JSPL may see 30% EBITDA cut on coal block loss: Nirmal Bang

JSPL, which is down nearly 20 percent since yesterday, could see a cut of 30 percent on its FY15 EBITDA if its worst case scenario of coal block de-allocation comes true on September 1. That’s word coming from Giriraj Daga, Senior Research Analyst at Nirmal Bang Institutional Equities. Metal stocks went into a tizzy yesterday after the Supreme Court pronounced that coal blocks allocated between 1993 and 2009 are illegal and unconstitutional. The 263-page order by the apex court indicts both BJP and Congress-led governments who were in-charge for the 16 year period. The court goes on to say the screening committee has never been consistent or transparent resulting in unfair distribution of national wealth. However, court stopped short of scrapping the allocation for the moment. It will hear arguments on September 1 to decide on the consequences of the illegality. Metals and power companies depend heavily on coal to run smelters and generate electricity. Daga believes JSPL, which is running close to 12 million tones of coal from two of their mines, is the most vulnerable of the metal pack from this entire coal allocation process.

Below is the transcript of Giriraj Daga’s interview to CNBC-TV18’s Ekta Batra and Anuj SinghalAnuj: We have to start with Jindal Steel and Power Limited (JSPL). How much more damage do you think the stock can see and at that point to you think it would become a neutral or a buy because we have seen almost 20 percent price damage to this stock?A: I would like to highlight that it depends on what the Supreme Court (SC) do on September 1. So rather than making an estimate that what will SC do on September 1, I think we should wait and watch. I would like to give a couple of scenarios. If we are assuming that the coal mines will be taken away and deallocated then possibly we are looking at as big a cut of 30 percent on the EBITDA on FY15 numbers which can be a very big hit and the stock can still go down from here also if that happens. The other scenario can be that these coal mines are taken and given to Coal India and this company will continue to get coal at FSA rate, the damage would be lesser and broadly done at current levels. If you say there is big penalty possibly at current levels we might see that this is more or less done with the damage. But it depends on what scenario it takes so rather than putting an estimate on what will SC do on September 1, I think we should do a wait and watch approach that should be the right strategy right now.Ekta: Tata Steel has bounced back because it is not going to be impacted by the SC ruling. What is your view on Tata Steel and your rating as well as your target price on the stock and have you become a little more incrementally positive because this SC ruling will not affect them?A: Yes we are positive on Tata Steel and our current rating is a buy rating and we have target price of close to Rs 660 on the stock. The reason is first of all they are not impacted as they don't have any coal mines. There is a slight hit on the future profitability as two coal blocks particularly Kotre Basantpur and Radhikapur was expected to come to them. But considering the lower coking coal prices in the international market we don't expect a serious impact to come into them and we have a buy rating. If you talk about broadly in our coverage, the other stock which will be hit hard is Hindalco where they are running at 2.5 million tonnes coal mine in Talabira-I and if that is taken possibly we are looking at close to 15 percent hit on EBITDA, I am focusing on the standalone EBITDA. I am keeping Novelis aside at this point of time so we can have 15 percent EBITDA on the standalone entity and 5 percent EBITDA on a consolidated entity for Novelis if the coal mines are deallocated. So there we will have to work out the numbers and we have a sell rating on Hindalco right now with a target price of Rs 141 which might further get downgraded. Anuj: In this space what would be your top pick and your top avoid right now?A: We continue to remain positive on Tata Steel and JSW Steel, anyway they are not impacted with this verdict. Sesa Sterlite we continue to remain positive, we were not factoring these coal mines to be there in FY16 and our estimate on that is Rs 360 this is without the coal mine. So we continue to remain positive on Sesa Sterlite also in the nonferrous pack while Tata Steel and JSW Steel in the ferrous pack.