>JINDAL STEEL AND POWER LIMITED (GEPL)

Jindal Steel & Power (JSPL), part of OP Jindal Group, is the world's largest coalbased, sponge-iron producer with a capacity of 1.37 million ton per annum (mtpa). It is an integrated steel producer having access to captive iron-ore, coal and power. It is also one of the low cost steel producers and enjoys EBITDA margin of ~40%, which is amongst the highest in the steel industry. It has also forayed into high margin power business with 1000 MW capacity. We initiate coverage on the stock and recommend 'STAY INVESTED'

INVESTMENT RATIONALE

Industry outlook: positive
JSPL is engaged in the businesses of steel and power, the long-term outlook of the sectors looks positive. Despite expected de-growth in global steel production, we believe India to produce 5-10% higher steel in 2009 due to huge government spending programs on urban and rural infrastructure. Also, demand of merchant power in India is expected to be strong in future due to huge power deficit scenario.

Adding value through backward and forward integration
JSPL has been adding value to its steel plant through backward integration (with captive raw materials, power) and forward integration (value added products like rail, structural, beams). We expect JSPL's standalone net sales to fall by ~7% YoY in FY10 (due to lower realization from steel products) and increase by 15% YoY in FY11 (due to higher sales volume of steel and power). We expect adjusted EBITDA margin to increase from ~36% in FY09 to ~42% in FY10 and ~46% in FY11 due to higher sales of value added products & power and lower raw materials cost.

Diversified into high margin 'power business' – a cash cow
JSPL diversified into power business in a big way through its subsidiary, Jindal Power Ltd (JPL) which commissioned 1000 MW (4 x 250 MW) power plants in phases during FY08-FY09. Entry into high margin power segment (~80% EBITDA margin, ~45% net margin) will help JSPL to de-risk earnings from commodity (steel) cycle. The subsidiary plans to add another 2400 MW capacity which will increase its total power capacity to 3400 MW by 2013. We expect JPL to contribute ~48% and ~43% to the consolidated earnings of JSPL in FY10 and FY11 respectively.

Mega capacity expansion programs – well on track
JSPL's mega capacity expansion programs are running well on track. The Company targets to become one of the leading steel producers in India thus adding steel capacity through green/brown field expansion at different locations. It also has massive plans to become a leading private power producer in India. The Company plans to come out with JPL's IPO in next 12-months to part finance its expansion program and to unlock value of its power business.

Financials, Valuation and Recommendation
We expect JSPL's consolidated net sales to remain flat in FY10 and grow by 10% in FY11 YoY. However, EBITDA is expected to grow at a higher rate of 14% each in FY10 and FY11 due to margin expansions. We expect consolidated EPS to be at Rs.231 and Rs.266 in FY10 and FY11 respectively.

At CMP of Rs.2622, the stock trades at 10x, 2.8x and 8.5x FY11 P/E, P/BV and EV/EBITDA respectively. We use SOTP valuation method to value JSPL. We assign 8.3x EV/EBITDA multiple for JSPL's standalone entity which gives a fair value of Rs.1200 per share (8x and 2x FY11 P/E and P/BV respectively). We get the fair value of JPL at Rs.1605 using DCF valuation method (14.4x FY11 P/E). Thus we arrive at the 12-month target price of JSPL at Rs.2805. 'STAY INVESTED'.

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