‘Buy’ Jindal Steel & Power (JSPL) given its strong fundamentals, attractive valuation and execution track record. We peg JSPL’s target price at 1x P/B on FY16e BV, or Rs 278 per share. De-allocation of all coal blocks has raised uncertainty. It may take a while for the situation to be resolved and for the outcome to become clear. Till then, investors and the market are likely to focus more on JSPL’s near-term earnings, cash flows, and net debt levels and less on sum-of-the-parts / DCF value. As a result, we peg our target price at 1x P/B at ~Rs 277 per share, which is backed by a conservatively calculated replacement value of plant and machinery.
De-allocation of coal mines and iron ore mining have taken JSPL shares down ~45% YTD. Coal mine auctions are likely to be completed by March 2015. Meanwhile, JSPL continued to execute and commission projects and as a result power and steel capacity is up ~2-2.5x. We visited JSPL’s projects and coal mines in Raigarh, Tamnar and Angul for a reality check.
Our interaction with people on the ground suggests that coal transportation by road is prohibitively expensive. Costs range from Rs 8 to Rs12 per tonne per km in Chhattisgarh and Odisha. As a result, the landed cost of coal for a bid winner, who is, say, 100 km from the mine, could be as high as Rs 1,800-2,500 per tonne for coal.