Sanjay Jain Pavas Pethia Tel:

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1 BSE Sensex S&P CNX 19,407 5,916 Bloomberg JSP IN Equity Shares (m) M.Cap. (INR b)/(usd b) 307.5/ Week Range (INR) 515/313 1,6,12 Rel. Perf. (%) -11/-19/-44 Financials & Valuation (INR b) Y/E March E 2015E Sales EBITDA Adj. PAT Adj. EPS (INR) EPS Gr(%) BV/Sh. (INR) RoE (%) RoCE (%) Payout (%) Valuations P/E (x) P/BV EV/EBITDA (x) Div. Yield (%) QFY13 Results Update Sector: Metals Jindal Steel & Power CMP: INR329 TP: INR305 Sell Consolidated EBITDA down 17% YoY: Jindal Steel & Power's (JSP) consolidated adjusted PAT declined 35% YoY to INR7.6b (4% lower than our estimate) due to higher than expected interest and depreciation. Consolidated EBITDA declined 17% YoY to INR15.9b, in line with our estimate. Standalone volumes higher but margins hit: Standalone steel volumes were strong due to liquidation of inventory, but margins were hit due to lower realizations and higher discounts. We were already factoring realization decline since 2QFY13, in line with industry trends, which JSP finally reported in 4QFY13. EBITDA declined 19% QoQ to INR10.4b, 3% lower than our estimate. Depreciation and interest costs were higher due to commercial production from plate mill at Angul. Jindal Power - higher volumes offset lower margins/realizations: Jindal Power reported strong volumes, with 100% PLF, overcoming transmission problems encountered in previous quarters. Realizations were lower at INR3.2/kwh (v/s our estimate of INR3.5/kwh), offsetting the gains on volumes. Oman DRI plant operated at full capacity; coal mining in Mozambique started: Oman DRI plant operated at 100% utilization. Sponge iron production increased 22% YoY to 1.52m tons in FY13. During FY14, the forward integration into 2mtpa steel capacity along with rolling mill will be completed. Mozambique coal mines have started operations and should deliver first shipments in 1QFY14. Steel capacity will increase from 3.5m tons to 7m tons by the end of FY14 due to 2m-ton forward integration at Oman and 1.5m-ton steel capacity at Angul. Stock appears expensive; maintain Sell: We believe JSP will continue to increase leverage due to high capital commitments in low margin projects in India. Further, JSP overseas coal projects capital commitments require significant upfront investments in infrastructure. Cons. net debt is up by INR80b to ~INR250b by FY13 end. Capex and investments in FY13 were ~INR107b. The stock appears expensive at 7.8x FY15E EPS, 1.2x FY15E BV, and at an EV of 6.2x FY15E EBITDA, in view of downside risk to earnings. Sell. Sanjay Jain (SanjayJain@MotilalOswal.com);Tel: Pavas Pethia (Pavas.Pethia@MotilalOswal.com); Tel: Investors are advised to refer through disclosures made at the end of the Research Report.

2 Consolidated EBITDA declined 17% YoY (and 11% QoQ) to INR15.9b JSP consolidated adjusted PAT declined 35% YoY (and 12% QoQ) to INR7.6b (4% lower than our estimate) due to higher than expected interest and depreciation. Consolidated EBITDA declined 17% YoY (and 11% QoQ) to INR15.9b, in line with our estimate. Standalone volumes higher but margins hit; lower steel realization not surprising Standalone steel volumes were strong due to liquidation of inventories, but margins were hit due to lower realizations and higher discounts. We were expecting steel realizations to fall in 2Q and 3Q, but were surprised to see no change. Hence, we are now not surprised that realizations have fallen though there were announcements of price hikes during the quarter. Standalone EBITDA was 3% lower than our estimate and declined 19% QoQ to INR10.4b. Depreciation and interest costs were higher due to commercial production from plate mill at Angul. Though the additional plates from Angul helped volumes, margins in plate conversion are thin. Sales volumes surprised positively, with 23% QoQ growth on account of liquidation of inventories and sales from Angul plate mill. Production of saleable steel increased 2% QoQ to 791k tons, which is in line with expectations. The Angul plate mill is now commercialized, resulting in higher interest and depreciation. Pellet production grew 7% QoQ (declined 3% YoY) to 1,038k tons. Sales of pellets too were 27% higher than our estimate and grew 6% QoQ to 658k tons. Despite 6% higher than estimated revenue, EBITDA was 3% below our estimate and declined 19% QoQ (and 21% YoY) due to pressure on margins, driven by fall in net realization of saleable steel. 2

3 Interest and depreciation were higher than estimates due to commissioning of Angul plate mill. Despite lower tax rate, adjusted PAT declined 8% QoQ (and 39% YoY), and was 17% below our estimate. Jindal Power: In-line performance; higher volumes offset lower margins/ realizations Power generation was robust, with a PLF of 100% (v/s our estimate of 88%), overcoming transmission problems faced in previous quarters. Average power rates were 9% lower than what we had expected at INR3.2/kwh due to higher percentage of exchange sales (30%) at INR2.5/kwh. Cost of power generation increased to INR1.37/kwh due to rising cost of coal mining. Adjusted PAT was up 10% QoQ (down 33% YoY) to INR2.8b (v/s our estimate of INR2.9b). The 2,400MW Tamnar-2 project is progressing well. The boiler of the first unit of 600MW was lit on 30 March This unit is likely to be commissioned by September The second unit of 600MW is likely be commissioned by December The Goda and Dumka projects still remain on paper; no equipment has been ordered so far. Overseas operations: Oman operated at full capacity; coal mining in Mozambique started The Oman DRI plant operated at full capacity in FY13. DRI production increased 22% YoY to 1.52m tons. The plant generated PAT of USD7m in 4Q and USD25m in FY13. During FY14, the forward integration into 2mtpa steel capacity along with rolling mill will be completed. Mozambique coal mines along with beneficiation and washery have started operations but the logistics bottlenecks will continue to hamper shipments. We believe operating cost will remain high, while the semi-soft coking coal from these mines sells at significant discount to prime Australian coal. Further weakness in prices will make this project unattractive. Segmental EBIT of iron and steel subsidiaries increased 23% QoQ to INR1.4b. 3

4 Profitability of new projects to be lower than operating assets; maintain Sell Steel capacity will increase from 3.5mtpa currently to 7mtpa by end of FY14 due to 2mtpa forward integration at Oman and 1.5mtpa steel capacity at Angul. We believe these projects will have much lower EBITDA contribution as compared to currently operating assets. We believe JSP will continue to increase leverage due to high capital commitments in low margin projects in India. Further, JSP is committing capital in overseas coal projects, which require significant upfront investments in infrastructure. Consolidated net debt has increased by INR80b to ~INR250b at the end of FY13. Capex and investments during the year were ~INR107b. The stock appears expensive at 7.8x FY15E EPS, 1.2x FY15E BV, and at an EV of 6.2x FY15E EBITDA, in view of downside risk to earnings. Maintain Sell. Sum-of-the-part valuations Equity Valuation Business Method Valuation Value Rationale Segment multiple (INR m) (INR/sh) Iron & Steel Steel, Power FY15E EV/EBITDA (x) , In-line with sector practice add: CWIP Steel, Power at discount , % discount based on our report dated 7th Jan, 2013 Less: net debt Steel, Power 217, net cons. debt (Except Jindal power) add: Jindal Power Power DCF (to equity) 128, ,000MW Capacity for Tamnar 1 add: Tamnar II Power DCF (to equity) 48, ,400MW capacity for Tamnar 2 SOTP 284, Source: MOSL 4

5 Jindal Steel & Power: an investment profile Company description Jindal Steel and Power (JSP) has 3m tons of operational steel-making capacity at Raigarh. It has one of the best iron ore and coal resources in India, with assets spread over various mineral-rich countries. JSP offers the best insulation from iron ore and coking coal price volatility among Indian steel producers. It is the only power producer in India, with most projects secured for coal from captive mines. It has rich iron ore and coal resources overseas, mainly in Mozambique, South Africa and Indonesia. Key investment arguments JSP has planned to increase its steel capacity 2x in FY14 to 7mtpa. It is augmenting capacity by setting up a 1.6mtpa module at Angul, which would use the coal gasification route. It plans to add two more modules of 1.6mtpa each at Angul and Raigarh, using this technology. It is also planning to add 2mtpa at its existing 1.6mtpa HBI plant in Oman. Jindal Power plans to double its power capacity from 2,434MW to 4,969MW by FY14 through Tamnar II expansion. It is putting up a 4x600MW power plant near its existing Tamnar I 1,000MW power plant. It has linkages for the first two units of 600MW each. New projects are going to deliver lower profitability than existing assets. Key investment risks Unexpected fall in steel prices and delay in project execution would adversely impact earnings. Recent developments JSP has declared final dividend of INR1.6/share for FY13. Valuation and view The stock appears expensive at 7.8x FY15E EPS, 1.2x FY15E BV, and at an EV of 6.2x FY15E EBITDA. Maintain Sell. Sector outlook World steel association (WSA) has recently cut demand growth estimate by 30bp to 2.9% for CY13 because EU27, CIS, NAFTA and Middle East are now expected to grow at slower rate. We continue to believe that global steel demand growth will be even slower, with growth rate of 1.6% for the world, 2% for China and 2.5% for India in CY13. As a result, iron ore and prime coking coal prices will fall to USD93/dmt cfr China for 63.5% Fe fines and USD125/t fob Australia, respectively. We believe that given the subdued outlook on steel demand and prices, margins of Indian steel companies will continue to be under pressure in FY14 and FY15. Comparative valuations JSPL SAIL Tata Steel P/E (x) FY14E FY15E P/BV (x) FY14E FY15E EV/Sales (x) FY14E FY15E EV/EBITDA (x) FY14E FY15E EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) Sell Stock performance (1 year) Shareholding pattern (%) Mar-13 Dec-12 Mar-12 Promoter Domestic Inst Foreign Others

6 Financials and Valuation 6

7 N O T E S 7

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