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Jindal Steel & Power: Scope for further downside limited

After the recent fall in the share price, concerns are largely priced in and valuations reasonable

Jitendra Kumar Gupta  |  Mumbai 

Naveen Jindal-promoted Jindal Steel & Power Ltd (JSPL) stock has seen some uptick over the past few days after hitting a low of around Rs 226 last week.

The recent correction in its share pricem after news broke that the Central Bureau of Investigation (CBI) was probing the company and its promoters over allocation of certain coal mines, has provided an opportunity to investors as its share trades significantly below its intrinsic worth, analysts said.

In a stress case scenario, namely, removing the benefits of captive under question (allotted in 2004, but still not operational) from the existing steel and power businesses, the valuation for the company works out to Rs 225 a share. While this is marginally lower than the current price of Rs 240, it is far lower than its estimated book value per share of Rs 270-280 in FY14.

"We think that consensus estimates are already reflecting a very gloomy scenario and may not see any significant downside from the current levels. Since the mines in question are still not contributing, there is no financial impact. Even if you assume in worst case that the mines are cancelled, if not extraordinarily high, the company's power projects will be allowed to make regulated returns at around 16 per cent. Even if we give 1.2-1.5 times to its (JSPL's) book value at Rs 280 a share, there is value in the stock. It appears to us that the stock is exceedingly cheap," said Rakesh Arora, who tracks the company at Macquarie Capital Securities.

The firm produces about 12 million tonnes (mt) of coal every year, about half of which goes into steel making and another half into the power business. Most analysts believe the existing mines are not in a dispute. During 2004-09, the company was allocated five coal blocks. While these mines are earmarked for future projects, analysts have not factored these in while arriving at their valuation estimates.

"None of these blocks are either operational or are expected to become operational over the next two to three years. Further, JSPL has not incurred material capital expenditure either on the coal blocks or associated projects," said Sanjay Jain of Motilal Oswal Securities in a recent note.

The risk, however, is if the company is unable to source coal for the future projects, it may impact profitability in the interim period.

Nevertheless, the investments that JSPL has made in these projects have some equity value. In FY13, it had capital work-in-progress (capital invested for future capex) of Rs 18,692 crore, the estimated equity value of which works out to Rs 5,600 crore or Rs 60 per share. This is about 25 per cent of JSPL's current share price of Rs 240.

Even though the concerns are justified, they are reflecting in the share prices. In this backdrop, there is little scope for further de-rating of shares. Fundamentally, the existing businesses are sound and should support both the valuations and share price from these levels. However, the probe has hurt sentiments, which are likely to remain subdued. As seen in the past, have been cagey about companies with regulatory risks. While the company has indicated no wrong-doing, clarity on this issue is important for sentiments to perk up.

First Published: Tue, June 18 2013. 22:44 IST