Motilal Oswal neutral on Jindal Steel; target Rs 271
Brokerage house Motilal Oswal has maintained a neutral rating on Jindal Steel & Power (JSPL) with a target price of Rs 271 in its June 11, 2013 research report.
June 12, 2013 / 17:05 IST
Motilal Oswal's research report on Jindal Steel & Power (JSPL)
"According to media reports, CBI has filed an FIR against Jindal Steel & Power (JSPL), group companies, Naveen Jindal (the promoter) and Mr D N Rao (former minister of state for coal) in connection with allotment of coal blocks during 2004-09. They have been charged with cheating, forgery, misrepresentation of net worth and concealing previous allotments of coal blocks."'During 2004-09, JSPL was allotted Gare Palma IV/6 (2006) in Chhattisgarh, Ramchandi (2009), Urtan North (2009) in Orissa and Jitpur (2007) and Amarkonda Murgadangal (2008) in Jharkhand, with total reserves and resources of 1,942m tons as per the following details. None of these blocks are either operational or are expected to become operational over the next two to three years. Further, JSPL has not incurred material capital expenditure either on the coal blocks itself or associated projects.""Thus, the de-allocation (if at all) is not likely to affect the operating assets. Prior to 2004, JSPL was allotted Gare Palma IV/1 (1996), Gare Palma IV/2 (1998), Gare Palma IV/3 (1998) and Utkal B-I (2003). The three Gare Palma coal blocks (allotted during 1996-98) are already operational and support sponge iron and power generation in Chhattisgarh for steel and power businesses.""We have valued the stock at INR274 based on the SOTP method. The target price includes INR78b (at 40 percent discount) for the valuation of CWIP. Since this event is likely to affect future projects, the INR78/share valuation of CWIP in our SOTP is at risk. In such a situation, JSPL too is likely to cut capex in greenfield projects. Assuming INR70b capex of the planned INR120b capex in the steel business is reduced during FY14-15, the net debt will be correspondingly lower. Adding back this, the target price will work out at INR271. We do not expect capex in the power business (Tamnar 2) to be affected as the project is in an advanced stage.""Although fundamentals of JSPL's businesses remain challenging due to (1) slowing steel demand and (2) power sector problems -- power demand on the back of financial stress in power distribution supply chain, the sharp correction of 50 percent in stock price since we downgraded the stock (to sell at INR462 in our sector thematic report CWIP valuation demystified dated January 7, 2013) calls for a review. The stock has fallen 20 percent below the revised SOTP of INR271/share, largely based on operating assets. The downside risk to earnings still remains, but the valuation close to P/BV of 1x provides comfort. We upgrade the stock to Neutral," says Motilal Oswal research eport.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. 
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