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Saturday, December 6, 2008

Jindal Steel & Power - Buy Report With Target

Indiabulls Securities Research has upgraded its rating on Jindal Steel & Power from hold to buy in its report dated December 3, 2008.

Target Price: Rs. 921

Power business to offset the impact of lower steel prices
Following the sharp decline in steel demand and the subsequent fall in steel prices, Jindal Steel & Power Limited (JSPL)’s stock has fallen by almost 60% since our last report. Though we have lowered our forward estimates substantially to factor in the sharper-than-expected fall in steel prices, we believe the current market price of JSPL more than factors in the bad news.

For the next few quarters our expectations are as follows:
Power to lead growth: JSPL, through its subsidiary Jindal Power Limited(JPL), is aggressively expanding into the power business. It has recently commissioned 250 MW of power capacity, taking the total capacity to 1,000 MW. The Company produced 1,489.6 mn units of electricity during Q2’09, generating revenues of Rs. 6.5 bn at the rate of Rs. 4.39 per unit.

Further, the Company has entered into MoUs with the governments of
Chhattisgarh and Jharkhand for setting up two power plants of 2,520 MW and
2,640 MW capacity, respectively. Thus, we believe that the power business will
not only drive growth for JSPL in the near future but also provide a cushion
from the cyclicity of the steel business.

Sales volumes to be under pressure:
After witnessing an impressive growth in sales volumes in H1’09, we expect volumes to be under pressure in H2’09 due to the decline in demand for steel on account of the downturn in the global economy. Going forward, we expect this trend to continue in FY10 as the downturn in the global economy intensifies.

Valuation
We have valued the Company by using the Sum-of-the-Parts (SOTP) valuation technique. We have used the DCF methodology to value the standalone company, assuming a WACC of 13% and a terminal growth rate of 5%.

Additionally, we have valued JPL at two times its estimated book value at the end of Q2’09. Our SOTP-based valuation of Rs. 921 suggests a potential upside of 18.6% from the current market price (CMP) of Rs. 776.9. Given the growth potential of its power business and based on our valuation, we upgrade our rating on the stock from Hold to Buy.
Source: IndiaBulls Research Report

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