Good show in tough environment; well placed for long term BUY May 05, 2016 Kamlesh Bagmar kamleshbagmar@plindia.com +91 22 66322237 Ankit Shah ankitshah@plindia.com +91 22 66322244 Rating Accumulate Price Rs66 Target Price Rs80 Implied Upside 21.2% Sensex 25,262 Nifty 7,736 (Prices as on May 05, 2016) Trading data Market Cap. (Rs bn) 60.3 Shares o/s (m) 914.9 3M Avg. Daily value (Rs m) 996.5 Major shareholders Promoters 61.89% Foreign 16.60% Domestic Inst. 2.93% Public & Other 18.58% Stock Performance (%) 1M 6M 12M Absolute 9.7 (10.5) (55.0) Relative 8.2 (6.6) (47.1) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 3.0 6.4 146.3 2018 13.4 3.4 293.8 Price Performance (RIC: JNSP.BO, BB: JSP IN) (Rs) 160 140 120 100 80 60 40 20 0 May 15 Jul 15 Sep 15 Source: Bloomberg Nov 15 Jan 16 Mar 16 May 16 Jindal Steel and Power (JSP) reported Q4FY16 earnings ahead of our expectation on the back of better earnings in steel operations. However, Jindal power (JPL) continued to disappoint due to higher fuel cost and low PLFs. We believe that negatives on the regulatory front are very well factored in the price with valuations at P/E of 5x and P/B of 0.3x FY18E, leaving significant scope for upside in the backdrop of strong earnings outlook in steel operations and bottomed out earnings in Power biz. We maintain Accumulate with TP of Rs80, valuing steel operations at 6x EV/EBITDA FY17E and JPL (3400MW) at Rs60m/MW. Lower than expected costs drove the beat in standalone operations: Volumes rose 37% QoQ/28% YoY to 1m tonnes (t), in line with our expectation. Though blended realisations were below our expectation by Rs1750/t, steeper thanexpected reduction in costs (lower by Rs4000/t against PLe) offset the impact and drove the beat in EBITDA. Lower costs were primarily attributed to lowerthan expected RM and visible rationalisation of fixed costs. Hence, EBITDA rose ahead of our expectation at Rs6.3bn (PLe: Rs4.1bn), up 35% QoQ/6% YoY. Aided by elevated tax credit, company reported lower than expected loss of Rs1.5bn (PLe: Rs3.2bn). Weakness in JPL likely to have bottomed out: Consolidated EBITDA grew 38% QoQ (+3% YoY) at Rs7.7bn (PLe: Rs5.5bn). EBITDA in JPL fell 27% QoQ/59% YoY to Rs1.4bn (PLe:Rs2bn). EBITDA of Oman steel ops rose 76% QoQ (down 56% YoY) at US$14 (PLe:US$12m) on account of steep cut in spreads. Impacted by additional depreciation (of Rs3bn) on account of change of method in JPL, company reported loss of Rs5.8bn (PLe:Rs5.7bn) against loss of Rs7.3bn/Rs4.6bn in Q3FY16/Q4FY15. Key financials (Y/e March) 2015 2016 2017E 2018E Revenues (Rs m) 199,365 182,235 279,731 322,086 Growth (%) 0.3 (8.6) 53.5 15.1 EBITDA (Rs m) 52,371 28,837 60,088 76,547 PAT (Rs m) (315) (19,082) 2,713 12,224 EPS (Rs) (0.3) (20.9) 3.0 13.4 Growth (%) (101.8) 5,961.7 (114.2) 350.6 Net DPS (Rs) Profitability & Valuation 2015 2016 2017E 2018E EBITDA margin (%) 26.3 15.8 21.5 23.8 RoE (%) (0.1) (9.6) 1.4 6.2 RoCE (%) 2.9 0.6 4.3 6.0 EV / sales (x) 2.5 2.8 1.9 1.6 EV / EBITDA (x) 9.3 17.9 8.8 6.8 PE (x) (191.7) (3.2) 22.2 4.9 P / BV (x) 0.3 0.3 0.3 0.3 Net dividend yield (%) Source: Company Data; PL Research Q4FY16 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Q4FY16 Result Overview (Rs m) Y/e March Q4FY16 Q4FY15 YoY gr. (%) Q3FY16 FY16 FY15 YoY gr. (%) Net Sales 51,537 44,810 15.0 41,333 182,235 191,779 (5.0) Raw Material 19,109 13,408 42.5 15,956 67,041 56,354 19.0 % of Net Sales 37.1 29.9 38.6 36.8 29.4 Staff Costs 2,168 3,132 (30.8) 1,479 8,944 10,910 (18.0) % of Net Sales 4.2 7.0 3.6 4.9 5.7 Power & Fuel 10,836 6,463 67.7 11,500 42,250 23,310 81.3 % of Net Sales 21.0 14.4 27.8 23.2 12.2 Stores and spares 3,703 4,001 (7.5) 3,674 15,188 17,578 (13.6) % of Net Sales 7.2 8.9 8.9 8.3 9.2 Foreign exchange (gain)/loss (757) 2,580 NA 287 (424) 3,197 NA % of Net Sales (1.5) 5.8 0.7 (0.2) 1.7 Other Expenses 6,772 9,602 (29.5) 7,550 27,264 35,409 (23.0) % of Net Sales 13.1 21.4 18.3 15.0 18.5 Cost of captive sales 2,055 (1,826) NA (2,330) (6,865) (7,585) NA % of Net Sales 4.0 (4.1) (5.6) (3.8) (4.0) Total Expenditure 43,887 37,360 17.5 38,115 153,398 139,172 10.2 EBITDA 7,650 7,451 2.7 3,218 28,837 52,607 (45.2) Margin (%) 14.8 16.6 7.8 15.8 27.4 Depreciation 9,346 7,007 33.4 6,378 28,194 27,328 3.2 Other income 1,422 1,054 34.9 1,636 5,354 4,484 19.4 EBIT (274) 1,497 NA (1,524) 5,997 29,762 (79.9) Interest 8,584 7,709 11.4 8,061 32,808 26,073 25.8 PBT (8,858) (6,211) NA (9,585) (26,811) 3,689 NA Extraordinary income/(expense) 2,066 (565) NA 1,610 62 PBT (After EO) (6,792) (6,776) NA (7,976) (26,750) 3,689 NA Tax (3,161) (964) NA (2,120) (6,763) (882) NA % PBT 46.5 14.2 26.6 25.3 (23.9) Reported PAT (3,631) (5,812) NA (5,855) (19,987) 4,570 NA Share of profit from associates 11 44 (75.2) 16 (14) 26 NA Minority interest 93 (575) NA (105) (980) (1,738) NA Net profit attributable to shareholders (3,713) (5,193) NA (5,735) (19,021) 6,335 NA Adjusted PAT attributable to shareholders (5,780) (4,708) NA (6,917) (19,067) 6,335 NA Source: Company Data, PL Research May 05, 2016 2
Exhibit 2: Operating Metrics Y/e March Q4FY16 Q4FY15 YoY gr. (%) Q3FY16 FY16 FY15 YoY gr. (%) Standalone operations Steel products (000 tonnes) 1,000,000 779,274 28.3 740,000 3,340,000 2,933,322 13.9 Revenue (Rs m) 34,199 33,006 3.6 27,946 125,028 132,823 (5.9) EBITDA (Rs m) 6,307 5,942 6.1 2,732 22,293 38,347 (41.9) Reported PAT (Rs m) (1,458) (2,346) NA (4,021) (10,189) (3,107) NA Adjusted PAT (Rs m) (1,458) (2,140) NA (4,721) (10,889) 4,971 NA Jindal power Ltd Gross power generation (m units) 2,358 2,692 (12.4) 2,580 9,541 10,636 (10.3) Realisation/unit (Rs) 7,010 7,740 (9.4) 8,150 30,150 32,280 (6.6) Revenue (Rs m) 1,360 3,350 (59.4) 1,860 6,690 16,670 (59.9) EBITDA (Rs m) (2,120) 970 NA 380 (1,030) (1,710) NA PAT (Rs m) 1,762 NA 380 1,090 8,795 (87.6) Shadeed Iron and steel HBI sales volume (000 tonnes) 400 166 140.6 250 1,080 446 142.0 Billet sales volumes (000 tonnes) 14 32 (56.0) 7 63 119 (47.0) Revenue (US$m) 1,000,000 779,274 28.3 740,000 3,340,000 2,933,322 13.9 EBITDA (US$m) 34,199 33,006 3.6 27,946 125,028 132,823 (5.9) Source: Company Data, PL Research May 05, 2016 3
Income Statement (Rs m) Net Revenue 199,365 182,235 279,731 322,086 Raw Material Expenses 146,994 153,398 219,643 245,539 Gross Profit 52,371 28,837 60,088 76,547 Employee Cost Other Expenses EBITDA 52,371 28,837 60,088 76,547 Depr. & Amortization 27,328 28,194 27,753 29,090 Net Interest 25,837 32,808 35,402 39,424 Other Income (14,633) 5,416 4,866 5,069 Profit before Tax (15,428) (26,750) 1,799 13,102 Total Tax 5,768 (6,763) 444 1,993 Profit after Tax (21,196) (19,987) 1,355 11,110 Ex Od items / Min. Int. (17,352) 1,028 1,358 1,114 Adj. PAT (315) (19,082) 2,713 12,224 Avg. Shares O/S (m) 914.9 914.9 914.9 914.9 EPS (Rs.) (0.3) (20.9) 3.0 13.4 Cash Flow Abstract (Rs m) C/F from Operations 9,884 34,296 45,712 64,222 C/F from Investing (63,096) (29,272) (19,971) (22,370) C/F from Financing 55,157 (32,953) (35,402) (39,424) Inc. / Dec. in Cash 1,945 (27,929) (9,661) 2,429 Opening Cash 9,404 11,033 (16,896) (26,557) Closing Cash 11,033 (16,896) (26,557) (24,128) FCFF (108,396) (2,284) 3,364 (34,412) FCFE (17,072) (2,284) 3,364 (34,412) Key Financial Metrics Growth Revenue (%) 0.3 (8.6) 53.5 15.1 EBITDA (%) (1.6) (44.9) 108.4 27.4 PAT (%) (101.8) 5,961.7 (114.2) 350.6 EPS (%) (101.8) 5,961.7 (114.2) 350.6 Profitability EBITDA Margin (%) 26.3 15.8 21.5 23.8 PAT Margin (%) (0.2) (10.5) 1.0 3.8 RoCE (%) 2.9 0.6 4.3 6.0 RoE (%) (0.1) (9.6) 1.4 6.2 Balance Sheet Net Debt : Equity 2.0 2.4 2.4 2.3 Net Wrkng Cap. (days) 7 (2) 9 14 Valuation PER (x) (191.7) (3.2) 22.2 4.9 P / B (x) 0.3 0.3 0.3 0.3 EV / EBITDA (x) 9.3 17.9 8.8 6.8 EV / Sales (x) 2.5 2.8 1.9 1.6 Earnings Quality Eff. Tax Rate (37.4) 25.3 24.7 15.2 Other Inc / PBT 121.5 (20.0) 270.5 38.7 Eff. Depr. Rate (%) 4.5 4.5 4.4 4.2 FCFE / PAT 5,423.1 12.0 124.0 (281.5) Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 210,421 187,952 190,664 202,888 Total Debt 455,007 455,007 455,007 455,007 Other Liabilities 28,757 28,983 28,507 28,298 Total Liabilities 694,185 671,942 674,179 686,193 Net Fixed Assets 567,421 569,410 561,657 554,967 Goodwill 5,485 5,485 5,485 5,485 Investments 3,528 3,528 3,528 3,528 Net Current Assets 117,752 93,519 103,509 122,214 Cash & Equivalents 26,184 (1,744) (11,405) (8,976) Other Current Assets 152,749 162,230 188,125 210,298 Current Liabilities 61,181 66,966 73,210 79,108 Other Assets Total Assets 694,185 671,942 674,179 686,193 Quarterly Financials (Rs m) Y/e March Q1FY16 Q2FY16 Q3FY16 Q4FY16 Net Revenue 43,890 45,475 41,333 48,380 EBITDA 9,803 8,166 3,218 5,549 % of revenue 22.3 18.0 7.8 11.5 Depr. & Amortization 7,466 5,005 6,378 6,400 Net Interest 8,516 7,647 8,061 8,100 Other Income 1,123 1,174 1,636 1,300 Profit before Tax (5,055) (6,927) (7,976) (7,651) Total Tax (1,501) 19 (2,120) (1,884) Profit after Tax (3,393) (6,180) (5,735) (5,648) Adj. PAT (3,393) (2,556) (6,917) (5,648) Key Operating Metrics Standalone operations Metallics Sales (Tonnes) 178,200 113,625 35,113 Steel Prod. Sales (Tonnes) 2,933,322 3,035,238 4,233,954 5,254,569 Steel Sales Vol. (Tonnes) 2,933,322 3,213,438 4,347,579 5,289,682 Real. / tn Steel 26,965 29,248 29,222 JSPL Pwr (m kwh) 2,402 3,203 3,557 3,190 JSPL Real/ Kwh 3 3 3 3 Stdalon Steel EBITDA(Rs m) 36,881 18,521 44,132 54,255 Stdalon Pwr EBITDA(Rs m) 1,465 1,922 2,846 2,552 Stdalon Total EBITDA (Rs m) 38,347 22,293 46,978 56,807 Stdalon PAT (Rs m) (3,107) (10,189) 6,399 8,590 Jindal Power Ltd JPL Kwh sold (m) 9,655 9,046 11,320 14,588 JPL Rate / Kwh 3 3 3 3 JPL EBITDA(Rsm) 16,670 6,690 10,943 16,638 JPL PAT (Rs m) 8,795 1,090 (6,338) 541 Shadeed iron and Steel Shadeed EBITDA (US$ m) 119 95 107 121 PAT (US$ m) 6 27 18 32 Source: Company Data, PL Research. May 05, 2016 4
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