Jindal Steel and Power Ltd

Transcription

1 STOCK POINTER Jindal Steel and Power Ltd BUY Target Price 472 CMP 155 FY2E EV/EBITDA 4.X Index Details Sensex 32,575 Nifty 1,114 Industry Steel & Power Scrip Details Mkt Cap( cr) 14,16 BVPS ( ) O/s Shares (Cr) 91.5 Av Vol (Lacs) Week H/L 62.6/158.3 Div Yield (%) FVPS ( ) 2 Shareholding Pattern Shareholders % Promoters 61.9 Public 38.1 Total 1 Jindal Steel & Power vs. Sensex SENSEX JSPL ;/ ;; We believe that the steel industry is headed for a cyclical upturn given that China has undertaken intiatives to cut excess capacities citing environmental issues. Following this we have seen a rebound in global steel prices. In India too the government measures to check dumping have resulted in prices firming up. With prices set to rally there is always the threat of imports increasing, especially flat products. However given the fact that JSPL is primarily into long products it should remain unaffected. Post capex completion at Angul, we expect JSPL to near double its revenues by FY2. This coupled with the fact that coal linkages with Coal India have been firmed up for five years and the domestic iron ore prices are quoting at lows, the steel business is expected to do well. The power business is also expected to perform well given that FSA & PPAs are in place. Further with the sale of its power asset Tamnar I (1, MW) already inked the company should be able to leverage its gearing to a certain extent. We expect revenues to grow at a CAGR of 22.7% to Rs. 39,184 crores while EBITDA is expected to grow at a faster clip of 27% CAGR to Rs. 9,615 crores by FY2. Net earnings are expected to turn the corner in FY18 and should scale to Rs.1,954 crores by FY2. We initiate with a BUY for a price target of Rs. 472 (target 7.X FY2 EV/EBITDA) representing an upside of 24.5% from the CMP of Rs.155 over the next 21 months. We are optimistic given that : Completion of capex at Angul should enhance crude steelmaking capacity to 8.9 million tonnes from 6 million tonnes in FY17. Steel volumes are expected to grow at a CAGR of 21% to 8.4 million tonnes in FY2. On the back of improving realisations, revenues from the steel business are expected to grow at a CAGR of 25% from Rs. 16,28 crores in FY17 to Rs. 31,574 crores by FY2. Key Financials ( in Cr) Y/E Mar Net Sales EBITDA PAT EPS EPS Growth (%) RONW (%) ROCE (%) P/E EV/EBITDA NA NA E NA E E (x) (x) - 1 of 34 - Tuesday 1 st August, 217

2 With signing of PPAs & FSAS (barring Tamnar I) visibility of power business should improve. We expect overall PLF utilizations to improve to 7% by FY2 from the current 35%. In line with this revenues are expected to grow at a CAGR of 17% to Rs. 5,63 crores by FY2 from the current Rs. 312 crores. JSPL skipped its debt repayment schedule in FY16 as it was cash strapped. To overcome this the company has inked an agreement to sell its 1, MW power generating asset (Tamnar I) to JSW energy for a consideration of Rs. 4, crores in FY19. This should help the company deleverage. Further improving business fundamentals should help lower debt gearing to 1.X by FY2 from 1.3X reported in FY17. This compares very favourably with that of peers JSW and Tata Steel. - 2 of 34- Tuesday 1 st July, 217

3 Company Background : Jindal Steel and Power Limited (JSPL) has operations in India and overseas. JSPL s business segments include Iron & Steel, Power and Others. JSPL s steel division has a total capacity of 9.94 million tonnes of iron making capacity and 8.9 million tonne of crude steel capacity. It has a integrated steel plants at Raigarh (3.4 MTPA), Angul (5 MTPA) & Oman (1.5 MTPA). Its Power Division (Jindal Power Ltd) has 3,4 MW power plant at Tamnar, Chhattisgarh. It is also backward integrated into mining with assets in Australia, Mozambique and South Africa. Jindal Steel and Power Ltd Steel business 8.9 million tonnes Power Business 34 MW Mining Business Raigarh 3 million tonnes Tamnar-1 2x25 MW 1 MW Australia Reserves : 175 MT Mining Capacity:2 MTPA Angul 4.4 million tonnes Oman 1.5 million tonnes Tamnar-2 4x6 MW 24 MW Mozambique & South Africa Reserves: 132 MT Mining Capacity : 3 MTPA Captive Power 17 MW - 3 of 34- Tuesday 1 st July, 217

4 Steel manufacturing flowchart Processing of Iron Ore into molten iron Iron Ore 1.4 tonne Ferro Chrome 2 kgs Liquid steel 1 tonne Thermal Coal 1.6 tonne Source: Ventura Research Sponge Iron 1 tonne Molten iron conversion into liquid steel Sponge iron 1 tonne Continuous casting into finished steel products Billet 1tonne TMT bars, Wire Rod, Structural1 tonne Liquid steel.84 tonne - 4 of 34- Tuesday 1 st July, 217

5 Key Investment Highlights Revival of steel cycle augurs well for revenue growth The period FY13-16 was a lean period on account of declining revenue from the steel business and erratic performance of the power vertical. Steel business suffered from sluggish demand and poor pricing. Since JSPL primarily manufactures long products it was insulated from dumping by Chinese and other international players. However, the sluggish demand for long products led to flat steel sales volume (around 4.4 MTPA in FY16), which resulted in the steel revenue s degrowing at a CAGR of 3% from Rs.16,615 crores in FY13 to Rs. 14,525 crores in FY16. Due to pricing pressure, realization per tonne dropped sharply by 37% YoY to Rs. 32,787 per ton in FY16 from Rs. 45,47 per ton in FY15. Steel business Recovery in sight In MTPA Better realisation and volume growth expected In Rs. Crores Green shoots FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E 5 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E 5 Capacity Volumes Average realization per tonne Revenue EBIDTA margin Power business - erratic performance Barring FY15 when the power business recorded its highest unit sales, the performance of this business has been rather erratic. As the company was concentrating on merchant sales, realizations were not as per anticipation given the weak demand for power. - 5 of 34- Tuesday 1 st July, 217

6 Power Generation & Power Revenue (including Tamnar I ) In Million Units In Rs. Crores FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY2 Power Generation Revenue Gross Realization per unit Revenue share of JSPL s business verticals % share 16 3 FY13 % Share 19 2 FY16 % share 15 5 FY Iron & Steel Power Mining - 6 of 34- Tuesday 1 st July, 217

7 Steel Business - green shoots seen in FY17. FY17 was the year of revival not only for the overall global steel cycle but also for the Indian steel industry and JSPL. This was on account of - 1. Sharp cut backs by China in its installed capacity citing environmental concerns. 2. Anti-dumping measures undertaken by major steel importers viz. India, US & Europe on Chinese dumping. 3. Decrease in domestic iron ore prices which have improved profitability. 4. Revival of Indian infrastructure given the measures taken by the Modi government. 5. Shrinking demand supply gap in the domestic market which has improved long term visibility. 6. Completion of capex at the Angul plant which augurs well for JSPL s steel revenue growth. Long products in particular plates, rails & TMT bars which are the revenue spinners of JSPL have strong drivers in place. 7. Existing operations at Raigarh to function at full throttle from FY Oman facility to produce value added products (TMT bars) from FY of 34- Tuesday 1 st July, 217

8 1. Sharp cut backs by China in its installed capacity citing environment concerns The Chinese government in 216 enacted the 13 th Five Year Plan with a blue print to reduce crude steel production capacity by 1-15 million tonnes by FY2-21. In 216, The State Council & the National Development and Reform Commission in China issued a number of diktats to reduce 45 million tonnes of capacity. But provinces and municipalities determined targets for reducing million tonnes of steel overcapacity in 216-nearly twice of the original figure established by their Central Government. This sharp scale back in production should lead to a sharp reduction in global capacities. Capacity cuts undertaken by Chinese provinces (Capacity in Million Tonnes) Province targets for "13th Five-Year Plan" Completed in 216 Remaining steel production capacity Utilization Rate (%) Hebei Shandong Jiangsu Xinjiang Tianjin Anhui Gansu Shaanxi Yunnan Central state owned enterprises Total Source: Greenpeace, Ventura Research Global Steel Supply & Demand dynamics Capacity adequate even after 85 MT capacity cut in China 15 1 Capacity adequate even after capacity cut back in China E Global Capacity Global Demand Source: World Steel Association, Ventura Research - 8 of 34- Tuesday 1 st July, 217

9 Although the global capacity still far exceeds consumption, the low price steel supply cuts by China will elevate marginal pressures and lend to buoyancy in steel prices. Chinese finished steel prices revival augurs well for global industry China TMT Rebar YoY China TMT Rebar MoM Source: Bloomberg, Ventura Research China Billet YoY Source: Bloomberg, Ventura Research China Billet MoM Source: Bloomberg, Ventura Research China Sections YoY Source: Bloomberg, Ventura Research China Sections MoM Source: Bloomberg, Ventura Research Source: Bloomberg, Ventura Research - 9 of 34- Tuesday 1 st July, 217

10 China HR Plate YoY China HR Plate MoM Source: Bloomberg, Ventura Research Source: Bloomberg, Ventura Research Hot Rolled Coil China YoY Hot Rolled Coil China MoM Source: Bloomberg, Ventura Research Cold Rolled Coil China YoY Source: Bloomberg, Ventura Research Cold Rolled Coil China MoM Source: Bloomberg, Ventura Research Source: Bloomberg, Ventura Research - 1 of 34- Tuesday 1 st July, 217

11 Coking coal Australia YoY Coking coal Australia MoM Coking coal USA YoY Coking coal USA MoM of 34- Tuesday 1 st July, 217

12 Domestic Price Trends Iron Ore Fines YoY Iron Ore Fines MoM (Rs./MT) (Rs./MT) Hot Rolled Coil YoY Hot Rolled Coil MoM 45 (Rs./MT) 45 (Rs/MT) HR Plate YoY HR Plate MoM 375 (Rs./MT) 4 39 (Rs./MT) Source: Bloomberg, Ventura Research Source: Bloomberg, Ventura Research - 12 of 34- Tuesday 1 st July, 217

13 6 (Rs./MT) Cold Rolled Coil YoY 6 5 (Rs./MT) Cold Rolled Coil MoM Billet Price YoY Billet Price MoM 35 (Rs/MT) 29 (Rs/MT) Source: Bloomberg, Ventura Research Structural s Mumbai YoY Structural s Mumbai MoM 4 35 (Rs./MT) (Rs./MT) of 34- Tuesday 1 st July, 217

14 Raipur Wire Rod 5.5 MM YoY Raipur Wire Rod 5.5 MM MoM 4 35 (Rs./MT) (Rs./MT) TMT Bar YoY TMT Bar MoM 6 5 (Rs./MT) (Rs./MT) of 34- Tuesday 1 st July, 217

15 2. Anti-dumping measures undertaken by major steel importers India, US & Europe on Chinese dumping Government of India was expeditious to act against the deteriorating steel industry by implementing a series of measures such as (a) higher import duty of 12.5% vs. 1% on HRC imports (b) safeguard duty (c) minimum import price (MIP) (d) anti-dumping duty. Currently, there is a safeguard duty at 15% on HRC imports (14 March September 217), which will fall to 1% (14 September March 218) and nil thereafter. Safeguard duty is applicable to China, Ukraine and all developed countries including Japan, South Korea and Europe. MIP (HRC import price was US$445/t) has been replaced with anti-dumping duty (reference price for imports is US$489/t). Landed cost of import of CFR HRC on 12 th July, 217 US$ per MT HRC prices, CFR mumbai 495. CFR + BCD (@12.5%) Safeguard 1% on CFR 74.3 Not applicable as CIF prices is Anti Dumping duty greater than references prices of US$ 489/MT Port handling 2. Miscellaneous expenses 5. Total in USD Landed cost of Import ( In INR) Ex-Mumbai (Including GST) Currently prices are much above the reference prices. However, this provides a cushion to domestic players from any pricing pressures (a much needed succor for the ailing steel industry) - 15 of 34- Tuesday 1 st July, 217

16 3. Decrease in iron ore prices have improved profitability Most of the players in India have captive mines. With mining issues being resolved more iron ore mines are expected to be allotted thereby easing future supply pressures. Decreasing trend in iron ore pricing is observed from FY13 onwards and it is expected to fall further which would aid profitability of primary steel producers. Out of the total iron ore requirement (FY18) of 8.9 Million Tonnes, JSPL purchased 4.89 million tonnes of iron ore fines from nearby mines, while iron ore pellets of 4 million tonnes were sourced internally from its pellet plant in Barbil. For the production of pellets in Barbil (which has a capacity of 9 million tonnes) it sources iron ore requirements from the captive Tensa Mine (upto 3 Million Tonnes) and the rest is purchased. Domestic prices correcting NMDC 6-4 MM Iron Ore Lumps YoY NMDC 6-4 MM Iron Ore Lumps MoM (Rs./MT) (Rs./MT) NMDC 64% Iron Ore Fines YoY NMDC 64% Iron Ore Fines MoM (Rs./MT) (Rs./MT) of 34- Tuesday 1 st July, 217

17 despite global prices moving up China Iron Ore 62% Fines YoY China Iron Ore 62% Fines MoM Source: Bloomberg, Ventura Research Source: Bloomberg, Ventura Research Brazil Iron Ore 65% Fines YoY Brazil Iron Ore 65% Fines MoM Australia Iron 61.5% Fines YoY Australia Iron Ore 61.5% Fines MoM of 34- Tuesday 1 st July, 217

18 4. Revival of Indian infrastructure given the measures undertaken by the Modi Government India became the 3 rd largest producer of steel in 215 and is well poised to emerge as the 2 nd largest producer after China. There is significant potential for growth given the low per capita steel consumption of 61 kgs in India, as compared to the world average of 28 kgs. The Indian economy is rapidly growing with enormous focus on the infrastructure and construction sector. Several initiatives mainly, affordable housing, expansion of railway networks, development of shipbuilding industry, opening of defense sector for private participation, and the anticipated growth in the automobile sector, are expected to create a significant amount of demand for steel in the country. Compelling growth prospects Growth in India s GDP European Union US Africa Middle China east World steel per capita consumption 63 India FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E GDP ( In Million USD) % GDP Growth (RHS) Source: World Steel Association, Ventura Research Source: Thomson Reuters, Ventura Research Indian steel demand set to grow at a CAGR of 7.1% from FY17 onwards Particulars (in MTPA) FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Capacity Utilisation (%) Crude Steel production Import Export Double counting Crude Steel demand Source: Steel Ministry, Ventura Research - 18 of 34- Tuesday 1 st July, 217

19 Sector wise Steel demand growth Sr. No. industry application Current Demand Estimated Demand CAGR (%) Current Share (%) Future Share (%) Product Profile (in MTPA) 1 Construction & Infrastructure Engineering & Fabrication Automotive Other Transport Packaging & others Total Finished Steel Consumption Per Capita (Kg/Capita) Source: Steel Ministry, Ventura Research Bar & Rods, structurals, plates and pipes Plates, Bars & Rods HRC, CRC, Plates Railway material Diversified 5. Shrinking demand supply gap of domestic manufacturers Investment in new steel capacity creation has come to a halt in India over the last three years due to the deteriorating global steel industry environment and highly leveraged balance sheets of Indian companies. It is estimated that Indian steel demand supply will tighten significantly post FY19 given slowing supply and gradually improving demand. Indian Steel Supply Particulars (in MTPA) FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Capacity Utilisation (%) Crude Steel production Source: Steel Ministry, Ventura Research 6. Culmination of capex at Angul augurs well for JSPL The Angul plant consists of 1.8 million tonnes of a coal fired synthetic gas based DRI plant and the recently commissioned 3.2 MTPA blast furnace. With these facilities now in operation, crude steel capacity is expected to grow 3X to 4.5MTPA from 1.5 MTPA. We expect steel volumes to grow at a CAGR of 65% to 4.5 MTPA by FY of 34- Tuesday 1 st July, 217

20 v Steelmaking capacity to grow 3 fold by FY18 at Angul 5 4 (In MTPA) FY15 FY16 FY17 FY18E FY19E FY2E Steel Volumes to be main contributor (In MTPA) (In %) FY15 FY16 FY17 FY18E FY19E FY2E Angul Steel Volumes Utilisation Rate (RHS) Break up of finished steel production at Angul Plant Capacity Production (' tonnes) Product (' tonnes) FY14 FY15 FY16 FY17 FY18E FY19E FY2E Plates TMT Bar 14. NA NA NA of 34- Tuesday 1 st July, 217

21 7. Existing operations at Raigarh to function at full throttle from FY18 onwards Total steel making capacity at Raigarh plant is expected to increase by.5 MTPA to 3 MTPA by FY2. We expect high steady utilization rates from FY19 onwards. Stable Steel Volumes expected In Milliion Tonnes (In %) FY17 FY18E FY19E FY2E Raigarh utilisation % (RHS) Product Break up of finished steel production at Raigarh Plant Capacity (' tonnes) Production (' tonnes) FY14 FY15 FY16 FY17 FY18E FY19E FY2E Rails Plates Sections of 34- Tuesday 1 st July, 217

22 8. Oman facility to produce value added products (TMT bars) from FY18 onwards JSPL completed acquisition in Shadeed Iron & Steel LLC in 21 (for $464 millions), and commissioned a Hot Briquetted Iron Plant of 1.5 MTPA capacity in FY11. Thereafter in FY14, the Company added a 2 MTPA steel melting shop to manufacture billets. This facility was commissioned in FY15. Further, the company undertook forward integration of 1.4 MTPA TMT bar rolling mill. With TMT bar volumes slowly ramping up, the product mix is expected to help improve average realizations. Value added product mix (In Million Tonnes) FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Billet TMT Bars Revenues from this business are expected to grow at a CAGR of 4.8% to Rs. 3,753 crores by FY2. Stable Revenues Rs. In crores FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E - 22 of 34- Tuesday 1 st July, 217

23 Power Business scripting a strong growth story In a renewable world, generation mix to still be dominated by coal assets Despite the high growth of renewables, India s energy mix will predominantly remain skewed towards thermal sources. Generation Mix 216 Generation Mix % share 4.64 % share Thermal Renewable Hydro Nuclear Thermal Renewable Hydro Nuclear Source: PWC, Ventura Research Source: PWC,Ventura Research Electricity Demand The overall deficit in fulfilling the energy requirement of the country has declined from 11.5% in FY97 to 2.1% in FY16. The energy requirement is estimated to increase at a CAGR of 7% from 1,354,874 million units in FY17 to 1,94,862 million units in FY22. Hence, we expect production to keep pace with demand. Region wise Electricity Demand (In Million Units) Region Northern Western Southern Eastern North East A & N Island Lakshdweep Total Source: CEA, Ventura Research Despite sale of assets JSPL s power revenues set to grow JSPL has 3,4 MW of generating assets of 34- Tuesday 1 st July, 217

24 Sold to JSW energy Sold to JSW energy However, to deleverage its balance sheet and improve liquidity, it concluded a binding agreement for the sale of a thermal power plant worth Rs. 4, crores (1, MW plant located at Tamnar, Chhattisgarh). This deal has two options: Option 1: Sale of asset without Fuel Source Agreement (FSA) for Rs. 4, crores Option 2: Sale of asset with FSA for Rs. 6,5 crores This deal is expected to conclude in H1FY19. In our model we have assumed option 1 for cash flow consideration. This would mean in case of option 2, there would be an upside risk to our EPS estimates by ~ Rs. 9.8 per share in FY19. Details of Power purchase agreements Project Buyer Period Quantity (MW) FSA Tamnar I Tamil Nadu Sep 214 to Aug 17 4 r Tamnar IITamil Nadu Feb 214 to Sep a Tamnar IIKarnataka Jun 216 to May a Tamnar IIKarnataka Oct 217 to Sep a Tamnar IIChattisgarh From start of commercial operation 6 a Tamnar IIChattisgarh From start of commercial operation 6 r Total 87 Power generation portfolio Tamnar I (2 unitsx25 MW) 1 MW Tamnar II (4 units x6 MW)24 MW Total 34 MW After the asset sale JSPL will be left with a portfolio of 2,4 MW of thermal power. We expect the revenues to grow at a CAGR of 17.5% to Rs. 5,63 crores by FY2. We expect the overall portfolio PLF to improve to 7% from the current 35%. We expect EBIDTA to grow at a CAGR of 2% to Rs. 1,814 crores by FY2. Capacity reduction with stable utilizations Stable revenue from long term PPA s In MW Decline in capacity post sale of Tanmar I FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E In Rs. Crores FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Capacity Overall PLF % (RHS) Revenue Gross realisation Per unit - 24 of 34- Tuesday 1 st July, 217

25 Mining Business sizable reserves Revenues from the mining segment were on a declining trend given the shutdown of its Australian assets (Labour unrest) and scaling down of its Mozambique assets given not so remunerative pricing for coking coal prevalent globally. However with the revival of coking coal prices, the mining operations were reinstated in FY17. We expect strong volume growth of 66% CAGR to 3.9 million tonnes by FY2. In line we expect revenues to grow at a CAGR of 27% to Rs. 1,89 crores citing the expected improvement in realizations. Location JSPL s mining vertical has sizeable reserves Annual Reserves Capacity Production (MTPA) Realisation MT MTPA FY17 FY18 FY19 FY2 $/Ton Australia Mozambique South Africa NA NA NA NA NA In Rs. Crores Mining business revenue FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E - 25 of 34- Tuesday 1 st July, 217

26 v Strong revenue & profitability growth on cards Overall on a consolidated basis we expect revenue to grow at a CAGR of 22.7% to Rs. 39,184 crores by FY2. On the back of the strong growth trajectory, improved pricing, and stable raw material costs, EBITDA is expected to grow at a faster CAGR of 27% to Rs. 9,615 crores by FY2. Consolidated Revenue Consolidated EBITDA 45 (Rs in crore) ( In %) Rs. In Crores 4 4, , , , 5 FY13 FY14 FY15 FY16 FY17 FY18EFY19E FY2E Net Sales EBITDA Margin (RHS) Source: Company, Ventura Research Source: Company, Ventura Research 5, FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Debt deleveraging on the anvil In line with the sagging fortunes of the steel industry, JSPL had defaulted on its debt obligations in FY16. JSPL s debt obligations too had ballooned to Rs. 45,956 crores and debt gearing had peaked at 1.3x. However with the cycle turning for the better in FY217, JSPL s servicing of debt was regularized. On the back of our optimistic outlook, expected improvement in profitability and proceeds from the Tamnar I asset (Rs. 4, crores) being used to repay debt, we expect the gearing to reduce to 1.X (FY2 overall debt of Rs. 28,459 crores) (1.) (X) Debt to Equity to Improve FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Debt to Equity ratio Interest Coverage Ratio (X) Debt to EBITDA ratio FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Debt to EBIDTA ratio - 26 of 34- Tuesday 1 st July, 217

27 Resurgence in profitability As a result we expect net earnings to turn around in FY18 (from loss making in FY17) and post a profit of Rs. 1,954 crores by FY2. Although optically profit growth between FY19 and FY2 is seemingly flat, we need to take into account that FY19 profit figure of Rs. 1,864 crores includes an exceptional one time profit of Rs. 1, crores. (On Sale of Tamnar I assets to JSW energy) Strong profitability on track 4 3 Rs. In Crores In % FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E PAT PAT margin - 27 of 34- Tuesday 1 st July, 217

28 Financial Performance JSPL s top line grew by 29% YoY in Q4FY17 to Rs. 6,29.5 crores from Rs. 4,872.4 crores in Q4FY16 on account of higher realization from the steel segment. Revenues of the steel segment grew by Rs. 687 crores on the back of a 23% jump in average realization to Rs. 4,163 per tonne in Q4FY17 from Rs. 32,673 per tonne in Q4FY16. Revenues from the power segment increased marginally by 8% YoY to Rs. 1,564.5 crores. The Mining vertical too reported a strong performance with revenues growing to Rs. 279 crores in Q4YF17 from Rs. 3 crores in Q4FY16. EBITDA increased by 42% YoY from Rs crores in Q4FY16 to Rs. 1,522.1 crores and the EBITDA margin improved by 63bps to 24.7% on account of operational leverage and decrease in other expenditure. In FY17, JSPL net sales stood at Rs. 21,5.5 crores registering a growth of 14.6% YoY. Steel sales volumes increased by 6% from 4.4 million metric tonnes in FY16 to 4.7 million metric tonnes in FY17 leading to a revenue growth of 7.9% to Rs.16,611 crores. The Power segment showed a growth of 12% YoY to Rs. 388 crores. Further, revenue from mining business increased by 2X from Rs. 49 crores in FY16 to Rs. 891 crores in FY17. EBITDA margin improved by 34 bps to 22.1% in FY17 due to a decrease in raw material costs. Net losses decreased substantially by 24% on reversal of amortization expenses for the mining business. Financial Performance (Rs. In Crores) Particulars Q4FY17 Q4FY16 FY17 FY16 Net Sales Growth 29.1% 14.6% Total Expenditure EBITDA Margin (%) 24.7% 18.4% 22.1% 18.7% Depreciation EBIT (Ex OI) Non Operating Income EBIT Margin (%) 8.8% -4.7% 3.4% -2.6% Finance cost Exceptional items PBT Margin (%) -.9% -19.9% Provision for Tax Profit after tax Margin (%) -1.6% -13.1% Minority Profit after Tax and allocation of minority Source: Company,Ventura Research - 28 of 34- Tuesday 1 st July, 217

29 Financial Outlook We expect net sales to grow at a 3 year CAGR of 22.7% from Rs. 21,5.5 crores in FY17 to Rs. 39,184 crores in FY2 on the back of an Infrastructure push by the Government, revival of the global steel cycle, completion of capex and monetization of the thermal power plant asset. EBITDA margin is set to improve to ~24% (+2 bps) by FY2 due to improved sales and stabilization of production cost. Further, the PAT margins are expected to improve to ~3.75% by FY2 from current levels on account of a gradual decrease in the interest cost. As a consequence, the return ratios, ROE and ROCE are set to improve significantly from -8% and -4% in FY17 to 7% and 4% respectively by FY2. 45, 4, (Rs in crore) 35, 3, 25, 2, 15, 1, 5, Strong Business growth visible ( In %) FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Net Sales EBITDA Margin (RHS) PAT Margin (RHS) Upswing in return ratios (No of times) Reducing Debt FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Debt to Equity ratio Healthy working capital cycle 15 1 (In %) (No of days) FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E RoCE RoE FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Inventory Days Debtor Days Credit Days - 29 of 34- Tuesday 1 st July, 217

30 Key Risk Coal block allocation scam CBI had registered a case against Mr. Naveen Jindal in the allocation of the Amarkonda Murgadangal coal block in Jharkhand. On 24 th April, 217 Mr. Jindal was formally charged with criminal misconduct & false representation of facts in the allocation of above coal block. Further, on 1 th July, 217 CBI filed another supplementary charge sheet against Mr. Jindal in the Urtan North coal block case. In our view, the above mentioned cases will not have any financial impact on the company. Markets have already priced in the impact of above cases & any adverse order will not impact the fortunes of the company. Slow down in Infrastructure boom Steel demand is expected to grow at a CAGR of 7.1% on the back of a boost given to infrastructure by the launch of Housing for all by 22, infrastructure status given to housing projects, opening up of the defence sector to private players and growth in the automobile industry. Any delays in achieving the stipulated targets would mean a setback to anticipated steel demand and hence impact the profitability assumption for JSPL negatively. - 3 of 34- Tuesday 1 st July, 217

31 Valuation We initiate coverage on JSPL as a BUY with a price objective of Rs. 472 (7.X EV/EBIDTA) representing a potential upside of ~24.5% from the CMP of Rs At present, the stock is trading at 4.5X and 3.9X its estimated EV/EBIDTA for FY19 and FY2. Although our valuation is aggressive, we believe that the following factors warrant a premium: 1. Robust outlook of the Steel sector, not only on the domestic front but globally too, augurs well for JSPL. 2. Commissioning of the 3.2 MTPA blast furnace at Angul to bolster the steel segment s revenue at a CAGR of 24% from Rs.16,28 crores in FY17 to Rs. 31,574 crores by FY2. 3. Improving outlook on Power business, revenues are going to grow at a CAGR of 17.5% to Rs. 5,63 crores by FY2. 4. Mining operations to get a fillip, therefore revenues are going to grow at a CAGR of 27% to Rs. 1,89 crores by FY2. 5. Sale of 1 MW Tamnar-I asset to create liquidity which in turn would aid in bringing down debt and improve the solvency position of the company JSPL EV/EBIDTA trend Mar-1 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 EV 7X 8X 9X 1X 11X - 31 of 34- Tuesday 1 st July, 217

32 Y/E March Sales EBITDA PAT Peer Comparison (Rs. In crore) EBITDA Margin (%) PAT Margin (%) ROE (%) ROCE (%) P/E (x) P/BV (x) EV/ EBITDA (x) Jindal Steel and Power 1.% ,371. 3, , N/A ,51. 4, , N/A E 13,415. 7, , E 37,329. 8,991. 1, Tata Steel 216 1,15, , ,11, , , E 1,23,1.2 18,57.2 5, E 1,24, ,942. 6, Steel Authority of India , , , N/A.4 N/A , , N/A.7 1, E 55, , E 61, , JSW Steel , ,73. 1, N/A , , , E 62, , , E 65, ,36.6 4, Prakash Industries 216 2, , E 3, E 3, Source: Thomson Reuters, Ventura Research Debt/ Equity - 32 of 34- Tuesday 1 st July, 217

33 Financials and Projections Y/E March, Fig in Cr FY16 FY17 FY18E FY19E FY2E Y/E March, Fig in Cr FY16 FY17 FY18E FY19E FY2E Profit & Loss Statement Per Share Data (Rs) Net Sales Adj. EPS % Chg Cash EPS Total Expenditure DPS..... % Chg Book Value EBDITA Capital, Liquidity, Returns Ratio EBDITA Margin % Debt / Equity (x) Other Income Current Ratio (x) PBDIT ROE (%) -9% -8% % 6% 7% Depreciation ROCE (%) -5% -4% % 3% 4% Interest Dividend Yield (%)..... Exceptional items Valuation Ratio (x) PBT P/E NA NA Tax Provisions P/BV Reported PAT EV/Sales Minority Interest EV/EBIDTA PAT Efficiency Ratio (x) PAT Margin (%) Inventory (days) RM / Sales (%) Debtors (days) Tax Rate (%) Creditors (days) Balance Sheet Cash Flow Statement Share Capital Profit Before Tax Reserves & Surplus Depreciation Minority Interest Working Capital Changes Long Term Borrowings Others Deferred Tax Liability Operating Cash Flow Other Non Current Liabilitie Capital Expenditure Total Liabilities Other Investment Activities Gross Block Cash Flow from Investing Less: Acc. Depreciation Changes in Share Capital..... Net Block Changes in Borrowings Capital Work in Progress Dividend and Interest Non Current Investments Cash Flow from Financin Net Current Assets Net Change in Cash Long term Loans & Advanc Opening Cash Balance Total Assets Closing Cash Balance of 34- Tuesday 1 st July, 217

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