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Street cautiously positive on JSPL post coal mine

Jindal Steel and Power (JSPL), which witnessed its lowest point in the business cycle due to mining constraints thereby impacting profitability of both steel and power segments, should likely see a reversal in its fortunes. This came at a time when demand and realisation environment in the two businesses has remained soft. Not surprisingly, its stock plummeted to Rs 125.05 (lowest levels in more than five years) in December 2014.

But, post allocation of a mine at reasonable valuations that 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 190.75 on Monday.

JSPL was able to get Gare Palma IV/2&3 blocks for a premium of Rs 108/tonne in the auction, which was a very positive development, says Goutam Chakraborty at Emkay Global. With this move, JSPL has been able to secure raw material security for Tamnar-1 (T1), which has a power generation capacity of 1,000mw. Company sources said that they have PPA of 400mw with Tamil Nadu, 250mw with Kerala, and another 250mw also. Though only part of PPA with Tamil Nadu is being supplied, rest will start later. However, analysts at Motilal Oswal Securities believe that the profitability may be under pressure initially. They say, JSPL will be selling merchant power (15 per cent of T1 capacity) at Rs 3.1/kwh while for remaining the tariff rate will be lower. Thus, they believe Ebidta from the project will come at Rs 940 crore as against their estimates of Rs 1,280 crore in FY16.

Nevertheless, this is still better than the current state where operations are hampered due to lack of coal. However, the street is awaiting clarity on whether JSPL will be able to use the coal for Tamnar 2 (T2) plants, which has fuel supply agreement (FSA) with Coal India. JSPL has a PPA of 710mw of the 2,400mw Tamnar-2 project.

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

For steel/sponge iron segment, JSPL is yet to succeed in procuring 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/tonne additional costs of coal in their estimates. The flip side is if further allocation of mines for this business comes at a higher cost. Either ways, it will have a strong influence on the stock. Analysts, thus, are currently in wait-and-watch mode with Neutral rating on the stock.


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