Jindal Steel & Power Post's Weak Result For June Quarter 2012

Jindal Steel & Power, a major steel producer and power generation company, announced its results for the June 2012 quarter. Though its steel and power business did pretty well during the quarter, the higher input costs dented the operating performance of the company. Also, the one-time provision of Rs 574 crore made on the back of the termination of its JV contract with the Bolivian government impacted the consolidated bottomline of the company. On a consolidated basis the topline of the company grew by 19 per cent YoY to Rs 4,680 crore while the bottomline has declined by 59 per cent on a YoY basis to Rs 385 crore.

On the issue of the huge provision made during the quarter, the company has stated that the investment made by the company in EI Mutun’s joint venture project and other operations have been impaired. And as prudence, the company has made a provision of Rs 574.12 crore in the quarter ended June 30, 2012.

The June quarter result has remained weak for the company on the back of the higher raw material cost (up by 50 per cent YoY) and the power & fuel cost (up by 43 per cent YoY) that has impacted the operating performance. The operating profit of the company has declined by 2.1 per cent on a YoY basis to Rs 1,592 crore. The overall cost of production jumped by 58 per cent on a YoY basis to Rs 3,682 crore. This has also impacted the margins which are down by 700 bps to 34 per cent as compared to the same period last year. Higher employee cost - up by 37 per cent on a YoY basis - further dented the operating performance of the company.

The decline in the margin was on the back of some correction in the steel prices during the quarter and rise in the power & fuel cost. This is despite the coking coal price in the international market having declined to USD 225 from USD 265 per tonne over the last three months. However, due to the rupee hovering around USD 56, the benefit has been negated.

On a segmental basis, both steel and power businesses have contributed decently to the topline of the company. The steel business, which contributes 72 per cent, grew by 21 per cent YoY to Rs 3,678 crore and the power business grew at 21 per cent YoY to Rs 1,297 crore. 

However, there has been some contraction on the margin side for both the divisions. The steel business’ PBIT margin declined by 140 bps to 26.6 per cent while that of the power business declined significantly by 12 per cent to 47.9 per cent YoY.

Sequentially, the performance has been very weak wherein the topline declined by 14 per cent and bottomline declined by 66.8 per cent on a QoQ basis. The rise in the interest cost (up by 44 per cent QoQ) also led to pressure on the net profit.

In conclusion, we believe that the June quarter’s performance has remained quite weak for the company mainly on the back of rupee depreciation, higher provision against the Bolivia investment and higher cost of production. Moreover, the environment still seems to be challenging in terms of the high input cost, depreciation of the rupee and a slow pick-up in demand in the coming months. This can dent the performance of the company in the coming quarter.

At its current price of Rs 396 and with trailing EPS of 36.65 the scrip is trading at a P/E multiple of 10.80. The current valuation looks marginally higher given the scenario which is still looking challenging in terms of the input cost and slow pick-up in demand. Therefore we recommend that investors should avoid the scrip in the short to medium term.