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Last Updated : Jan 08, 2013 03:12 PM IST | Source:

Sell Jindal Steel; target of Rs 356: Motilal Oswal

Motilal Oswal is bearish on Jindal Steel & Power and has recommended sell rating on the stock with a target of Rs 356 in its January 7, 2013 research report.

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Motilal Oswal is bearish on Jindal Steel & Power and has recommended sell rating on the stock with a target of Rs 356 in its January 7, 2013 research report.
“JSP’s steel business benefitted from 10x increase in iron ore prices and 6x increase in coking coal prices over the last 10-12 years. Similarly, its power business benefitted from high merchant power rates. Captive thermal coal and iron ore mines helped to keep the cost of production of steel and power under check. Further, JSP kept its balance sheet light by investing in only high RoI businesses rather than pursuing large ambitions in the asset-heavy steel or power businesses. The cost of the completed projects has already been fully recovered (see exhibit, CWIP catching up with net debt). High growth in earnings and absence of dilution led to massive re-rating of the stock during FY08-10; low earnings volatility reduced the cost of equity. The basis of valuation shifted from EV/EBITDA to P/E to capture the high growth and strong pipeline of projects.”
“As at the end of FY13, JSP will have CWIP of ~INR223b outstanding of the INR286b capex, which will have an NPV of –INR114b. The CWIP/MCap ratio, though not as bad as in FY02, has risen sharply to 52%. The CWIP/EV ratio has increased to 34%. Cash flows from high yield operating assets are now being deployed in low yield projects. This will drive further de-rating of the stock, in our view. Our SOTP value has gradually declined from INR728/share (as per our report dated 18 July 2011) to INR356/share because of the following reasons:  The value of the steel and CPP business has declined from INR342/share to INR186/ share due to delays in the 1.5mtpa steel and 810MW CPP project at Angul, and the 540MW CPP project at Raigarh. The profitability of 1,350MW has been far lower than expected due to higher than expected fuel cost and inability to sell power in the merchant market due to regulatory hurdles. The value of Jindal Power has declined from INR337/share to INR145/share due to repeated delays in initiating power projects of 1,980MW at Goda and Dumka in Jharkhand because of uncertainty regarding coal blocks and tardy land acquisition. Tamnar-2 has been delayed due to temporary suspension of ToR (terms of reference) for the project. The Bolivia project was closed with losses of ~INR5b (INR5/share) instead of value of INR21/share in our SOTP.” 
Applying our two alternative approaches to valuation, we find that JSP has downside in all of the four situations. We downgrade our stock recommendation from Neutral to Sell.
1. SOTP: We have valued operational assets at an EV of 5x one-year forward EBITDA. We have adjusted the CWIP against the NPV of the projects to capture their intrinsic value. JSP’s valuations are highly sensitive to steel/iron ore prices. In the base case scenario, where we assume iron ore prices of USD83/ton and coking coal prices of USD125/ton, we arrive at a value of INR172/share. In the optimistic scenario, where we assume iron ore prices of USD106/ton and coking coal prices of USD170/ton, we arrive at a value of INR269/share.

2. FY20 valuations discounted for five years: We arrive at FY20 valuations to factor in completion of all ongoing projects and the possible delays. We have discounted these valuations backwards for five years by JSP’s cost of equity of 18.1%. In the base case scenario, we arrive at a value of INR202/share. In the optimistic scenario, we arrive at a value of INR279/share.

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First Published on Jan 8, 2013 01:51 pm
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