Return ratios start looking up EBITDA to post 20% CAGR; upgrade to Buy
* Return on capital employed has hit bottom:
Jindal Steel and Power (JSP) has invested heavily in steel, power projects in India and mining assets overseas. Over four years, a total of INR350-400b has been invested in setting up a new 12mtpa steel plant Greenfield site (capacity of 1.5mtpa in phase I) at Angul and Brown field expansion of Jindal Power’s capacity by 2,400mw. Further, JSP has invested monies overseas in 2mtpa gas-based steel plant in Oman and coking coal assets of Gujarat NRE in Australia. RoCE (pre-tax) has fallen from a peak of 32.8% in FY09 to 7.9% in FY14 due to long gestation period of these projects. We expect RoCE to start improving now.
* EBITDA to post CAGR of 20% over FY14-17E:
JSP has recently commissioned 1.5mtpa Angul steel plant with associated facilities during January-May 2014. The 2,400mw (T2) project at Tamnar has already commissioned three units of 600mw each by end-FY14. Oman HBI unit has been forward integrated in billet making recently. Thus, INR300-320b of capex is now put into operation. In spite of uncertainties, we expect consolidated EBITDA to clock a CAGR of 20% over FY14-17E. Uncertainties on sourcing coal, selling power and steel have clouded near term earnings outlook. However, each of these problems is surmountable with time and positive political will. We expect a favorable resolution.
* Stock trades at discount to intrinsic value:
We review the model and introduced FY17 estimates. We roll over the target price on FY16 estimates. We believe the stock is trading at significant discount to its intrinsic value. We have used three alternative approaches to value the stock: (1) SOTP methodology yields a target price of INR409/share based on FY16E 6.5x EV/EBITDA for steel business and DCF for Jindal Power, (2) P/BV(x) has hit the bottom along with RoE. On factoring moderate re-rating of P/BV(x) and expected growth in book value, the stock should be trading at an average of INR399 during FY16 and (3) the replacement cost yields a target price of INR410/share, not counting the value of mines and opportunity cost.
* Upgrading the stock to Buy:
JSP is now likely to derive benefit from the INR350b invested over four years. Cash flows will see significant boost on the back of 20% CAGR in EBITDA. With the 12mtpa Greenfield Angul site under its belt, company is now well set to grow steel capacity manifold over next 5-10 years with much lower execution risk. Proximity to the iron ore mining region in Odisha will be a key advantage. We expect that power business too will start growing on de-bottlenecking of transmission infrastructure and reforms in power distribution and coal production. We upgrade JSP to a Buy, with a target price of INR409, 25% upside. Utkal B1 coal mine will drive another ~10% upside.
* Stock trades at discount to intrinsic value:
We review the model and introduced FY17 estimates. We roll over the target price on FY16 estimates. We believe the stock is trading at significant discount to its intrinsic value. We have used three alternative approaches to value the stock: (1) SOTP methodology yields a target price of INR409/share based on FY16E 6.5x EV/EBITDA for steel business and DCF for Jindal Power, (2) P/BV(x) has hit the bottom along with RoE. On factoring moderate re-rating of P/BV(x) and expected growth in book value, the stock should be trading at an average of INR399 during FY16 and (3) the replacement cost yields a target price of INR410/share, not counting the value of mines and opportunity cost.
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* Return on capital employed has hit bottom:
Jindal Steel and Power (JSP) has invested heavily in steel, power projects in India and mining assets overseas. Over four years, a total of INR350-400b has been invested in setting up a new 12mtpa steel plant Greenfield site (capacity of 1.5mtpa in phase I) at Angul and Brown field expansion of Jindal Power’s capacity by 2,400mw. Further, JSP has invested monies overseas in 2mtpa gas-based steel plant in Oman and coking coal assets of Gujarat NRE in Australia. RoCE (pre-tax) has fallen from a peak of 32.8% in FY09 to 7.9% in FY14 due to long gestation period of these projects. We expect RoCE to start improving now.
* EBITDA to post CAGR of 20% over FY14-17E:
JSP has recently commissioned 1.5mtpa Angul steel plant with associated facilities during January-May 2014. The 2,400mw (T2) project at Tamnar has already commissioned three units of 600mw each by end-FY14. Oman HBI unit has been forward integrated in billet making recently. Thus, INR300-320b of capex is now put into operation. In spite of uncertainties, we expect consolidated EBITDA to clock a CAGR of 20% over FY14-17E. Uncertainties on sourcing coal, selling power and steel have clouded near term earnings outlook. However, each of these problems is surmountable with time and positive political will. We expect a favorable resolution.
* Stock trades at discount to intrinsic value:
We review the model and introduced FY17 estimates. We roll over the target price on FY16 estimates. We believe the stock is trading at significant discount to its intrinsic value. We have used three alternative approaches to value the stock: (1) SOTP methodology yields a target price of INR409/share based on FY16E 6.5x EV/EBITDA for steel business and DCF for Jindal Power, (2) P/BV(x) has hit the bottom along with RoE. On factoring moderate re-rating of P/BV(x) and expected growth in book value, the stock should be trading at an average of INR399 during FY16 and (3) the replacement cost yields a target price of INR410/share, not counting the value of mines and opportunity cost.
* Upgrading the stock to Buy:
JSP is now likely to derive benefit from the INR350b invested over four years. Cash flows will see significant boost on the back of 20% CAGR in EBITDA. With the 12mtpa Greenfield Angul site under its belt, company is now well set to grow steel capacity manifold over next 5-10 years with much lower execution risk. Proximity to the iron ore mining region in Odisha will be a key advantage. We expect that power business too will start growing on de-bottlenecking of transmission infrastructure and reforms in power distribution and coal production. We upgrade JSP to a Buy, with a target price of INR409, 25% upside. Utkal B1 coal mine will drive another ~10% upside.
* Stock trades at discount to intrinsic value:
We review the model and introduced FY17 estimates. We roll over the target price on FY16 estimates. We believe the stock is trading at significant discount to its intrinsic value. We have used three alternative approaches to value the stock: (1) SOTP methodology yields a target price of INR409/share based on FY16E 6.5x EV/EBITDA for steel business and DCF for Jindal Power, (2) P/BV(x) has hit the bottom along with RoE. On factoring moderate re-rating of P/BV(x) and expected growth in book value, the stock should be trading at an average of INR399 during FY16 and (3) the replacement cost yields a target price of INR410/share, not counting the value of mines and opportunity cost.
To Read Complete Report Click Here
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