>JINDAL STEEL & POWER: Utkal mining lease to be signed soon and mining to start by Sep12

■ Maintain Buy — JSPL continues to execute in a tough environment on multiple fronts. JSPL has managed to overcome many project-related challenges over past 6-8 months which demonstrates the company’s ability to interface with government and manage its environment well. Execution capability combined with disciplined capital allocation track record and structural advantages (i.e. access to captive coal and iron ore) convinces us to retain a Buy rating despite the stock outperforming the BSE Sensex by 17.4% YTD.


■ Multiple catalysts over next 12 months — 1) JSPL has advanced CoD of Tamnar 2 unit 1 (600MW) to March 2013 from December 2013 to take advantage of the extension of section 80IA (CIRA est. – December 2013), 2) Angul project agitation has been resolved and work has resumed on ground (commissioning by FY13 end), 3) Dumka (1320MW) has received environmental clearance and is ready to place equipment orders, 4) 810MW (6x135MW) are operating at 75-80% PLF and remaining 540MW (4x135MW) will be commissioned by September 2012.


■ Steel Tailwinds — JSPL’s product mix has been improving with sale of pig/sponge iron decreasing to 14% of total volume in FY11 from 26% in FY10 and likely to be below 10% in FY12. JSPL stands to benefit from strong long product (2/3rd of output) prices (+10% since Dec11) and falling coking coal prices. Our sales volume assumptions incorporate a 13% growth in FY13 and 32% growth in FY14. Stable pricing, falling coking coal prices and strong volume growth augur well for JSPL.


■ TP and EPS change — We increase TP to Rs672 (from Rs645) and revise FY12/ FY13/FY14E EPS downwards by 2%/13%/4% as we 1) roll forward power DCF value to June12 from Dec11 and steel EV/E from Sep12 to Mar13, 2) delay Angul power/steel capacity by ~6 months which impacts FY13 numbers most, 3) no longer value Bolivia.


■ Key Risks — Negative news flow on Bolivia and delay in signing of mining lease for Utkal coal block are key risks. JSPL has invested US$70mn in Bolivia so far, hence the impact, if any, is likely to be limited. The company expects the Utkal mining lease to be signed soon and mining to start by Sep12.


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