JSPL back to square one on bid rejection: Kotak Institutional Equities

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Published: March 25, 2015 12:09:35 AM

Suspend rating on Jindal Steel & Power (JSPL) — previously ‘add’ — pending clarity on the coal-sourcing arrangement...

Suspend rating on Jindal Steel & Power (JSPL)  — previously ‘add’ — pending clarity on the coal-sourcing arrangement for both the power and steel businesses.

Cancellation of bids for the power business, coupled with lack of wins in steel, leave JSPL in the lurch, as fuel sourcing becomes highly uncertain for both energy intensive businesses.

While our current earnings estimates continue to build the benefit of coal block wins, the future course of business is entirely contingent on the type of fuel sourcing arrangements.

EPS can range from R31.5 with continuation of existing fuel sourcing arrangement to R20.2, assuming that the entire coal requirement is bought from the e-auction market. While our e-auction sourcing assumption is based on the premise that JSPL will be able to source its entire coal requirement from the e-auctions (or import at comparable costs), we believe it may be a logistical nightmare.

Absence of coal blocks takes away the mainstay of Jindal Power’s fuel-sourcing arrangements, putting at risk 2.2 GW out of its 3.4 GW of coal-base capacities at Tamnar.  Limited linkages and absence of captive coal blocks would make imports an expensive and logistically difficult choice of fuel. JSPL has not yet won a mine for its steel operations in the non-regulated category where the bids have been aggressive. JSPL’s steel operations require ~7 mtpa of coal (and 5 mtpa for merchant power plants).

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