Jindal Steel & Power (Q4 FY14)

India Infoline News Service | Mumbai |

JSPL managed to report a 19.7% qoq decline in operating profit at Rs9.7bn, quite lower than our estimate of Rs12.3bn.

CMP Rs255, Target Rs260, Upside 2% 
  • JSPL reported dismal numbers during the quarter with below par performance in all its units

  • Standalone numbers were impacted by the modernization of existing capacity at Raigarh, increasing steel capacity from 3mtpa to 3.7mtpa

  • Standalone power production too was lower on a qoq basis due to lower demand from the steel plant and lower evacuation capacity

  • The company is currently undergoing trial runs for its new steel plant at Angul and also commissioned the 2*135MW power units at Angul

  • Lack of transmission network led to a decline in power production under JPL. PLF declined to 77%, its lowest level since 2009, from 100% in Q4 FY13 and 96% in Q3 FY14

  • Standalone operating profit of Rs9.7bn was quite lower than our estimate due to lower volumes in steel and power

  • Maintain Market Performer with a price target of Rs260

Result table
(Rs mn) Q4 FY14 Q4 FY13 % yoy Q3 FY14 % qoq
Net sales 36,865 42,137 (12.5) 37,767 (2.4)
Material costs (12,697) (17,971) (29.3) (11,927) 6.5
Power and fuel costs (2,428) (2,436) (0.3) (2,953) (17.8)
Personnel costs (1,541) (1,237) 24.6 (1,325) 16.3
Other overheads (10,484) (10,131) 3.5 (9,464) 10.8
Operating profit 9,715 10,363 (6.2) 12,098 (19.7)
OPM (%) 26.4 24.6 176 bps 32.0 (568) bps
Depreciation (3,157) (3,081) 2.5 (2,985) 5.7
Interest (4,050) (2,369) 71.0 (3,667) 10.5
Other income 1,341 1,358 (1.2) 9 14,163.8
PBT 3,849 6,271 (38.6) 5,456 (29.4)
Tax 459 (1,496) (130.7) (1,800) (125.5)
Effective tax rate (%) (11.9) 23.9 33.0
Adjusted PAT 4,308 4,775 (9.8) 3,656 17.8
Adj. PAT margin (%) 11.7 11.3 36 bps 9.7 201 bps
Reported PAT 4,308 4,775 (9.8) 3,656 17.8
Ann. EPS (Rs) 18.8 20.4 (7.8) 15.8 19.3
Source: Company, India Infoline Research

Upgradation and modernization led to a loss of production

JSPL’s Q3 FY14 revenue was lower than our estimate of Rs39bn on account of lower volumes in steel and power. Steel production during the quarter declined 16.2% qoq due to the upgradation and modernization of the existing capacities at Raigarh. This was marginally offset by reduction in finished goods inventory, as sales volume were higher by 0.2% qoq. However, on a yoy basis both production and sales were quite lower. Power volumes too remained low due to lower demand from the steel division and restricted availability of evacuation capacity. Lower pellet sales also dragged topline lower. The impact of improved steel realisations on a qoq basis was offset by a 5-6% decline in pellet sales realisation. 


Production and Sales performance
(Tons) Q4 FY14  Q4 FY13 % yoy Q3 FY14 % qoq
Production          
Steel products 687,299 791,236 (13.1) 819,858 (16.2)
Pellets 1,031,746 1,038,290 (0.6) 1,049,145 (1.7)
Power 1,458 1,477 (1.3) 1,629 (10.5)
Sales          
Steel products 766,272 908,736 (15.7) 764,511 0.2
Pellets 320,000 657,722 (51.3) 450,000 (28.9)
Source: Company, India Infoline Research

Operating profit declines 6.2% yoy

JSPL managed to report a 19.7% qoq decline in operating profit at Rs9.7bn, quite lower than our estimate of Rs12.3bn. The underperformance was largely due to lower production at both the units of Steel and power. The loss of volumes due to the overhaul of the Raigarh facility and higher costs involved in the commissioning of the new power plants at Angul led to the decline in operating profit. Raw material costs as a % of sales increased from 31.6% in Q3 FY14 to 34.4% during the quarter due to higher consumption of pellets. Other expenditure as a % of sales jumped from 25.1% in Q3 FY14 to 28.4%. However, on a yoy basis EBIT margins for the steel business was marginally higher due to higher steel prices. EBIT from the power division declined 20.8% yoy to Rs1.7bn on the back of lower realisations and costs involved in commissioning of 2 units of 135MW at Angul. The company completed the commissioning of all the six units of 135MW each at Angul. It continues to face issue with evacuation of power from the region. The upgradation process would continue in Q1 FY15 and hence would lead to lower steel production in Q1 FY15. 


Cost Analysis (Standalone)
(As a % of sales) Q4 FY14  Q4 FY13 bps yoy Q3 FY14 bps qoq
Material costs 34.4 42.6 (821) 31.6 286
Power and fuel costs 6.6 5.8 80 7.8 (123)
Personnel Costs 4.2 2.9 124 3.5 67
Other overheads 28.4 24.0 440 25.1 338
Total costs 73.6 75.4 (176) 68.0 568
Source: Company, India Infoline Research

JSPL’s 96.4% subsidiary, Jindal Power Ltd’s (JPL) performance was sharply impacted by the lack of evacuation capacity in the region. Power production during the quarter declined 14.6% yoy to 1,882mn units. PLF declined to 77%, its lowest level since 2009, from 100% in Q4 FY13 and 96% in Q3 FY14. The company recorded a bottomline of Rs2.2bn, lower by 22.7% yoy. Average power realizations remained steady at Rs3.11/unit in Q4 FY14 as the company had to sell power at lower price on the exchange. The company has synchronized the third unit of the 4x600MW power plant at Tamnar-II and expects all the three plants to start commercial production in H2 FY15 as the transmission network eases with commissioning of new lines.

International projects report higher operating loss

The international performance was weaker than expected due to the sharp correction in coking coal prices during the quarter. Operating profit was also impacted due to the acquisition of Wollongong Ltd (formerly Gujarat NRE) during the quarter. The impact of lower contribution from Mozambique, South Africa and Wollongong Coal was somewhat offset by a strong performance at Oman. The company managed to increase its revenue from the Oman unit by 10% yoy. It was also successful in completing the 2mtpa steel plant in Oman during the quarter and expects to start commercial production in Q1 FY15. 

Availability of coal to keep stock performance under check

JSPL’s stock has underperformed over the last one year on account of issues related to allocation of coal blocks. Concerns regarding availability of transmission lines in the region have added pressure on the stock. We believe availability of transmission lines for the all the units would be lower leading to the units operating at lower utilisation levels. We have reduced our power sales volume number for FY15 due to the above reason. Power prices are expected to remain subdued due to the sharp reduction in peak PLF deficits. We don’t expect a recovery in merchant prices in the near term as Discoms would stay away from buying expensive power. We have also reduced our steel volume estimates for FY15 to account for the modernisation exercise taken by the company. The profitability of JSPL’s Angul project would be largely dependent on availability of captive coal. We believe signing of mining lease for the coal block by the State Government would be a major positive for the company. We maintain our Market Performer rating on the stock with a revised price target of Rs260.


Segment results (Standalone)
(Rs mn) Q4 FY14 Q4 FY13 % yoy Q4 FY14 Q4 FY13
Sales (Rs m) in % Sales contribution (%)
Iron & Steel 34,348 40,322 (14.8) 93.2 95.7
Power 6,026 5,508 9.4 16.3 13.1
Others 770 797 (3.4) 2.1 1.9
Less: Intersegment sales (4,280) (4,489) (4.7) (11.6) (10.7)
Total 36,865 42,137 (12.5)
EBIT (Rs m) in % EBIT contribution (%)
Iron & Steel 5,903 6,546 (9.8) 153.3 104.4
Power 1,671 2,109 (20.8) 43.4 33.6
Others (3,724) (2,384) 56.2 (96.7) (38.0)
Total 3,849 6,271 (38.6)
EBIT margins (%) in bps
Iron & Steel 17.2 16.2 95
Power 27.7 38.3 (1,056)
Total 10.4 14.9 (444)
ROCE (%) in bps
Iron & Steel 13.1 22.7 (960)
Power 11.0 14.8 (374)
Others (13.6) 10.4 (2,401)
Total 25.5 14.1 1,143
Source: Company, India Infoline Research

Financial Summary
Y/e 30 Jun (Rs m) FY13 FY14E FY15E FY16E
Revenues 198,068 196,941 252,048 311,539
yoy growth (%) 8.8 (0.6) 28.0 23.6
Operating profit 59,944 64,506 76,879 100,309
OPM (%)   30.3   32.8   30.5   32.2
Reported PAT 29,101 27,799 31,257 42,568
yoy growth (%) (26.6) (4.5) 12.4 36.2
EPS (Rs)   31.1   30.4   34.2   46.5
P/E (x)   8.2   8.4   7.5   5.5
Price/Book (x)   1.1   1.0    0.9   0.8
EV/EBITDA (x)   8.1   9.0   7.3   5.3
Debt/Equity (x)   1.2   1.6   1.3   1.1
RoE (%)   14.8    12.7   13.0   15.4
RoCE (%)   10.9   9.1   9.2   11.8
Source: Company, India Infoline Research

***Note: This is a NSE Chart

 

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