>Jindal Steel and Power Limited (MERRILL LYNCH)

■ 2Q disappoints, power nearing peak, rich valuations, U/P
Group PAT declined 18% q-o-q to Rs8.1bn, below our Rs10bn est. This was led by lower power profits due to lower avg. tariff and vols. Also steel profits disappointed due to lower vols & higher costs. We raise our FY10-FY11e EPS by 2-7% as we raise our domestic steel price est. to reflect mark to market prices & higher cost support in FY11e. Power biz outlook is strong, but earnings momentum is close to peak. Its leverage to steel price is low (1% chg changes EPS by 1.2%). Our SOTP NPV of Rs435 implies 32% downside potential.

■ Standalone PAT was up 2% q-o-q, volumes disappoint
2Q standalone PAT (mainly steel biz) was Rs3.0bn. EBITDA declined 1% q-o-q to Rs5.5bn. Realizations were better, up 6% q-o-q. Volumes declined 12% q-o-q, 13% below our est. This may due to sluggish demand for long products during monsoons. Inventories appear to have increased by ~0.05mt in 2Q. Steel cost/t increased 5% q-o-q. We forecast standalone EPS to grow 21% in FY11e.

■ JPL profits down 27% q-o-q on lower tariff and volumes
Power subsidiary, JPL’s 2Q PAT was Rs5.1bn. Est. sales volumes were down 11% q-o-q due to shut down at two of its units & seasonally weak demand during monsoons. Average tariff was down 18% q-o-q at Rs5.3/unit due to lower power tariff. We forecast JPL profits of Rs24.9bn in FY10e and Rs21.9bn in FY11e.

■ SOTP valuation implies 32% downside potential
We understand JSPL plans to sell excess power from 810MW Orissa captive power unit at a tariff of Rs3/kwh. Hence, we raise our tariff forecast for power sales from Orissa captive power to Rs3/kwh (Rs2.5/kwh earlier). JSPL is up 308% YTD. JSPL is trading at 15.6x FY11e EPS and 4.8x P/B, expensive in our view. Our SOTP NPV of Rs435 implies Rs135 for steel & Rs300 for power business.

To read the full report: JINDAL STEEL