Street cautiously positive on JSPL post coal mine

Allocation of coal block has brightened prospects, outcome for steel segment awaited

Jindal Steel and Power (JSPL), which witnessed its lowest point in the business cycle due to mining constraints that impacted profitability of both steel and power segments, should see a reversal. Its stock had plunged to Rs 125 (lowest in five years) in December 2014.

But, after the allocation of a mine at reasonable valuations (this will boost the power segment’s profitability), the Street has turned cautiously optimistic. Since the mine win, it has surged over 22 per cent, closing at Rs 191 on Monday.

JSPL was able to get the Gare Palma IV/2&3 blocks for a premium of Rs 108 per tonne in the auction, which was a positive development, says Goutam Chakraborty at Emkay Global. With this, JSPL has been able to secure raw material security for Tamnar-1 (T1), which has a power generation capacity of 1,000 megawatts (Mw). Sources said the company had power purchase agreements (PPAs) of 400 Mw with Tamil Nadu, 250 Mw with Kerala, and another 250 Mw. Though only a part of the PPA with Tamil Nadu is being put through, the rest will be activated later. But analysts at Motilal Oswal Securities believe that the profitability may come under pressure initially. They say JSPL will be selling merchant power (15 per cent of T1 capacity) at Rs 3.1 per kilowatt-hour (kWh). For the rest, the rate will be lower. Thus, they believe  earnings before interest, taxes, depreciation, and amortisation (Ebitda) from the project will come at Rs 940 crore as against their estimates of Rs 1,280 crore in FY16.

But this is still better than the current state. However, the Street is awaiting clarity on whether JSPL will be able to use the coal for Tamnar-2 (T2) plants, which has a fuel supply agreement (FSA) with Coal India. JSPL has a PPA of 710 Mw of the 2,400-Mw Tamnar-2 project.

While clarity on some of these issues will help, the bids for mines for the steel and sponge-iron segment, still to yield results, could act as next positives for the stock.

For the segment, JSPL is yet to procure a coal mine. While recent auction bids have ranged from Rs 900 to Rs 3,500 a tonne, analysts are factoring in Rs 1,000 a tonne additional costs of coal in their estimates. The flip side will be when further allocation of mines for this business comes at a higher cost. Either way, it will have a strong influence on the stock. Analysts, thus, are currently in a wait-and-watch mode with a neutral rating on the stock.