The Hindu Business Line : Jindal Steel and Power: Buy

AN investment can be considered in the stock of Jindal Steel and Power. Volume growth from capacity expansion, positive demand outlook, expansion in earnings due to setting up of power business, broader business mix that could weather a cyclical downfall, if any, augur well for the company's growth.

At its current price of Rs 1,450, the stock trades at a multiple of about 7.5 times its trailing FY 05 earnings. JSP is setting up a 1,000-MW power plant through Jindal Power (a wholly owned subsidiary) which is likely to start contributing to its revenues from FY 08.

The company has already entered into agreements to sell 65 per cent of power on contract basis, while the remaining will be sold in the spot market. On the back of robust demand for power and the reforms taking place in the sector, power business is likely to drive the earnings growth in the long term.

In the steel business, while the demand for rails and structurals is likely to remain strong, average realisations over the next few quarters are likely to be lower when compared to the levels in FY 05. Volume growth from its capacity augmentation (in plate mill and rail beam) and higher contribution from value-added long products are likely to buffer earnings from lower realisations.

Sales of iron ore, which have shown a steady increase over the last two years, are likely to continue in the next few years. Prices of iron ore are likely to remain firm in the medium term, lending a stable outlook for its earnings. Its backward integration both in steel and the proposed business is expected to strengthen its position and sustain its cost competitiveness.

Any delays in project implementation and cost over-runs remain principal risks to our recommendation.

Radhika Kamath

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