JSPL share price gains 3% after PhillipCapital sees 53% upside on winning coal block


Shares of Jindal Steel and Power rose 2.6 percent intraday on November 5 after global brokerage house PhillipCapital maintained a buy call on the stock on winning a coal block in Chhattisgarh.

The brokerage expects the stock to rally by 53 percent to Rs 210 per share. Jindal Steel and Power was quoting at Rs 138.90, up Rs 1.65, or 1.20 percent, on the BSE at 1102 hours.

JSPL has turned out to be the highest bidder for the Gare Palma IV/1 coal block, with a bid of Rs 230 per tonne.

“Effective coal cost is expected to reduce to Rs 1,800-1,900 per tonne. Total savings can be Rs 400-500 crore, considering linkage coal supply at lower rates. 25 percent of the coal from this mine can be used in Jindal Power (power plant) as well,” PhillipCapital said.

According to the brokerage, statutory approvals may come fast as it’s an operational mine. “The government is yet to accept the bid offer and we expect formal notification within a week,” it said.

The company operated the mine before its de-allocation in 2015. The mine has a production capacity of 6 million tonne per annum and is around 50km from the company’s power plant.

“Clarity over the allocation process and its timelines, though, are still awaited. According to the company, the coal block may be able to start operations in FY21,” said Motilal Oswal, which also has a buy call on the stock with a target price of Rs 162, implying an 18 percent upside from current levels.

JSP has an annual coal requirement of 8.5mt for its steel plant. Of this, 4mtpa is tied up to linkage, while the remaining 4.5mt is procured through e-auction.

Motilal Oswal sees around Rs 600 crore of savings for JSPL from the 6mt of Gare Palma coal, which is higher than PhillipCapital’s expectations.

“The expected cost of coal from Gare Palma (including production, cess, bid price of Rs 230 per tonne) is around Rs 1,500 per tonne. With e-auction prices of around Rs 2,500 per tonne, the 4.5mtpa requirement can be substituted with Gare Palma mine – indicating savings of Rs 1,000 per tonne. We note the remaining 1.5mt of Gare Palma production can be (1) sold in the open market, (2) sold to its power plant in Tamnar or (3) used to produce steel through the CGP-DRI route at Angul. While economics will determine the end-use, the company should realise a minimum around Rs 1,000 per tonne of savings (given it can sell in open market),” it explained.

Prabhudas Lilladher expects the coal block to add Rs 4,600 crore (Rs 46 per share) to the equity value based on EV/EBITDA of 5.5x to the assumed cost saving of Rs 830 crore, much higher than Motilal Oswal.

“Led by key positive change on cost and raw material security, sharp increase in production and strong scope for improvement in Jindal Power, we upgrade the stock to buy with target of Rs 170, implying 24 percent potential upside from current levels,” it said.

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