Stock corner: Maintain ‘buy’ on JSPL with target price of Rs 145

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Published: November 6, 2019 3:52:47 AM

In our view, cost reduction and the ongoing volume ramp-up are a double bonanza for JSPL.

Stock corner, JSPL, JSPL target price, Ebitda, Gare Palma, coal procurement costJSPL has emerged as the top bidder for Gare Palma IV/1 coal block with a premium of Rs 230/t (floor price: Rs 170/t).

Media reports suggest Jindal Steel & Power (JSPL) has emerged as the top bidder for Gare Palma IV/1 coal block. This would be beneficial for the company as: our initial estimates suggest (at full mine capacity of 6 mtpa) a reduction in coal procurement cost of at least Rs 5 bn per year; and being the previous allottee of the mine, JSPL would be familiar with its geology and coal grade.

In our view, cost reduction and the ongoing volume ramp-up are a double bonanza for JSPL. We await more details. Should the cost benefit of Rs 5 bn get realised, we estimate upside potential of 7% to FY21E Ebitda.  Maintain ‘Buy’ with a TP of Rs 145/share. The stock is trading at 5.6x FY21E Ebitda. As per the media reports, JSPL has emerged as the top bidder for Gare Palma IV/1 coal block with a premium of Rs 230/t (floor price: Rs 170/t). The mine has total reserves of 159.4 mt (open cast: 133.3 mt) and annual production capacity of 6 mtpa.

At the rated capacity, Gare Palma 1V/1 would be sufficient to meet about 70% of the steel division’s total coal requirement. Being a previous allottee of the mine, JSPL would be familiar with the mine and would have configured its DRI plant accordingly. Furthermore, the company can also sell surplus coal at 25% of notified price to its subsidiary JPL, thereby reducing its coal cost and reliance on external supply. We understand that JSPL will have to bolster the conveyor system to improve evacuation.

Taking cognisance of our e-auction price estimates, we reckon a benefit of at least Rs 800–850/t on coal procurement, resulting in a cost benefit of about Rs 5 bn per annum at the rated mine production of 6mtpa. This translates to potential upside of 7% to our FY21E Ebitda.

We expect the imminent cost benefit from captive coal to augment the ongoing volume uptick gains. Based on our preliminary estimates, we reckon potential upside of 7% to our FY21E Ebitda. Maintain ‘Buy/SO’ with a TP of Rs 145/share – an exit multiple of 5.8x FY21E Ebitda.

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