Jindal Steel & Power: Sell

The stock of Jindal Steel & Power (JSPL) has fallen almost 50 per cent since June this year. Alleged illegalities by JSPL in iron ore sourcing in Odisha and uncertainty over the fate of its captive coal blocks following the Supreme Court’s cancellation of coal block allocations has weighed on the stock. In September, the Supreme Court cancelled all but 14 coal blocks allocated by the Government between 1993 and 2008, which were found to be illegal.

With the CBI last week filing an FIR against JSPL in the coal block allocation scam, the company’s legal troubles seem to be far from over. This comes close on the heels of a report on illegal mining in Odisha by the Supreme Court appointed Central Empowered Committee in which JSPL finds a mention. The report has raised questions on the allegedly illegal arrangement between JSPL and Sarada Mines for sourcing iron ore.

One recent development, however, offers some hope. With the Government deciding to e-auction the cancelled coal blocks, there is some clarity on these blocks. While JSPL now stands a chance to win back its mines, it remains to be seen how many of these it will be able to secure and at what cost.

More importantly, conviction in the coal scam could prove to be a setback for JSPL as it could then be debarred from participating in the e-auctions. That apart, JSPL will also have to bear a penalty of around ₹2,950 crore for the coal mined by it, as per the Supreme Court order.

While the stock is trading cheap, given the several uncertainties surrounding the company, investors can exit the stock. At ₹165, the stock trades at about six times its 2015-16 estimated earnings and at 0.6 times its consolidated book value, both at the lower end of its five-year historical valuation band.

The recent coal block de-allocation includes all of JSPL’s nine captive blocks, some of which feed its current operations.

JSPL’s 5.15-million tonnes per annum finished steel plants, its captive power plants as also the 2,800-MW power plant run on coal from the now de-allocated blocks.

While the company can continue to source coal from these mines until March 2015, unless it secures back these mines in the auctions, its operations could be affected.

JSPL’s future capacity expansion plans also risk being affected. With the Government leaving open the possibility of allowing private players in commercial mining, coal block auctions at later stages could see stiff competition.

JSPL’s under-siege India operations account for around 85 per cent of the company’s consolidated operations. Moreover, not all of JSPL’s global operations are profitable.

JSPL’s consolidated profit fell by a third to ₹1,910 crore in 2013-14, after a 27 per cent decline in profit in 2012-13. Its margins have been on a consistent decline over the past few years. In the latest June quarter, while the company reported an operational improvement, its net profit declined 15 per cent to ₹418 crore.