Jindal Steel and Power: No near-term triggers

Most analysts have trimmed their FY14 estimates for now

Jindal Steel and Power (JSPL) continued to trend downward as it hit four-year low of Rs 295.25 on Monday.  The has stock lost more than 8% in last two trading sessions after posting a dismal show in the March 2013 quarter. While the consolidated net profit in the recently concluded quarter came in at Rs 753 crore, registering a 35% fall over March’12 quarter (much lower than Analyst’s expectations of Rs 950 crore), analysts don’t see an early reversal in fortunes for the company going ahead.

The demand and realisation for the steel segment remains weak. The power segment, too, continues to see weak realisation. JSPL, in its conference call, indicated that power evacuation problems have been resolved, but not entirely, which resulted in the company selling 30% of its volume to power exchanges at a lower tariff compared to the normal market rates.

JSPL produced 7.9-lakh tonne of steel, while it sold 9.1-lakh tonne thereby liquidating excess inventory. Its earnings before interest and tax (EBIT) for the steel division came in 23% lower on a sequential basis even on higher volumes, reflecting sharp drop in realisation. “We are also concerned with a 4.3% sequential drop in power production volumes in the standalone business, suggesting that the 1,350MW project could be facing further issues stabilization issues,” notes Chirag Talati, an analyst at Barclays.

Soft prices

On steel realisation, the management stated that the company has liquidated its steel inventory which led to a 3 – 7% drop in steel prices and was of the view that steel prices have started showing a marginal uptrend since the beginning of April 2013. However, Giriraj Daga, an analyst at Nirmal Bang points out that the company sold an additional 2-lakh tonne over the normal run-rate and such a sharp price fall shows the extremely weak nature of the Indian steel market.

On the other hand, JSPL is expanding capacity in the power segment by commissioning the 2.4GW power project in stages by Q2FY15. Thus, the benefits from this expansion will take time to accrue. Analysts at Religare add that with most of JSPL’s expansion projects coming online only in the second half of the fiscal year, they expect a lacklustre FY14 for the company. Also, the dependence on imported/e-auction coal in the near-term and a rising debt profile are a concern. The project has been funded on the basis of 75:25 for debt to equity.

In this backdrop, analysts have trimmed their FY14 estimates for now. Daga of Nirmal Bang has revised his FY14 EBIDTA estimates downwards by 8% following a subdued performance in the recently concluded quarter, while the profit estimate has also been revised downwards by 10% primarily due to an around 5% cut in steel realisation. Analysts at Religare have also cut their earnings estimates and maintain HOLD with a revised target price of Rs 330 set at 7x FY15E EV/EBITDA.