Stock Review: Jindal Steel & Power

The company aims to earn a healthy share of revenues from the steel segment, as power plans have not panned out as expected

 

The management of Jindal Steel & Power (JSPL) has expressed interest in acquiring 70 per cent stake in Zimbabwe Iron & Steel Company (Zisco), which has iron ore reserves, a0.8-million-tonne steel-making facility, limestone mines with 60 million tonnes reserves and $280-million debt.

The company bought Oman's Shadeed Iron & Steel in June for $525 million. Through these purchases, JSPL aims to strengthen its global presence and earn a healthy share of revenues from the steel segment, as some of its plans in the power sector have not gone as expected.

Zisco's iron ore reserves and the steel-making facility, coupled with its low-cost directly reduced iron (made at one-fifth of the fuel cost compared to that in India), will support JSPL's plan to expand capacity to around eight million tonnes by FY12 from the current 3.5 million tonnes.

The power business, through subsidiary Jindal Power (JPL), has not been doing too well. It contributes around 57 per cent to earnings before interest and tax (Ebit). Realisations declined to `4.5 per unit in the June quarter from `6.2 earlier, dragging net earnings by around five per cent. The rates are expected to remain soft in the coming year, reckon analysts. Moreover, the commissioning of captive units at JSPL (10x135 Mw) has already been delayed by around two quarters, which will push back earnings from power, say analysts at IIFL. There will also be delays in the execution of JPL's 2.4-Gw project, even as the company has got the necessary clearances from the environment ministry.

The Zisco acquisition may challenge the company's strong cash position. It had free cash worth `112 crore as of March. The debt-to-equity ratio is comfortable at around 0.95:1, but interest rate costs may eat into margins in case fresh debt is taken. Hence, the speed of execution and integration will be the deciding factors.