JSPL: Low debt ratio, October-December earnings justify current valuation

Jindal Steel and Power trades at a significant premium to its steel-making peers, and judging by its October-December 2011 quarterly performance, it appears to be in a comfortable position to sustain this gap.

Despite the continuation of challenges posed before the steel sector at large, JSPL’s relatively low leverage and lesser dependence on third parties for inputs, like coking coal and iron ore compared with its peers have helped it through another difficult quarter.

Sales from its steel and power businesses combined rose 37% over the year-ago period toRs 4,358 crore which resulted in a 5% increase in per share profits. Revenue from its steel business, which constitutes two-third of its total revenue rose 36%.

While production of steel products witnessed the largest growth as a segment, realisations for this segment declined reiterating the general sluggishness in demand for steel. However, realisations from the sale of pellets, which almost doubled, helped improve the performance.

In the nine months since March 31, 2011, the company’s consolidated sales have already touched Rs 12,725 crore, which is 3% short of its total sales last year. This indicates that despite the difficulties faced by the steel industry, JSPL appears to be in a comfortable position to post annual sales growth of around 20% at least assuming the current economic environment prevails. However, there are concerns about per-share earnings growth.

Earnings per share could be in the range of Rs 40-43 based on the company’s performance in the first three quarters. Through 2011, the business performance of JSPL relative to its peers was reflected in its share price. The stock fell 29% compared with a 39% drop in the BSE Metal Index.

At Rs 509, JSPL is available at 10.7 times its trailing 12 months earnings per share.

This makes it almost twice as expensive as the government’s Steel Authority of India or JSW Steel which trade around 7.6 times each.

But given its low debt-to-equity ratio of one-time and strong earnings, this gap is justified.