19 February 2015
Update | Sector: Metals
Jindal Steel & Power
BSE Sensex
29,462
S&P CNX
8,895
CMP: INR195
n
TP: INR140 (-28%)
Neutral
Retains Gare Palma IV/2&3; maintain Neutral
Jindal Steel and Power (JSP) retained its operational coal mine, Gare-Palma
IV/2&3, for its subsidiary Jindal Power (JPL) by forgoing the cost of mining
and paying additional premiums of INR108/t in the final e-auction. Although
11 bidders had qualified, six bidders (three bids of Jindal Power, one bid
each of Jindal India Thermal Power, GMR and Adani) participated in the
final e-auction held today (Feb 19
th
). With this, JPL (3,400mw) has secured
fuel for Tamnar-1 (1,000mw) plant. However, it will have to scout for a PPA.
JPL will be allowed to sell 15% of the generation in merchant market, while
the remaining 85% of volumes will have to be sold through PPA. According
to the terms of mining agreement, the PPA tariff will not compensate for
the cost of mining and additional premium of INR108/t.
JPL has a PPA of 200mw for Tamnar-1 (T1) and 710mw for 2,400mw
Tamnar-2 (T2). Since the T2 PPAs have coal linkages from Coal India, JPL will
likely use the captive coal mine (Gare-Palma IV/2&3) for T1 and scout for a
new PPA so that a total of 1,710mw capacity gets tied up, in our view. If JPL
tries to use coal for T2 PPAs, which it may until a new PPA is signed, it will
have to forgo the linkages. We believe the company will avoid this, unless it
is unable to secure coal mines for T2 as well. With all the operational coal
mines in power sector being taken, JPL will have to wait for the non-
operational mines. Thus, we assume that JPL will use coal for T1.
We believe the company will be able to sell 15% of T1 power, 150mw, in
merchant market at INR3.1/kwh. For 850mw under expected PPA, the tariff
will get adjusted to a lower rate of INR2.41/kwh based on regulated returns
of 15.5% under CERC guidelines as explained in exhibit 1. The mining costs
will not be allowed in normalized tariff pursuant to signing of coal mining
contract for Gare Palma IV/2&3. Transportation cost is also not applicable
as coal is moved through a conveyor.
Under the assumptions, T1 will be able to generate an EBITDA of INR9.4b
(INR1.37/kwh) and PBT of INR6.6b. This is lower than our estimate for
FY16E EBITDA of INR12.8b (INR1.6/kwh). Since power operators like Essar
Power, CESC etc have bid for mines at much higher “additional premium”,
there is an expectation that competitors will be quoting a higher fixed
capacity charge. Hence, JPL may be able to secure a higher tariff than the
normative calculations in exhibit 1. Thus, we retain our estimates until the
actual PPA is signed.
The visibility of coal supply for T1 has improved. Given its low cost
structure, there is hardly any risk to secure a PPA. Steel business still needs
to secure Gare-Palma IV/1 to maintain a low cost structure. We have
factored INR1,000/t in our model for additional cost of bidding for this
mine. This appears a very conservative estimate as the bids for other
operational coal mines have ranged from INR918/t to INR3,502/t so far.
Stock Info
Bloomberg
Equity Shares (m)
M.Cap.(INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg al(INRm)/Vol‘000
Free float (%)
JSP IN
914.9
178.7/2.9
350/125
25/-45/-63
1,120/5,337
38.9
n
Financial Snapshot (INR Billion)
Y/E Mar
2015E 2016E 2017E
Sales
210.4 245.5 296.4
EBITDA
Adj. PAT
Adj. EPS (INR)
EPS Gr(%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV
EV/EBITDA (x)
Div. Yield (%)
14.9
0.9
9.6
0.8
51.0
0.9
9.9
0.8
17.1
0.8
8.2
0.8
n
62.4
12.0
13.1
60.8
3.5
3.8
72.8
10.5
11.4
n
-37.2 -70.7 198.0
223.5 225.0 234.1
5.6
5.8
14.3
1.7
4.8
48.8
5.0
6.7
16.4
n
Sanjay Jain
(SanjayJain@MotilalOswal.com); +91 22 3982 5412
Dhruv Muchhal
(Dhruv.Muchhal@MotilalOswal.com); +91 22 3027 8033
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.