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MOSL: JINDAL STEEL & POWER (Buy)-Order on Sarda mines deferred

Jindal Steel & Power: Order on Sarda mines deferred

(JSP IN, Mkt Cap USD2.1b, CMP INR150, TP INR175, 17% Upside, Buy)

 

The Supreme Court (SC) has deferred its verdict on JSP’s case related to the offtake of iron ore from the Sarda mines. As a backdrop, we note that operations at the Sarda mines have been shut since 2014. JSP though had made payment for ~12mt of iron ore (mainly fines) to Sarda and the state (royalty/taxes), thereby stating its claim on the related ore. This claim has been challenged by the Odisha government in the SC (Odisha High court had ruled in favor of JSP). Odisha has claimed that transportation of material forms part of mining activity (according to the MMDR Act) and necessitates an environment clearance for the mine. Hearing on this case has been ongoing and a verdict was expected in today’s hearing. The decision though has been deferred with the next hearing now scheduled to the second week of Jan’20, according to our interactions with JSP.

 

Positive verdict may lead to INR22-24b savings

JSP cited it sources iron ore fines at INR1,800-2,000/t (ex-mine). Thus, if the company were allowed to lift the 12mt of fines, it will lead to a benefit of INR22-24b. Moreover, this would come at a time when the domestic iron ore market may get disrupted upon expiry of iron ore leases in Mar’20. Our FY21 volume estimates (~6mt) imply annual iron ore requirement of ~9.6mt. JSP sources ~3mt from its captive mines and the balance (~7mt) from various merchant mines. Thus, availability of this 12mt would provide significant cushion against any possible disruption (accounting for 18-20 months of sourcing from merchant mines).

 

Maintain Buy on FCF generation as volumes ramp up

In recent times, JSPL’s stock has re-rated (up ~55% over the past two months) on expectations of (a) benefit of coal block allocation (Gare Palma), (b) possible positive verdict on the Sarda mines case and (c) a recovery in steel prices. Domestic and global steel prices have shown signs of recovery over the past two months which is a positive. We do not build in any benefit from offtake of iron ore from the Sarda mines as the final verdict is still awaited. Favorable verdict for the same would drive an upside to our numbers. We note that the stock may remain volatile over the near term on news flow related to the same. We continue liking JSP as major capex is now behind and FCF generation should continue along with ramp-up in volumes. Re-iterate Buy with an SOTP-based target price of INR175.