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Friday, May 04, 2012

Edelweiss calls a ‘Buy’ on Jindal Steel & Power
CMP: Rs. 494    Target Rs. 648

Jindal Steel & Power’s (JSPL) steel business performed strongly in Q4FY12, led by sharp jump in both steel and pellet sales volumes. The segment is likely to remain robust owing to firm steel prices, weak coking coal cost and completion of Angul DRI project in March 2013. JSPL intends to start its first unit in the 2,400 MW power project one year ahead of its original schedule. We are positive on JSPL on the back of growth in both steel and power businesses and its portfolio of resource assets. We maintain ‘BUY’ with TP of INR 648.

Steel business: Outlook positive for near term: JSPL expects coking coal prices to remain weak at the current levels and domestic steel prices to remain firm, thereby implying strong EBITDA margins in the near term. The 1.5 mtpa plate mill is expected to be commissioned in Q1FY13, but the 2.2 mtpa DRI plant is delayed by a quarter to March 2013 (factored in our estimates). Pellet realisations and volumes are also expected to remain robust going forward.

Power business: Looking to advance 2,400 MW project: The company is looking to commission final 4 units of 135 MW in the next 4  5 months. Angul and Raigarh units are expected to operate at 95% and 75  80% PLF post stabilization, respectively. The company has accelerated implementation of 2,400 MW project and is targeting early start of Mar’ 13 for the first unit against Mar’ 14 earlier.

Investment Theme: JSPL’s steel business is attractive considering captive raw materials (iron ore and thermal coal) and improved product mix, including pellets. Company’s steel volumes are expected to increase in FY13 and FY14, led by ramp up of existing capacity and the Angul project. EBITDA margins of the existing power business of 1,000 MW are amongst the highest in India, due to captive coal and merchant tariffs. FY13 to see upside from its 10x135 MW power plants. Upsides also likely from the company’s coal projects in Mozambique and Indonesia. 

Outlook and valuations: Attractive; maintain ‘BUY’: The company expects merchant power tariff to remain at INR 3.75  4.25/unit in FY13, led by high coal prices, and then rise in FY14. Steel business could benefit from Angul DRI plant volumes in FY14. Further, generation from 10x135 MW power plant is expected to ramp up in FY13. We retain our FY13 and FY14 estimates and maintain ‘BUY/SO’ with TP of INR 648/share. The stock is trading at 6.6x FY14E EV/EBITDA

Centrum calls a ‘Buy’ on Hero MotoCorp
CMP: Rs. 2072    Target Rs. 2262

Hero MotoCorp Limited’s (HMCL) 4QFY12 operating results were below our expectations with EBITDA margins at 15.3% compared to our estimate of 15.7% and consensus estimate of 15.6%. While revenue growth was higher by 0.6% compared to our estimate at Rs. 60 bn on account of better-than-expected realizations (up 1.2% QoQ vs. est. inc of 0.5%), higher than expected RMC/unit (up 1.6% QoQ vs. est. inc of 0.5%) and higher other expenditure led to lower than expected operating performance despite higher than expected revenues.

Adjusted PAT stood at Rs. 6.04 bn (our est. Rs 6.6.48 bn). The management expects industry growth to be around 9 - 10% and believes HMCL will register better than industry growth rate (>10%). We continue to maintain Hold rating on the stock with a target price of Rs. 2,262 as the stock offers limited upside from current levels.

Operating results below expectations: HMCL registered 12%/flat YoY / QoQ revenue growth in 4QFY12 to Rs 60 bn. Net realization for the quarter inched up 1.2% QoQ, better than our expectation of 0.5%, leading to better than expected revenue growth. However, due to higher than expected increase in RMC/unit , EBITDA margins came at 15.3% , lower than our expectation of 15.7% and consensus estimate of 15.6%. Adjusted PAT stood at Rs. 6.04 bn compared to our estimate of Rs. 6.48 bn. 

Conference call highlights:  1.) HMCL has declared dividend of Rs. 45 for FY12 (dividend yield of 2% at CMP) 2.) The company indicated that inventory levels were normal and retail sales largely mirrored wholesale sales 3.) It will continue to introduce 7 - 8 new models / variants in FY13E as well 4.) Will increase the scooter segment capacity to 50,000 / month – Maestro received encouraging response 5.) Profitable volume growth in exports will take 4 - 5 quarters as initial brand building, advertising and promotion will eat into profits, and the company is targeting sales of 1mn units by FY16E / FY17E. 6.) Overall annual capacity of two - wheelers to be increased to 7mn units by July / August 2012 from current 6.6mn units annually 7.) It recently hiked prices effective 1st of May 2012 on the 100cc and 125cc segment by Rs. 500 and by Rs. 1000 on the 150cc segment.

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