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Jindal Steel & Power: Cold comforts

Coal cost to compress margins despite good quarterly show

Jindal Steel & Power
Rating: Reduce

Broadly in line; raw material concerns remain. JSP’s Q2FY15 consolidated Ebitda was ahead of our estimates, led by a 5% beat from the power business and higher Ebitda from subsidiaries. A sequential spike in realisations contributed to the beat in the power business. Near-term earnings notwithstanding, the financial performance will deteriorate considerably once the cost of coal sourcing increases and will result in margin compression. Risks to domestic steel earnings are also high with the uncertainty on operational continuity of the Sharda mine. Maintain Reduce rating with target price of R170.

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Q2FY15 results: 8% beat at Ebitda level led by power and others Jindal Steel & Power’s consolidated Ebitda of R16.4 bn (+8% year-on-year, +5% quarter-on-quarter), was 8% ahead of our estimate. However, the standalone steel Ebitda of R9.6 bn was lower than our estimate due to a sequential decline in steel realisations. Despite a weak standalone performance, the consolidated Ebitda beat was led by (i) 22% q-o-q growth in Jindal Power’s Ebitda to R5.2 bn aided by a sharp increase in blended realisations and higher generation from Tamnar II (18% PLF for 1,800 MW), and (ii) higher Ebitda contribution from other subsidiaries.

We note that while aggregate disclosed Ebitda of foreign subsidiaries declined to $13m in Q2FY15 from $19m in Q1FY15, such an Ebitda calculation from reported consolidated financials shows an increase. Net income of R4.4 bn was aided by a lower effective tax rate of 7%.
Power: Spike in realisations: Jindal Power reported a strong 39% y-o-y growth in revenues to R9.2 bn on expanded capacities of 2,800 MW and gross generation of 2,799 MU (million units) (+ 33% y-o-y). The sharp spike in blended realisations to R3.6/kWh (+15% q-o-q) and the ability to absorb incremental depreciation and interest cost on additional 1,800 MW capacity (interest and depreciation cost of R1 bn reported) helped to report a respectable PAT of R2.9 bn. Cost of generation at R1.6/ kWh rose by 30% over previous quarters, reflecting the higher cost of sourced coal versus captive mines supply coal to Phase I.

The Q2FY15 results indicate Jindal Power was able to absorb the incremental cost associated with Tamnar II despite a sub-optimal 18% PLF (plant load factor). However, uncertainty over auctioning of coal blocks, likely over the next few months, is more relevant from the perspective of stock performance. We maintain our cautious view due to uncertainty about coal and iron ore.

—Kotak Institutional Equities

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