Sector Indices

Name Value Change %
BSE Carbonex 1,104.40 16.9 1.6
BSE Greenex 1,805.52 24.0 1.3
BSE SME IPO 820.89 [4.5] [0.5]
BSE 100 6,800.10 104.0 1.6
BSE 200 2,718.94 39.6 1.5
BSE 500 8,431.71 122.3 1.5
BSE AUTO 13,494.62 297.3 2.3
 

Jindal Steel & Power (Q1 FY12)

India Infoline Research Team / 12:58 , Jul 29, 2011

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