Maintain ‘neutral’ on Jindal Steel and Power (JSPL) and value the stock at R157 per share on FY16e and R210 per share on FY17e. We have lowered FY16e ebitda by 15.1% and EPS by 42% to factor the correction of R1,000 per tonne in net sales realisation (NSR) for steel products as well as lower pellet production on shortage of iron ore.
JSPL business is witnessing the lowest point in its business cycle. Although business headwinds are far from over, we believe the valuations have become attractive for a long term investor. After 48% correction since August 25, 2014, the stock trades at 32% discount to FY15e book value of R225 and 55% discount to replacement cost of R338 per share.
Even if we impair the value of bad mining investments overseas and ignore the value of CWIP (Angul phase 2, Wollongong), the stock is still worth R179 per share on replacement/book value and it will take at least 10 years for another player to replicate these assets.
We expect India’s coal and iron ore mining issues to be largely addressed in the next two to three years. JSPL stands a good chance of winning a non-regulated coal block for its sponge iron unit at Raigarh, but the CGP at Angul site is now stranded for a coal mine. We estimate that JSPL can bid up to R1,000 per tonne for non-regulated coal block Gare Palma IV/1 and still achieve significant savings.
By Motilal Oswal