Event update: Jindal Steel & Power (Outperformer) - Time for ‘Power’ boost

Event

Jindal Steel and Power’s (JSPL) subsidiary, Jindal Power (JPL) has been declared as L1 bidder for 515MW three year medium-term power purchase agreement (PPA)

Details

• The tariff discovered under the bid is Rs4.41/unit and PPA is expected to be finalised soon. The auction was conducted by PFC (nodal agency) and NHPC is the aggregator responsible for signing PPAs with successful bidders and power sale agreements (PSA) with willing distribution companies (DISCOMS).
• The bid parameters were: a) fixed charge – same for three years, and b) variable charge – base year will increase by 50% of wholesale price index (WPI) inflation every year.
• JPL will be required to maintain 85% plant availability (PAF) for recovery of fixed charges. The PPA also provides for incentives at 50% of fixed charges for maintaining PLF above 85% and penalty of 25% of fixed charges for PAF below 85%.
• For upto 315MW, the company has coal linkage with Coal India (CIL), while for 200MW, JPL will have to meet its coal requirements from e-auction purchase and imports. On average, we estimate EBITDA/unit of Rs1.5-1.6 for JPL on this 515MW, which would translate into EBITDA of Rs6.7-7.2bn/year.

Our view: JPL could breakeven at PBT if the deal materialises

We expect JPL to sign the PPA and the company expects to supply power Oct 2019 onwards. Currently, ~31% (1,070MW) of JPL’s 3,400MW capacity is tied up under long and medium term PPAs. Of this, 200MW PPA with Tamil Nadu is due for expiry in Aug 2019. If JPL is able to extend the 200MW PPA and also sign the 515MW PPA, the combined PLF would increase to ~50% H2FY20 onwards from ~35% in FY19. We have factored in ~40% PLF for FY20E and ~42% for FY21E. We would wait for JPL to sign the new PPA before factoring the same into our estimates. We estimate JPL’s PBT loss of ~Rs7.3bn for FY19E, which could be wiped out in FY21E if JPL manages to sign the PPA. We value JSPL’s steel business at 6.0x FY20E EV/EBITDA at Rs175/sh and the power business at Rs79/sh (DCF-based); reiterate Outperformer rating with a target price of Rs254.