Jindal Steel & Power Limited

HOLD Target Price ; Rs 765

CMP: Rs.694.90 Market Cap: Rs.646812.9mn. Date: 13 Jan,2010.

Key Ratios:

Particulars FY08

A

FY09

A

FY10E FY11E

OPM(%) 40 34 36 36

NPM(%) 23 20 19 20

ROE(%) 33 29 19 18

ROCE(%) 23 21 15 15

P/BV(x) 9.14 2.32 9.73 7.94

P/E(x) 27.5 8.00 50.86 43.34

EV/EBDITA(x) 5.61 4.07 29.9 27.3

Debt

Equity(x)

1.04 0.94 0.82 0.74

Key Data:

Sector Steel

Face Value 1.00

52 wk. High/Low

(Rs.)

778.00/120.35

Volume (2 wk.

Avg.)(lakh)

4.71

SYNOPSIS

• JSPL is a leading player in Steel, Power,

Mining, Oil & Gas and Infrastructure. With

an annual turnover of over US $2.00 billion

(Rs. 10,000 crore).

• JSPL is the largest private sector investor in

Chhattisgarh.

• JSPL has consistently tapped new

opportunities by increasing production capacity, diversifying investments, and

leveraging its core capabilities to venture into new businesses.

• The company’s expansion Projects in Orissa, a 12.5 million ton integrated steel

plant and 2600 MW Captive Power Plant in phases, with a total investment of over US $

8.00 billion (Rs. 40,000 crore). The first phase

of 3 million ton is expected to be commissioned by 2011.

• The topline of the company are expected

to grow at a CAGR of 12% over 2008A to

2011E.

Share Holding Pattern:

V.S.R. Sastry

Vice President

Equity Research Desk

91-22-25276077

vsrsastry@firstcallindiaequity.com

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

drsastry@firstcallindia.com

Table of Content

Investment Highlights ................................................................................................................... 3

Peer Group Comparison ............................................................................................................. 6

Financials ....................................................................................................................................... 6

Charts ............................................................................................................................................. 9

Outlook and Conclusion ........................................................................................................... 11

Industry Overview....................................................................................................................... 11

Investment Highlights

• Results Updates (Q2 FY10)

The bottomline of the company for the quarter stood at yoy that is

Rs.3050.10mn from Rs.4500.00mn of same period of last year. Total revenue

for the second quarter stood at Rs.15982.40mn from Rs.22161.20 which is

27.9% decreased than that of a year ago period. EPS for the quarter stood

at Rs.3.28 per equity share of Rs.1.00 each. Equity Capital has change from

154.7 to 930.8.

Expenditure of the company decreased 29% YoY to Rs.10468.90mn from

Rs.14716.60mn of same period of last year. Interest expenses for the quarter

stood at Rs.545mn. OPM & NPM for the quarter stood at 36% and 19%

respectively.

Quarterly Results - Standalone (Rs in mn)

As at Sep - 09 Sep - 08 %Change

Net Sales 15982.40 22161.20 (27.9)

Net Profit 3050.10 4500.00 (32)

Basic EPS 3.28 29.09

Equity Capital 930.8 154.7

• Jindal Power Limited files DRHP with SEBI (BSE)

Jindal Power Ltd. (JPL), a subsidiary of the Jindal Steel & Power Ltd ,

proposes a Public Issue of equity shares through 100% book building

method in accordance with the Securities and Exchange Board of India

(Issue of Capital and Disclosure Requirements) Regulations, 2009 and has

filed a Draft Red Herring Prospectus with the Securities and Exchange

Board of India.

Pursuant to this, JPL proposes to raise INR 7,200 Crores and intends to utilize

the net proceeds of the Issue to part finance the construction and

development of various Thermal Power Projects and party for the General

Corporate Purposes.

• Setting up hydro electric power project (BSE)

JPL will be setting up Subansiri Middle 1600 MW hydro electric power

project in

Arunachal Pradesh on river Kamla, a Tributary of river Subansiri pursuant to

Memorandum of Agreement entered into by and between Government

of Arunachal Pradesh, Hydro Power Development Corporation of

Arunachal Pradesh Ltd. and JPL.

JPL has received Survey License from Ministry of Energy, Nepal for setting

up 220 MW Chainpur Seti hydro electricity project in Nepal.

• Expansion Projects

o Orissa

A 12.5 million ton integrated steel plant and 2600 MW Captive Power

Plant in phases, with a total investment of over US $ 8.00 billion (Rs. 40,000

crore). The first phase of 3 million ton is expected to be commissioned by

2011.

o Jharkhand

An 11 million ton integrated steel plant and 2600 MW Captive Power Plant

in phases, with a total investment of over US $ 6.00 billion (Rs. 30,000 crore).

o Chhattisgarh

7 million ton steel plant, 2 million ton cement plant and 1600 MW Captive

Power Plant with a total investment of over US $ 5.20 billion (Rs. 26,000

crore).

Jindal Power Limited, an affiliate of JSPL, is expanding the capacity of its

existing 1000 MW O.P.Jindal Super Thermal Power Plant at Tamnar by

adding 2400 MW with an investment of US $ 2.40 billion (Rs. 12,000 crore).

Peer Group Comparison

Name of the

company

CMP

(As on 13

Jan,

2010)

Market

Cap.

(Rs. Mn.)

EPS

(Rs.)

P/E

(x)

P/BV

(x) Dividend(%)

Jindal Steel &

Power Ltd 694.90 646812.9 13.85 50.09

11.92 550

SAIL 237.10 979937.5 12.82 18.51 3.50 26

Tata Steel 625.65 555085.5 40.78 15.38 2.28 160

JSW Steel 1116.50 208839.9 38.13 29.28 2.74 10

Key Concerns

• Any significant delay in the implementation of the capacity addition

programme will pose a threat to our rating.

• Price control on short-term power sale may impact the higher realisation

of JPL.

Financials

12 Months Ended Profit & Loss Account (Standalone)

Particulars FY 08 A FY 09 A FY 10 E FY11 E

(Rs.Mn) 12m 12m 12m 12m

Net Sales 54,107.50 76,531.90 65434.77 75249.99

Other Income 491.2 1,462.40 1096.80 1206.48

Total Income 54,598.70 77,994.30 66531.57 76456.47

Expenditure -32,793.60 -51,605.20 -42794.3 -49213.49

Operating Profit 21,805.10 26,389.10 23737.23 27242.98

Interest -2,264.90 -2,040.00 -1938.00 -2034.90

Gross Profit 19,540.20 24,349.10 21799.23 25208.08

Depreciation -4,515.10 -4,330.30 -5066.5 -5573.1

Profit before Tax 15,025.10 20,018.80 16732.78 19634.98

Tax -2,655.50 -4,654.00 -4015.9 -4712.4

Net Profit 12,369.60 15,364.80 12716.91 14922.59

Equity Capital 154 154.65 930.80 930.80

Reserves 37,093.70 52,856.30 65,573.21 80,495.80

EPS 80.32 99.35 13.66 16.03

*Equity Capital has been changed

Quarterly Ended Profit & Loss Account (Standalone)

Particulars Mar 09 A June 09 A Sep 09 A Dec 09 E

(Rs.Mn) 3m 3m 3m 3m

Net Sales 17,606.90 15,761.30 15,982.40 16302.05

Other Income 1,134.60 165.3 204.6 225.06

Total Income 18,741.50 15,926.60 16,187.00 16527.11

Expenditure -13,300.10 -10,174.20 -10,468.90 -10677.84

Operating Profit 5,441.40 5,752.40 5,718.10 5849.27

Interest -259 -327.6 -545 -572.25

Gross Profit 5,182.40 5,424.80 5,173.10 5277.02

Depreciation -1,087.10 -1,228.90 -1,270.30 -1321.11

Profit before Tax 4,095.30 4,195.90 3,902.80 3955.90

Tax -505.1 -1,195.30 -852.7 -870.30

Net Profit 3,590.20 3,000.60 3,050.10 3085.61

Equity Capital 154.65 154.7 930.8 930.80

EPS 23.22 19.40 3.28 3.32

*Equity Capital has been changed

*A=Actual, E=Estimated

Charts

Comparative Graph

JSPL BSE SENSEX

Outlook and Conclusion

• At the current market price of Rs.694.90, the stock trades at a P/E of 50.86x

and 43.34x for FY10E and FY11E respectively.

• On the basis of EV/EBDITA, the stock trades at 29.97x and 27.30x for FY10E

and FY11E respectively.

• Price to Book Value of the stock is expected to be at 9.73 and 7.94

respectively for FY10E and FY11E.

• The Net sales of the company are expected to grow at a CAGR of 12% over

2008 to 2011E.

• Equity Capital has been changed.

• JPL will be setting up Subansiri Middle 1600 MW hydro electric power project

in

Arunachal Pradesh on river Kamla, a Tributary of river Subansiri pursuant to

Memorandum of Agreement entered into by and between Government of

Arunachal Pradesh.

• Expansion Projects in Orissa

A 12.5 million ton integrated steel plant and 2600 MW Captive Power Plant in

phases, with a total investment of over US $ 8.00 billion (Rs. 40,000 crore). The

first phase of 3 million ton is expected to be commissioned by 2011.

• We recommend ‘HOLD’ in this particular scrip with a target price of Rs.765.00.

Industry Overview

The Indian steel industry entered into a new development stage from 2005–06,

resulting in India becoming the 5th largest producer of steel globally. Producing

about 55 million tonnes (MT) of steel a year, today India accounts for a little over

7 per cent of the world's total production.

India is the only country across the world to post a positive overall growth in

crude steel production at 1.01 per cent for the January-March period of 2009.

The recovery in steel production has been aided by the improved sales

performance of steel companies. The steel sector grew by 5.3 per cent in May

2009.

Significantly, state-owned steel maker, Steel Authority of India (SAIL), which

reported a net profit of US$ 571 million in January-June 2009, has become the

most profitable steel company globally, beating steel majors such as

ArcelorMittal, Posco, Bao Steel and Nippon in the half yearly profits.

Production

Steel production reached 28.49 million tonne (MT) in April-September 2009.

Further, India, which recorded production of 22.14 MT of steel during April-

August 2009, is likely to emerge as the world's third largest steel producer in the

current year, according to Goutam Kumar Basak, Executive Secretary, Joint

Plant Committee (JPC).

The National Steel Policy has a target for taking steel production up to 110 MT by

2019–20. Nonetheless, with the current rate of ongoing greenfield and

brownfield projects, the Ministry of Steel has projected India's steel capacity is

expected to touch 124.06 MT by 2011–12. In fact, based on the status of

memoranda of understanding (MoUs) signed by the private producers with the

various state governments, India's steel capacity is likely to be 293 MT by 2020.

Consumption

India accounts for around 5 per cent of the global steel consumption. Almost 70

per cent of the total steel used is for kitchenware. However, its use in railway

coaches, wagons, airports, hotels and retail stores is growing immensely.

India's steel consumption rose by 5.7 per cent to 26.49 MT in the first six months of

the current fiscal over the same period a year ago on account of improved

demand from sectors like automobile and consumer durables.

A Credit Suisse Group study states that India's steel consumption will continue to

grow by 16 per cent annually till 2012, fuelled by demand for construction

projects worth US$ 1 trillion.

The scope for raising the total consumption of steel is huge, given that per

capita steel consumption is only 35 kg – compared to 150 kg across the world

and 250 kg in China.

Steel players like JSW Steel and Essar Steel are increasing their focus on opening

up more retail outlets pan India with growth in domestic demand. JSW Steel

currently has 50 such steel retail outlets called JSW Shoppe and is targetting to

increase it to 200 by March 2010. They expect at least 10-15 per cent of their

total production to be sold by their retail outlets.

Essar Steel which currently has over 300 retail outlets across the country, plans to

set up 5,000 outlets of various formats soon. It expects to sell 3MT of steel through

the retail route in two years.

Exports

Out of India's annual iron ore production of more than 200 MT, about 50 per

cent is exported.

Iron ore exports increased 17 per cent to 12.6 MT in February 2009 from 10.8 MT in

the same month a year ago, owing to a moderate revival in demand from

Chinese steel producers, as per the latest data compiled by a group of top

Indian mining firms.

Earlier, according to a study, with the rise in demand for steel in China, India's

iron ore exports went up by 38 per cent to reach 13.6 MT in December 2008

against 9.8 MT in December 2007. Around 50-60 per cent of India’s iron ore is

exported to China.

Power

As the Indian economy continues to surge ahead, its power sector has been

expanding concurrently to support the growth rate. The demand for power is

growing exponentially and the scope for the growth of this sector is immense.

India's total installed capacity of electricity generation has expanded from

105,045.96 MW at the end of 2001–02 to 155,859.23 MW at the end of November

2009. In fact, India ranks sixth globally in terms of total electricity generation.

Source-wise, at the end of November 2009, thermal power plants accounted for

an overwhelming 63.92 per cent of the total installed capacity, producing

99628.48 MW. Hydel power plants come next with an installed capacity of

36,885.40 MW, accounting for 23.67 per cent of the total installed electricity

generation capacity.

Besides thermal and hydel power, renewable energy sources contribute 9.77 per

cent to the total power generation in the country producing 15,225.35 MW.

Nuclear energy makes up the balance 2.64 per cent, contributing 41,200 MW.

Growth Potential

According to a report by KPMG and CII, released in December 2007, India's

energy sector will require an investment of around US$ 120 billion- US$ 150 billion

over the next five years.

The government has revised its target of power capacity addition to 92,700 MW

in the 11th Five Year Plan (2007-12), from the earlier estimate of 78,577 MW (as of

June 2007) to sustain the growth momentum of the economy.

Further, according to Planning Commission estimates, renewable energy (RE)

projects worth US$ 16.50 billion, for the generation of 15,000 MW power, would

come up in the 11th Plan.

Moreover, the government has earmarked a total capital subsidy of US$ 6.88

billion for providing electricity connections and for the distribution of

infrastructure to rural households.

The Indian Power Sector has come a long way from one small unit in 1880s to

1,362 MW in 1947 to 147,965 MW in 2008–09 and 151,073 MW in July 2009. Further,

the per capita consumption of power in India has gone up significantly since the

1990s. The targeted per capita consumption at the end of the current Five-Year

Plan (2011–12) is 1,000 kWh.

Thermal power accounts for much of the power produced in India, followed by

hydro. India has a renewable energy installed capacity of about 13,242 MW (as

on July 31, 2009), which constitutes 9 per cent of total installed capacity. The

country has the fourth-largest number of wind energy installations in the world.

_______________________________________________ _____

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