30 July 2012
1QFY13 Results Update | Sector: Metals
Jindal Steel & Power
BSE SENSEX
S&P CNX
16,839
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
5,100
JSP IN
934.1
663/390
-7/-23/-29
369.0
6.7
CMP: INR395
TP: INR382
Neutral
Consolidated
Jindal Steel and Power's (JSPL) adjusted consolidated profit after tax (CPAT) for 1QFY13 grew 4.4% YoY to
INR9.6b, 9% below our estimate due to lower sales volumes in the steel business, higher costs in Jindal Power,
and higher interest costs. Reported CPAT of INR3.85b included INR5.7b on account of impairment in value of
investment in Bolivia.
Production of steel and pellets remained strong, but sales volumes disappointed, as demand and prices
deteriorated sharply in June 2012. The accumulated inventory will yield lower profits in the subsequent
quarter because of lower steel prices.
Jindal Power continues to maintain superior plant load factor (PLF) of 99%. Power rates and PAT have been on
a declining trend. Cost of production (EBIT level) remains high at INR1.6/kwh. A disputed INR 1b of accumulated
electricity duty imposed by Chhattisgarh has now been fully provided thereby inflating the cost of power
generation. The timing of change in accounting policy is unconvincing.
Jindal Power will continue to sell power through short to medium term contacts in competitive bidding and
will participate in long-term bidding, if there are opportunities. Margins will remain strong because the cost
of power generation is high for marginal producers, who depend on high cost imported coal. Unless a separate
window is created for such power plants to transfer the benefit of low cost coal to the end user, margins will
remain firm, provided no excessive provisioning is done.
We have cut our EPS estimates for FY13/FY14 by 15%/20% to INR39.4/INR37 to factor margin compression in the
steel business and higher provisioning in Jindal Power. Maintain
Neutral
with an SOTP-based target price of
INR382.
Sanjay Jain
(SanjayJain@MotilalOswal.com);Tel: +9122 3982 5412
Pavas Pethia
(Pavas.Pethia@MotilalOswal.com); Tel: +9122 3982 5413
Investors are advised to refer through disclosures made at the end of the Research Report.
1

Jindal Steel & Power
Standalone: steel sales suffered due to weak demand; CPP PLF still low
Production of steel and pellets remained strong, but the sales volumes
disappointed as demand and prices deteriorated sharply in June. The accumulated
inventory will yield lower profits in subsequent quarter because of lower steel
prices.
Sales of metallic were nearly discontinued as HBI imports from Oman subsidiary
were cut. A conversion arrangement for pellets into sponge iron has been worked
out with local sponge iron producers. This is reducing the availability of surplus
pellets for 3rd party sale.
Production of both DRI and Pig iron increased 23% QoQ to 375kt and 485kt
respectively. Production of saleable steel was flat QoQ. There was increase in
inventories as sales of steel products declined 24% QoQ to 561kt. Pellets sales
declined sharply 43% QoQ to 395kt.
Production remained strong
Pellets and metallic sales declined
Source: Company/MOSL
Captive power generation increased 7% QoQ to 1.5b kwh. Sales of power increased
5% QoQ to 584m kwh. 3rd unit of 135MW at Angul has been commissioned on 9th
July 2012. Thus, a total of 7 units out of 10 units of 135MW each have been
commissioned.
EBITDA increased 8% to INR10.4b but it was 17% below estimate due to lower
sales volumes.
Power generation up but margins slipped
PLF remains low
Source: Company/MOSL
30 July 2012
2

Jindal Steel & Power
Overseas steel business: EBIT up 56% QoQ to INR1.5b
The revenue of overseas steel business increased 51% QoQ to INR6.2b with
corresponding 56% increase in EBIT to INR1.5b.
Jindal Power: Rates down 5% QoQ, untimely provisioning boosted cost
Jindal power continues to maintain superior PLF of 99%. Power rates and PAT have
been on declining trend.
Power generation increased 2% QoQ to 2166m kwh and PLF improved 200bp to
99%.
Power rates are estimated to be lower 5% QoQ to INR3.7/kwh. PAT declined 25%
QoQ to INR3.1b.
Cost of production (EBIT level) remains high at INR1.6/kwh. A disputed INR 1b of
accumulated electricity duty imposed by Chhattisgarh has now been fully provided
thereby inflating the cost of power generation. The timing of change in accounting
policy is unconvincing.
PAT and rate: a declining trend
Generation remains strong
Source: Company/MOSL
30 July 2012
3

Jindal Steel & Power
EPS cut 15%/20% for FY13/FY14 to factor margin compression and project
delay
Production of steel and pellets remained strong, but the sales volumes
disappointed as demand and prices deteriorated sharply in June. The accumulated
inventory will yield lower profits in subsequent quarter because of lower steel
prices.
Sales of metallic were nearly discontinued as HBI imports from Oman subsidiary
were cut. A conversion arrangement for pellets into sponge iron has been worked
out with local sponge iron producers. This is reducing the availability of surplus
pellets for 3rd party sale.
Cost of iron ore has moved up significantly over 12-18 months because pellet
plant relies on 3rd party sourcing. This has not dented the margins so far because
prices of pellets and steel have been correspondingly high. Although prices of
steel have started softening, the prices are iron ore fines will continue to remain
strong because of heavy investment in pelletization capacity across India. This
will likely put the pressure on steel segment margin. Discretionary use of zero
cost iron ore inventory makes the analysis of margins complicated and unreliable.
Jindal Power will continue to sell power through short to medium term contacts
in competitive bidding and will participate in long term bidding if there are
opportunities. Margins will remain strong because the cost of power generation
is high for marginal producers who depend on high cost imported coal. Unless a
separate window is created for such power plants to transfer the benefit of low
cost coal to the end user, the margins will remain firm provided no excessive
provisioning is done.
Jindal power's 2400MW expansion at Tamnar is expected to get commissioned
during FY14 and FY15. Coal India has assured linkage to 1200MW but for balance
1200MW, JSPL will have to depend on imported coal.
JSPL has now exited iron ore mining project in Bolivia with write-off of INR5.7b.
However, it continues to look for investment in resources across the world. Gujarat
NRE and CIC Energy are some of the recent adventures. These investments are of
long term strategic importance at this moment with very little equity value in
near term.
We have cut EPS by 15%/20% to INR39.4/INR37 for FY13/FY14 respectively to factor
margin compression in steel business and higher provisioning in Jindal power.
Also, the Angul project's commissioning has been further delayed by 3 months to
June 2013.
JSPL has enjoyed re-rating over last 3-4 years as it delivered superior returns with
earnings cagr of 42% over FY42% over FY07-12. Project delays and rising capital
intensity has stalled the earnings growth. We now expect earnings to decline at
cagr of 9% to INR37 in FY14.
We valued the stock at INR382 based on SOTP. Iron and steel business is valued at
INR193 based on FY14 PE of 10x, while power business is valued based on DCF.
30 July 2012
4

Jindal Steel & Power
Sum of the part valuations
Equity Valuation
Iron & Steel
Shadeed
Rockland & GNM
Jindal Power
Tamnar II
SOTP
Business
Segment
Steel, Power
Steel
Coal
Power
Power
Method
Valuation
multiple
10.0
10.0
Value
(INR m) (INR/sh) Rationale
180,743
22,371
2,046
126,906
24,648
356,715
This is equal to FY14 EV/EBITDA of 5.8x
1.5mtpa DRI plant, Attractive 22 year gas supply
contract
2 Coal tenaments in Australia
136 1000MW Capacity for Tamnar 1
26 2400MW capacity for Tamnar 2
382
Source: Company, MOSL
193
24
FY14E PER (x)
FY14E PER (x)
Actual Mkt Cap
DCF (to equity)
DCF (to equity)
30 July 2012
5

Jindal Steel & Power
Jindal Steel & Power: an investment profile
Company description
Jindal Steel and Power (JSP) currently has 3mtpa of
operational steelmaking capacity at Raigarh. It has one
of the best iron ore and coal resources in India, with
assets spread over various mineral-rich countries. JSP
offers the best insulation from iron ore and coking coal
prices among Indian steel producers, and is the only
power producer in India, most of whose projects are
secured for coal from captive mines. The company has
rich iron ore and coal resources overseas, mainly in
Mozambique, South Africa and Indonesia.
Most of the power projects are secured for fuel
through captive sources.
Unexpected fall in steel prices and delay in project
execution would adversely impact earnings.
Key investment risks
Recent developments
JSPL has exited iron ore mining project in Bolivia with
write-off of INR5.7b.
Valuation and view
Key investment arguments
JSP has planned to increase its steel capacity 4x over
the next four years. It is augmenting its existing
3mtpa capacity, by setting up a 1.6mtpa module at
Angul, which will use the coal gasification route. It
plans to add two more modules of 1.6mtpa each at
Angul and Raigarh, using this technology. At Patratu
(Jharkhand), JSP has selected the blast furnace route
for steel making.
Only 1/3rd of the 12mtpa steel capacity will be
exposed to coking coal imports.
Jindal Power plans to increase capacity by 10x in 10
years by adding 4,380MW of thermal power projects
in Chhattisgarh and Jharkhand at a capex of USD5.3b
and 6,100MW of hydro power projects in Arunachal
Pradesh at a capex of USD8.1b.
We valued the stock at INR382 based on SOTP.
Maintain
Neutral.
Sector outlook
Steel prices have declined across major geographies
in 1QFY13 with major drop in the month of June,
2012. The decline is most severe in China where
prices are at their two year low levels. However
Indian prices so far have avoided similar correction
due to support from rupee depreciation.
We expect steel prices to correct, going forward, on
account of slowdown in domestic demand and some
reversal in the INR depreciation against the USD.
According to World Steel Association Global crude
steel production declined 2.5% MoM (flat YoY) to
127.9mt in June driven by decline of 2% in China, 3%
in CIS, 4% in Europe and 6% in North America.
Comparative valuations
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY13E
FY14E
FY13E
FY14E
FY13E
FY14E
FY13E
FY14E
JSPL
10.0
10.7
1.7
1.5
2.7
2.8
8.6
8.3
SAIL
9.3
10.9
0.8
0.8
1.1
1.3
6.9
8.6
Tata Steel
13.3
7.9
1.4
1.3
0.7
0.7
6.9
6.4
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
39.4
37.0
Consensus
Forecast
45.3
53.1
Variation
(%)
-12.9
-30.3
FY13
FY14
Target price and recommendation
Current
Price (INR)
395
Target
Price (INR)
382
Upside
(%)
-3.3
Reco.
Neutral
Stock performance (1 year)
Shareholding pattern (%)
Jun-12
Promoter
Domestic Inst
Foreign
Others
30 July 2012
59.0
7.3
21.9
11.8
Mar-12
58.9
6.9
23.1
11.1
Jun-11
58.4
6.5
24.1
11.0
6

Jindal Steel & Power
Financials and Valuation
30 July 2012
7

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