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.
It has also 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.
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. Going forward, we expect this trend to continue in FY10 as the downturn in the global economy intensifies.
Due to the downturn in the global economy and the slowdown in credit growth, infrastructure development activities and consumer spending have been adversely affected.
The construction and automobile sectors, which are major consumers of steel, have witnessed a significant decline in activity, thus leading to a slowdown in the demand for steel.
With the advanced economies going into a recession and the emerging economies slowing down, demand for steel is not expected to improve in the near term.
As a result, we expect steel prices to fall further in the coming months. However, we believe the decline in realizations will be restricted for JSPL as it stays focused on value-added products.
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 Rs921 suggests a potential upside of 18.6% from the current market price of Rs776.9. Given the growth potential of its power business and based on our valuation, we upgrade our rating on the stock from Hold to BUY.