Event update: Jindal Steel & Power (Outperformer) - Winning of coal mine- Agame changer
Event
Jindal Steel and Power (JSPL) emerges as the highest bidder in the Gare Palma IV/1 coal block auction held on 4th Nov, 2019 at a premium of Rs230/t. The coal block has capacity of 6mtpa.
Details
JSPL can effectively replace 6mt expensive e-auction coal with the currently acquired coal block. The company can sell upto 25% of coal in the open market at a Coal India’s notified price by paying 15% more premium on the bid price. Approx 4.5mt coal can be used in JSPL standalone business while 1.5mt can be sold to its power subsidiary, JPL. Currently, it cost ~Rs3,100/t to acquire coal under e-auction at Raigarh plant as well at JPL while ~Rs3,700/t at Angul plant.
Our calculation suggests that JSPL can save ~Rs1,410/t on 6mt of coal. (see calculation on next page).
JSPL emerged as the highest bidder in the auction of Gare Palma IV/1 coal block concluded today with a bid price of Rs230/t. Vedanta and JSW Steel were the other bidders. The reserve price for auction was set at Rs150/t. The coal block is situated in Mand Raigarh Coal Field in Chhattisgarh and is located at a distance of ~40kms from JSPL’s Raigarh plant.
The mine has capacity of 6mtpa and has extractable reserves of 114mt and coal grade in D-G. The normative authority will now recommend the winner to the Government and thereafter, Government will allocate the coal block to JSPL.
Our view: provides incremental value of ~Rs42/sh for JSPL
We are positively surprised by the winning bid price of Rs230/t. We believe that the coal block will be allotted to JSPL soon. This will help improving its EBITDA by ~Rs8.5bn/year from FY21 onwards. This not only will help in controlling its coal cost but will improve assets utilisation too which is a long term positive. Giving 5x multiple to this saving, this provides value of Rs42/share (vs CMP of Rs137). Our current target price of Rs234 does not include the above benefits, pending final outcome. Reiterate JSPL as our top pick.
Jindal Steel & Power is engaged in the manufacture of rails, parallel flange beams and columns, plates and coils, angles and columns, rebars, wire rods, fabricated secions, speedfloor, semi-finished products, power, minerals and sponge iron.
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