Jayaswal Neco Industries

India Infoline News Service | Mumbai |

Jayaswal Neco (JNE), through the integration of its group companies, is transforming itself from a primary pig iron and steel casting producer to an integrated steel producing company.

Integration of group operations completes value chain
Jayaswal Neco (JNE), through the integration of its group companies, is transforming itself from a primary pig iron and steel casting producer to an integrated steel producing company. The process of integration is expected to be completed this quarter. This would add 0.8mtpa of sinter plant, 0.25mtpa of sponge iron plant, 0.8mtpa Steel Melting Shop and 0.9mtpa of rolling capacity to the company’s original capacity of 0.7mtpa of pig iron and 0.2mtpa of iron & steel casting. The integration will also raise the power generation capacity to 45MW. It is also setting up a wire rod block and a 6MW WHRS power plant at a total capex of Rs930mn, to be operational in FY12E. Further, the company plans to set up a 0.3mtpa sponge iron unit associated with a 50MW WHRS power plant over the next three years. JNE is also setting up a 300MW coal-based power plant at an estimated cost of Rs16.5bn through its 100% subsidiary Raigarh Energy Ltd.
 
Raw material integration to rise by FY12
The company was allotted one coking coal, two thermal coal and seven iron ore mines to meet its raw material requirement. Of the two thermal coal mines, the Gare Block IV/4 in Raigarh has been operational since FY07 and produced 0.4mtpa in FY10. The thermal coal block of Gare IV/8 and the coking coal mine are at various stages of regulatory approvals and the development of the mines will take a few years. Of the 7 iron ore mines, the company has received all clearances for two. While the company expects to start mining by end of FY11, we believe, commissioning would take further time as both the mines are located in areas affected by Naxalite activities. Once its iron ore and coking coal mines are operational, we believe that JNE’s profitability will jump sharply.
 
Earnings to gain momentum; Recommend BUY
The company has set up a sinter plant and is in the process of setting up a coal washery to maximize returns from its captive resources. Operating margins are set to expand led by sales of finished goods and an increase in raw material integration. Our back of the envelope calculations suggest that the company’s bottomline would jump ~3.5x over FY10-12 led by commissioning of the iron ore mine. We recommend a BUY on the stock for a target of Rs45.
 
Valuation summary
Y/e 31 March (Rs m)
FY07
FY08
FY09
FY10
Revenues
12,472
14,736
16,110
17,874
yoy growth (%)
41.6
18.2
9.3
10.9
Operating profit
1,162
1,637
2,516
2,902
OPM (%)
9.3
11.1
15.6
16.2
Pre-exceptional PAT
262
862
918
698
Reported PAT
224
862
272
698
yoy growth (%)
-
285.2
(68.5)
157.1
 
 
 
 
 
EPS (Rs)
  2.3
  7.6
  8.1
  3.0
P/E (x)
  16.4
  5.0
  4.7
  12.9
P/BV (x)
  5.9
  2.7
  0.8
  1.5
EV/EBITDA (x)
  9.1
  6.2
  5.8
  6.9
Debt/Equity (x)
  9.1
   4.0
  2.0
  1.9
ROE (%)
  43.6
  74.9
  26.4
  12.3
ROCE (%)
  12.4
  20.0
  17.1
  14.2
Source: Company, India Infoline Research

BSE 7.70 0.34 (4.62%)
NSE 8.00 0.40 (5.26%)

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