Buy Jai Balaji Industries; target of Rs 316: Motilal Oswal

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Buy Jai Balaji Industries; target of Rs 316: Motilal Oswal

Motilal Oswal is bullish on Jai Balaji Industries and has recommended buy rating on the stock with a target of Rs 316 in its May 30, 2011 research report.

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Motilal Oswal is bullish on Jai Balaji Industries and has recommended buy rating on the stock with a target of Rs 316 in its May 30, 2011 research report.

"Jai Balaji Industries' (JBI) 4QFY11 adjusted PAT increased 61% QoQ to Rs 321m, below our estimate of Rs 392m due to higher tax paid during the quarter and an increase in interest costs. EBITDA was Rs 1.2b, a little above our estimate of Rs 1.14b. 4QFY11 net sales increased 14% QoQ to Rs 6.7b due to higher steel prices and better metallic realizations. The company produced 104,845 tons of pig iron in 4QFY11, down 6% QoQ as one of its blast furnaces was under maintenance shutdown in March. The company expects strong growth in production over the next two years as it has undertaken maintenance work for both its furnaces and does not expect a major maintenance shutdown. Besides, iron ore availability has improved after an increase in export duty levied on ore."

"The company's brownfield expansion is on track with 0.35mtpa coke oven batteries to be commissioned by September 2011. Production from the coking coal mines will reduce the hot metal cost significantly. Additional waste heat will generate ~20MW power. In the near term Jai Balaji is focusing on increasing metallic production and ramping up its DI pipe mill, which will improve margins due to the use of captive pig iron and sinter. Earnings in the subsequent quarters will be lower due to weakening of product prices and the lag effect of higher coke costs. Though the near term valuations look stretched due to deployment of capital in green field projects, the stock is attractive from a long term perspective."

"We believe the company's large coal reserves and significant capex plans to monetize the reserves will enable JBI to drive strong earnings growth over the next five years. The demand-supply gap for coal is likely to widen in India. As the near-term earnings do not capture large long term upsides, we have valued the stock based on its 2x FY12E book value, resulting in a target price of Rs 316, an upside of 68%. Maintain Buy," says Motilal Oswal research report.

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