11 June 2014

Update | Sector: Metals

Jindal Steel & Power

BSE Sensex
25,474

S&P CNX
7,627

CMP: INR327

TP: INR409

Upgrade to Buy

Return ratios start looking up

EBITDA to post 20% CAGR; upgrade to Buy
Stock Info
Bloomberg

JSP IN

Equity Shares (m)

914.9

52-Week Range (INR)

350/182

1, 6, 12 Rel. Per (%)

27/3/11

M.Cap. (INR b)

298.9

M.Cap. (USD b)

5.0

Financial Snapshot (INR Billion)

Y/E March
2015E 2016E 2017E
Net Sales
248.5 296.8 336.1
EBITDA

76.7

93.5 104.5

Adj PAT

24.7

30.2

35.9

EPS (INR)

26.9

33.0

39.2

11.5

22.6

18.6

10.4

11.6

12.3

Growth (%)
RoE (%)
RoCE (%)

8.7

10.1

10.6

12.1

9.9

8.3

P/BV (x)

1.2

1.1

1.0

EV/EBITDA (x)

8.7

7.5

6.8

P/E (x)

Shareholding pattern (%)

As on
Mar-14 Dec-13 Mar-13
Promoter

60.4

59.7

59.1

Domestic Inst 4.1

4.7

6.8

22.8
12.8

22.6
11.6

Foreign
Others

23.1
12.3

Stock Performance (1-year)

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 Powers 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.

Sanjay Jain (SanjayJain@MotilalOswal.com); +91 22 3982 5412

Investors are advised to refer through disclosures made at the end of the Research Report.

Jindal Steel & Power

Method 1: Sum-of-the-parts-valuation at INR409/share

Steel volumes to clock

14% CAGR

If JSP uses zero cost iron ore

inventories, there may be
temporary positive
aberration to earnings

Income Statement
Y/E March
Net sales
Steel segment
Standalone
Steel sales (kt)
Pellet sales (kt)
Shadeed
HBI (kt) production
Wollongong (GNM)
Coking coal (kt)
Others
Jindal power
Sales (Mkwh)
EBITDA
Steel segment
Standalone
EBITDA/t of steel
Shadeed
EBITDA/t of HBI
Wollongong (GNM)
EBITDA/t of coal
Others
Jindal power
EBITDA (INR/kwh)

We expect consolidated EBITDA to post a CAGR of 20% over FY14-17E driven by

15% growth in steel business and 30% growth in Jindal Power.
Steel business EBITDA will be driven by 14% steel volume CAGR to 4.3mt driven
by new 1.5mtpa capacity at Angul and modernization of Raigarh facilities. We
are a bit conservative on volumes keeping in sight weak demand for plates
currently. These facilities have the potential to produce 5mtpa.
We expect the steel EBITDA per ton to dilute as share of high margin third party
sale of pellets and power in the revenue mix would decline. Further, we assume
that large part of iron ore would be sourced at market prices. We estimate the
average landed cost of INR2,500/t for iron ore fines and assume pellet
realization at INR7,000/t.
Shadeed (Oman) steel plant will start deriving benefits of forward integration.
We expect EBITDA to nearly double to INR8-9b.
Wollongong coking coal mines (65% stake) too are expected to turn around.

FY12
182,086
151,683
133,340
2,385
1,995
27,961
1,200

FY13
198,068
172,971
149,547
2,843
2,112
29,012
1,520

FY14
200,040
174,839
145,440
2,935
2,035
34,580
1,468

-9,618
30,404
7,750
68,868
46,055
42,297
17,733
3,524
2,936

-5,588
25,097
7,411
65,685
50,614
45,126
15,872
4,903
3,226

-5,180
25,201
7,984
60,764
42,943
43,123
14,690
3,790
2,581

235
22,813
2.9

585
15,071
2.0

-3,970
17,821
2.2

11 June 2014

FY15E
248,477
205,706
168,829
3,324
3,561
37,740
1,500
2,317
412
-3,180
42,771
11,955
76,674
54,791
47,205
14,202
7,688
5,125
1,868
-1,970
21,882
1.8

FY16E
296,778
232,960
190,809
3,852
4,095
40,860
1,500
4,471
1,175
-3,180
63,818
16,782
93,512
61,594
52,268
13,570
8,356
5,571
2,940
2,503
-1,970
31,919
1.9

FY17E
336,092
248,452
203,336
4,328
3,132
40,860
1,500
7,436
1,720
-3,180
87,641
24,603
104,478
64,962
54,217
12,526
8,301
5,534
4,414
2,567
-1,970
39,516
1.6

(INR Million)
Remarks
assumed steel prices are stable
CAGR growth of 12% over FY14-17
Angul driving steel volumes at 14%cagr
Pellet capacity doubled to 9mtpa in FY15

CAGR growth of 52% over FY14-17

T2 driving vol. in FY15-17
CAGR growth of 15% over FY14-17
Margins diluting
Margins improving (forward integration)
GNM to turn around

CAGR growth of 30% over FY14-17

T2 is margin dilutive

Jindal Powers T2 has already signed the PPA for 400mw with Tamil Nadu (TN).
T2 is running only one unit of 600mw at 50-60% PLF. Nearly 150mw of power
sales are already flowing to TN on a long term PPA basis. The volumes will
increase to 400mw by August 2014 as the transmission bottlenecks are
addressed. We believe T2 will be able to sell 4b kwh in FY15, 8.8b kwh in FY16
and 16.6b kwh in FY17. There may be some slips if there are delays in power
sector reforms and/or delay in demand pick-up or in rectifying infrastructure
bottlenecks. However, NPV of JPL is less sensitive to some delays.

Jindal Steel & Power

Although Angul phase 2

capex is on hold, yet we
believe JSP will put 3mtpa
expansion on fast track and
spend INR 60b each in FY16
and FY17

Capital work in Progress (INR billion)

Standalone

Jindal power

Angul Phase 2
150
77

140

32
15
3
FY05

11
FY06

27
9
FY07

21
7
FY08

20

23

9
23

64

71

FY09

FY10

FY11

105

115

103

70

FY13

16
13

16
9
FY14 FY15E FY16E FY17E
33

FY12

80

Source: MOSL, Company

Target price calculations

YEAR
Steel Business
A. EBITDA
B. Target EV/EBITDA(x)
C. EV (AxB)
Jindal Power (JPL)
D. PV of JPL's FCFF
Consolidated
EBITDA
E. Enterprise Value (C+D)
F. Net Debt
G. CWIP
H. Discount on CWIP (%)
Equity Value (E-F+G*(1-H%))
Target price (INR/share)
Target price (INR/share)

(INR Million)
FY12

FY13

FY14

FY15E

FY16E

FY17E

46,055

50,614

42,943

54,791
6.5
356,144

61,594
6.5
400,361

64,962
6.5
422,254

259,198

264,037

264,084

INR137b for T1 and rest for T2

76,674
615,342
371,874
122,771

93,512
664,398
399,607
109,171

104,478
686,339
410,800
165,171

CAGR growth of 20% over FY14-17

366,239
400

373,962
409
445

440,709
482
536

68,868

65,685

60,764

169,416
136,520

244,180
192,303

352,146
252,328

11 June 2014

At end-FY16, CWIP will largely pertain to Angul phase II capacity expansions by

3mtpa. The expansion will come at lower specific capex as the infrastructure is
already built keeping in mind 12mtpa final capacity at this site. The IRR of
project is expected to match WACC. Thus, we would value it at cost rather the
past practice of discounting.

Remarks
Excluding Jindal Power (JPL)

INR120b factored for Angul Phase 2

CWIP is valued at book (no discount)

With Utkal B1 coal block

We value the steel business at EV/EBITDA of 6.5x and the power business on PV
(present value) of FCFF (future cash flow to firm) discounted at WACC of 10.1%
(cost of equity at 15% and pre tax cost of debt at 10%).
Thus, we arrive at a SOTP of INR409/share based on FY16E.
If Utkal B1 coal becomes operational by end-FY15, the SOTP will be raised to
INR445/share on FY16 basis and INR536/share on FY17 basis.

Jindal Steel & Power

Method 2: Value at INR399 on re-rating of P/BV due to improving RoE

JSP has a strong business positioning in both steel and power. Despite cyclical nature
of steel business, company generated high level of returns and never slipped into
losses. Thus, it is not vague to look at valuations with respect to book value.
Although RoCE is expected
to improve from 7.9% in
FY14 to 10.5% in FY17E, yet
it would have been better
at 11.9% if the INR120b
capex for Angul phase II had
not been factored

Return ratios have hit bottom

RoIC (%)
45.7

27.2

FY07

42.3
33.7

31.1

26.5
32.8

16.5

20.2
27.5
21.3

19.9

FY08

RoCE (%)

FY09

FY10

17.2

FY11

FY12

12.3
FY13

13.8

12.3

12.1

12.8

7.9
FY14

8.8

10.1

10.5

FY15E

FY16E

FY17E

Source: MOSL, Company

The P/BV ratio has closely tracked RoE. There has been significant de-rating along
with falling RoE. We believe RoE has hit the bottom and is likely to improve
gradually as new projects start to generate cash flows.
We expect P/BV ratio to get
re-rated as RoE has already
hit the bottom

RoE and P/BV ratio

RoE (%), LHS

P/BV (x), RHS

35.030.5
30.0

7.0
6.0

25.2

25.0
15.0

5.0

17.7

20.0 5.1
3.3

10.0
0.0
FY11

FY12

3.0
2.0

2.0

5.0

4.0

12.3

11.6

10.4

10.2

1.1
FY14

FY13

1.0

1.3

1.4

1.5

FY15E

FY16E

FY17E

0.0

Source: Company, MOSL

With a combination of growing book value and modest re-rating of P/BV ratio, we
expect the stock to trade at an average price of INR399 during FY16.
Expect stock to trade above
INR399 in FY16

Yearly stock price average v/s book value

Stock price (INR) - yearly avg.

Book value (INR/share)- yearly avg.

675
563

553

412
250
94
FY10

131

172

211

FY11

FY12

FY13

330

399

477

237

259

285

318

FY14

FY15E

FY16E

FY17E

Source: Company, MOSL

11 June 2014

Jindal Steel & Power

Method 3: Value at INR410/share on replacement cost basis

There are significant
barriers to entry in setting
up projects of such size

The replacement cost of

projects is INR410/share.
Replacement cost does not
include valuation of (1)
12mtpa captive coal mines,
(2) 2-3mtpa captive iron ore
mines in India and (3) loss
of opportunity

JSP has invested heavily (INR355-400b) over four years. The new projects are now
operational but are being valued at discount to cost. Lower profitability largely due
to demand side issues and some uncertainties on sourcing raw materials are key
reasons for it. There are significant barriers to entry in setting up projects of such
size. Further, the cost of recreating such facilities would be significantly higher.
These problems too are surmountable. Thus, we believe that IRR of these projects
would improve to an extent that valuations would overcome project cost. On
replacement cost basis, JSP should be valued at a minimum of INR410/share as
explained in following table. This valuation does not capture the advantage of
12mtpa captive coal mines and 2-3mtpa captive iron ore mines. Hence, we believe
the stock is undervalued with respect to its intrinsic value.
Replacement cost
Process
Specific
Capacity
A. Steel

Value

cost (USD m) (USD m)

(mtpa)

(USD/t)

Raigarh

3.0

1,000

Angul Steel

1.5

1,000

1,500

500

1,000

Oman
B. Power

(MW)

(U$m/MW)

1,000

1.0

1,000

Tamnar -2

2,400

1.0

2,400

810

1.0

810

C. Overseas mining

(INR b)

(INR)

5,500

330

361

4,210

253

276

3,000

Tamnar -1
CPP

Value
per share

Sub total

42

46

D. Capital work in progress

700

700

123

134

E. Total Asset Value (A+B++D)

747

817

F. Net Debt

372

406

G. Net Asset Value (NAV)

375

410

Risk factors

11 June 2014

Jindal Power has yet to find buyers (PPA) for 2,000mw and coal supply (FSA) for
1,200mw for Tamnar-II. We have assumed PLF of 25% in FY15E, 45% in FY16E
and 85% in FY17E. In the absence of PPA and/or FSA, Jindal Power may resort to
merchant sales of power and purchase of e-auction coal. Margins in such a
situation will be volatile.
For Angul steel plant, we assume that thermal coal will be available in e-auction
in the range of INR1,800-2,100/t. In case of delay in developing coal block or
delay in production growth at Coal India, there may be significant impact on eauction coal prices in view of large quantities required.
Margins in steel business are exposed to steel and iron ore prices. We expect
iron ore supply in Odisha will ease. If there are delays to restart the closed iron
ore mines, supply may be tighter and the cost of iron ore may be higher than
our estimates. However, JSP can use zero cost inventories of iron ore fines to
keep its overall cost low for one or two years.

Jindal Steel & Power

Financials and valuation

Income statement
Y/E March
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Min. Int. & Assoc. Share
Adj Cons PAT

(INR Billion)
2012
182.1
38.9
68.9
37.8
13.9
55.0
3.6
1.4
-0.9
51.9
11.9
22.9
40.0
41.0
7.7
-0.4
40.6

2013
198.1
8.8
65.7
33.2
15.4
50.3
7.6
1.4
-5.7
38.3
9.2
24.0
29.1
34.9
-14.9
0.0
34.8

2014
200.0
1.0
60.8
30.4
18.3
42.5
15.0
0.7
-3.0
25.1
6.2
24.6
18.9
21.9
-37.1
0.2
22.1

2015E
248.5
24.2
76.7
30.9
24.2
52.5
23.4
2.9
0.0
32.0
8.2
25.6
23.8
23.8
8.6
0.8
24.7

2016E
296.8
19.4
93.5
31.5
27.4
66.1
28.6
3.2
0.0
40.7
10.9
26.9
29.8
29.8
25.0
0.5
30.2

2012
0.9
180.2
181.1
170.9
11.9
367.0
223.3
58.4
164.9
136.5
3.8
143.9
35.8
13.1
1.5
93.6
83.1
29.1
54.0
60.9
367.0

2013
0.9
211.6
212.5
246.2
13.4
477.6
267.0
74.3
192.7
192.3
8.1
176.0
45.2
19.5
2.0
109.3
93.1
31.4
61.7
83.0
477.6

2014
0.9
225.2
226.1
362.3
14.7
613.9
356.2
86.5
269.7
252.3
3.4
209.3
48.8
17.7
10.2
132.6
126.8
27.5
99.3
82.5
613.9

2015E
0.9
246.6
247.5
379.8
15.6
653.2
544.0
108.1
435.9
122.8
3.4
215.4
52.4
22.5
7.9
132.6
130.2
31.0
99.3
85.2
653.2

2016E
2017E
0.9
0.9
273.6
306.2
274.5
307.1
419.8
454.8
16.6
17.7
721.1
790.2
629.2
639.9
132.9
160.7
496.3
479.2
109.2
165.2
3.4
3.4
241.3
275.3
59.6
64.5
28.9
34.2
20.2
44.0
132.6
132.6
135.0
138.8
35.7
39.5
99.3
99.3
106.3
136.5
721.1
790.2
E: MOSL Estimates

Balance sheet
Y/E March
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets

11 June 2014

2017E
336.1
13.2
104.5
31.1
30.4
74.1
30.3
4.8
0.0
48.5
12.6
26.0
35.9
35.9
20.7
-0.1
35.9

(INR Billion)

Jindal Steel & Power

Financials and valuation

Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)

2012

2013

2014

2015E

2016E

2017E

43.4
58.2
193.7
1.6
3.8

37.3
53.7
227.3
1.6
4.4

24.2
44.2
247.1
1.6
7.7

26.9
53.4
270.5
1.6
6.9

33.0
63.0
300.1
1.6
5.7

39.2
72.4
335.7
1.6
4.8

7.5
5.6
1.7
2.6
6.9
0.5

8.8
6.1
1.4
2.8
8.4
0.5

13.5
7.4
1.3
3.3
10.7
0.5

12.1
6.1
1.2
2.7
8.7
0.5

9.9
5.2
1.1
2.4
7.5
0.5

8.3
4.5
1.0
2.1
6.8
0.5

25.2
17.3

17.7
12.4

10.1
7.9

10.4
8.7

11.6
10.1

12.3
10.6

0.5
26.2
71.8
93.8

0.4
36.0
83.4
86.5

0.3
32.3
89.1
72.1

0.4
33.1
76.9
65.8

0.4
35.5
73.3
64.1

0.4
37.2
70.0
62.3

0.9

1.2

1.6

1.5

1.5

1.4

2012
51.9
13.9
-1.4
3.6
-10.0
-17.0
43.4
-73.3
-0.8
0.0
-74.1
0.0
31.2
-3.6
-1.5
27.5
-3.2
4.6
1.5

2013
38.3
15.4
-1.4
7.6
-7.8
-21.6
36.8
-99.5
-4.3
0.0
-103.8
0.0
75.3
-7.6
-1.5
67.5
0.5
1.5
2.0

2014
25.1
18.3
-0.7
15.0
-4.9
8.6
57.7
-107.4
-37.2
0.0
-144.6
-5.0
116.1
-15.0
-1.7
95.0
8.2
2.0
10.2

2015E
32.0
24.2
-2.9
23.4
-7.3
-4.9
60.7
-58.2
0.0
0.0
-58.2
0.0
17.5
-23.4
-1.7
-4.7
-2.2
10.2
7.9

Cash flow statement

Y/E March
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance

11 June 2014

(INR Billion)
2016E
2017E
40.7
48.5
27.4
30.4
-3.2
-4.8
28.6
30.3
-9.9
-11.5
-8.9
-6.4
70.9
82.8
-71.6
-66.7
0.0
0.0
0.0
0.0
-71.6
-66.7
0.0
0.0
40.0
35.0
-28.6
-30.3
-1.7
-1.7
12.9
7.8
12.3
23.8
7.9
20.2
20.2
44.0
E: MOSL Estimates

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Jindal Steel & Power

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11 June 2014

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