Jindal Steel & Power (Q1 FY12)

CMP Rs614, Target Rs660, Upside 7.6%

• Q1 FY12 standalone revenue of Rs25.3bn was lower than our estimate on account of lower steel sales volume
• Except sponge iron, production of all other products declined on a qoq basis
• Operating profit decreased 9.9% qoq to Rs9.6bn, marginally lower than our estimate of Rs9.9bn on account of lower steel sales
• Average power realizations under JPL declined on a qoq basis from Rs4.1/unit in Q4 FY11 to Rs3.8/unit
• JPL’s PAT decreased by 8.6% qoq and 19.5% qoq to Rs4.5bn, on the back of lower power tariffs
• Maintain Market Performer rating with a revised 9-month price target of Rs660 

Result table

(Rs mn)	Q1 FY12	Q4 FY11	% qoq	Q1 FY11	% yoy
Net sales	25,265	27,422	(7.9)	21,216	19.1
Material costs	(6,682)	(7,452)	(10.3)	(6,146)	8.7
Power and fuel costs	(1,888)	(1,997)	(5.5)	(1,151)	64.0
Personnel costs	(881)	(693)	27.1	(617)	42.7
Other overheads	(6,181)	(6,589)	(6.2)	(5,389)	14.7
Operating profit	9,634	10,691	(9.9)	7,913	21.7
OPM (%)	38.1	39.0	(86) bps	37.3	83 bps
Depreciation	(2,066)	(1,945)	6.2	(1,475)	40.1
Interest	(1,325)	(1,061)	24.9	(742)	78.6
Other income	167	1,232	(86.5)	62	168.5
PBT	6,410	8,918	(28.1)	5,759	11.3
Tax	(1,709)	(2,435)	(29.8)	(1,402)	21.9
Effective tax rate (%)	26.7	27.3		24.3
Adjusted PAT	4,702	6,483	(27.5)	4,357	7.9
Adj. PAT margin (%)	18.6	23.6	(503) bps	20.5	(193) bps
Reported PAT	4,702	6,483	(27.5)	4,357	7.9
Ann. EPS (Rs)	20.1	27.8	(27.5)	18.7	7.8

Source: Company, India Infoline Research

Lower steel volumes lead to a 7.9% qoq decline in topline
JSPL’s standalone Q1 FY12 revenue declined 7.9% qoq to Rs25.3bn lower than our estimate of Rs27.3bn. The underperformance was due to lower steel sales volume. Pellet sales jumped 73.6% on a qoq basis to 0.35mn tons from 0.2mn tons in Q4 FY11. Metallic sales volume was quite lower on a yoy basis and also on a qoq basis on account of higher internal consumption. In Q1 FY12, steel production decreased 2.4% qoq to 607,726 tons and sales volumes decreased 14% qoq to 456,887 tons. Segment wise, revenues from the steel division decreased 9.6% qoq and that from the power division increased by 4.8% qoq. The jump in revenue from power division was due to higher power realizations. Power production volumes decreased 6.9% qoq to 931mn units. Average power realization in the standalone entity increased from Rs3.44/unit in Q4 FY11 to Rs3.87/unit during the quarter.
Production and sales volume

	Q1 FY12	Q4 FY11	% qoq	Q1 FY11	% yoy
Production
Sponge iron	363,653	322,335	12.8	345,305	5.3
Pig iron	402,107	426,359	(5.7)	387,828	3.7
Steel products	607,726	622,594	(2.4)	506,001	20.1
Pellets	828,800	866,725	(4.4)	207,748	298.9
Power	931	1,000	(6.9)	729	27.7
Sales
Sponge iron	-	8,258	-	97,164	-
Pig iron *	-	40,694	-	105,020	-
Steel products	456,887	531,104	(14.0)	503,176	(9.2)
Pellets	347,104	200,000	73.6	11,893	2,818.6
Power	259	299	(13.4)	240	7.9
Total steel volumes	456,887	580,056	(21.2)	705,360	(35.2)

Source: Company, India Infoline Research * pig iron sales not provided for the quarter

Segmental results (Standalone)

	Q1 FY12	Q4 FY11	qoq chng	Q1 FY12	Q4 FY11
Sales (Rs m)			in %	Sales Contribution (%)
Iron & Steel	24,098	26,658	(9.6)	95.4	97.2
Power	3,606	3,442	4.8	14.3	12.6
Others	296	217	36.2	1.2	0.8
Less: Intersegment sales	(2,735)	(2,896)	(5.6)	(10.8)	(10.6)
Total	25,265	27,422	(7.9)
EBIT (Rs m)			in %	EBIT contribution (%)
Iron & Steel	7,671	8,289	(7.5)	119.7	93.0
Power	1,313	1,597	(17.8)	20.5	17.9
Others	(2,573)	(968)	165.8	(40.1)	(10.9)
Total	6,410	8,918	(28.1)
EBIT margins (%)			in bps
Iron & Steel	31.8	31.1	74
Power	36.4	46.4	(999)
Total	25.4	32.5	(715)
ROCE (%)			in bps
Iron & Steel	35.8	38.5	(277)
Power	15.6	19.6	(398)
Others	(2.3)	(2.1)	(15)
Total	25.5	28.8	(323)

Source: Company, India Infoline Research

Operating profit decreased 9.9% qoq to Rs9.6bn
Operating profit during the quarter decreased 9.9% qoq to Rs9.6bn, marginally lower than our estimate of Rs9.9bn. The underperformance in operating profit was on account of lower than expected steel sales volume. OPM decreased 86bps qoq to 38% in Q1 FY11 on account of higher coking coal costs and subdued long steel prices. On a segmental basis, EBIT margins for the steel business increased from 31.1% in Q4 FY11 to 31.8% in Q1 FY12 and that of the power division declined sharply from 46.4% to 36.4%. The company’s power division EBIT in Q1 FY12 was impacted due to higher coal costs. Costs per unit of power increased from Rs1.85 in Q4 FY11 to Rs2.46 in Q1 FY12.

Power subsidiary’s quarterly profit bounces back marginally
JSPL’s 96.4% subsidiary, Jindal Power Ltd (JPL), recorded a bottomline of Rs4.5bn, a decline of 8.6% qoq and 19.1% yoy. The bottomline is lower than expectations due to lower realizations and volume. Average power realizations decreased from Rs4.1/unit in Q4 FY11 to Rs3.8/unit in Q1 FY12, lower than our expectation of Rs3.9/unit. Power generation for the quarter was 2.17mn units, 0.5% lower on a qoq basis and 2% on a yoy basis. PLF for the quarter stood at 99.2%.

Standalone earnings to drive earnings growth over the next two years
Steel prices globally have been in the downward trend over the last one quarter on the back of inventory destocking and subdued demand. Steel production has been gradually rising over the last three months, with global capacity utilization staying above the 80+% levels. We believe that steel prices would find strong support at current levels on the back to strong raw material prices. We expect steel prices to increase from current levels as the destocking phase would end soon and we would witness a gradual rebound in demand. We believe that JSPL will be one of the major beneficiaries of the sharp increase in coking coal and iron ore prices on account of its raw material integration and the DRI-EAF route of steel manufacturing benefit. The company has managed to synchronize two units of 135MW and expects the gradual ramp up to 135*10MW to be completed by mid-FY13. Thus the standalone entity will lead earnings growth over the next two years on account of higher contribution from the standalone entity’s power plants. We believe JPL’s average realisation per unit would continue to be in the range of Rs3.5-4.5 and would lead to a flat earnings growth under the power subsidiary over the next two years. We maintain our market performer rating on the stock with a revised 9-month price target of Rs660.

Financial summary

Y/e 31 Mar (Rs m)	FY10	FY11E	FY12E	FY13E
Revenues	110,915	131,117	185,944	208,082
yoy growth (%)	2.0	18.2	41.8	11.9
Operating profit	58,513	63,929	86,807	87,216
OPM (%)	52.8	48.8	46.7	41.9
Pre-exceptional PAT	35,766	37,546	48,786	48,529
Reported PAT	35,730	37,546	48,786	48,529
yoy growth (%)	16.3	5.1	29.9	(0.5)
EPS (Rs)	38.4	40.2	52.2	52.0
P/E (x)	16.0	15.3	11.8	11.9
Price/Book (x)	5.5	4.1	3.1	2.5
EV/EBITDA (x)	11.3	11.1	8.3	8.3
Debt/Equity (x)	0.8	1.0	0.9	0.7
RoE (%)	41.0	30.6	29.9	23.4
RoCE (%)	27.4	21.6	21.4	18.1

Source: Company, India Infoline Research