Jindal Steel & Power Margins under Pressure for March Quarter 2012

Jindal Steel & Power, a major steel producer and power generation company, has announced its results for the March 2012 quarter. The company, on the back of a hike in steel prices, higher sales volume and increase in power production due to the commencement of its new 135 MW power plant in January 2012, has reported decent financial numbers for the quarter. The net sales of the company has grown by 42 per cent on a YoY basis to Rs 5,465 crore and the net profit has grown by 16 per cent on a YoY basis to Rs 1,161.54 crore.

The YoY jump in the revenue during the quarter was mainly on account of the hike in the power segment (contributing 21 per cent of the total revenue) which grew by 143 per cent on a YoY basis to Rs 1,280 crore. The iron and steel segment (contributing 75 per cent of the revenue) grew by 10 per cent on a YoY basis to Rs 4,404 crore. The growth in the steel segment was on account of the decent growth in the sales volume of sponge iron and iron ore pellets which grew by 206 per cent and 207 per cent on a YoY basis respectively. The significant jump in the growth of iron ore pellets was due to its newly commissioned 5 MTPA capacity in Barbil, Orissa.

The YoY jump in the revenue during the quarter was mainly on account of the hike in the power segment (contributing 21 per cent of the total revenue) which grew by 143 per cent on a YoY basis to Rs 1,280 crore. The iron and steel segment (contributing 75 per cent of the revenue) grew by 10 per cent on a YoY basis to Rs 4,404 crore. The growth in the steel segment was on account of the decent growth in the sales volume of sponge iron and iron ore pellets which grew by 206 per cent and 207 per cent on a YoY basis respectively. The significant jump in the growth of iron ore pellets was due to its newly commissioned 5 MTPA capacity in Barbil, Orissa. However, the EBITDA margin of the company on a YOY basis declined by 1,000 bps to 34.7 per cent. This was largely on account of the higher raw material cost which continued to remain steep during the quarter. The raw material and the power & fuel cost went up significantly by 79 per cent and 16 per cent on a YoY basis respectively. Higher employee cost - up by 77 per cent on a YoY basis - further dented the operating performance of the company.

This is despite the fact that the coking coal prices in the international market have declined to USD 225 from USD 265 per tonne in the last three months. However, with the rupee hovering around a level of USD 49-50, the positive factors arising out of the fall have been compromised. In conclusion we believe that the performance of the company during the quarter has remained quite decent, especially in terms of the topline and bottomline. However, on the margin front the higher raw material cost and the employee cost impacted the margins significantly.

Both the business segments have done well during the quarter. The hike in the price of long steel products (which constitute 60-65 per cent of the steel segment revenue) will remain till May following which there will be a decline due to the monsoon when the construction activity slows down. Also, the environment still seems to be challenging in terms of the high input cost, depreciation of the rupee and the slow pick-up in demand in the coming months. This could affect the performance of the company in the coming quarter.

At its current price of Rs 497 and with trailing EPS of 43.26 the scrip is trading at a P/E multiple of 111.48. The current valuations look marginally higher given the scenario which is still looking challenging in terms of the input cost and the slow pick-up in demand. Therefore our recommendation to investors is to avoid the scrip in the short to medium term.