-20 per cent returns over the next one year.
