Jindal Steel and Power: Waiting for a single positive spark

With Jindal Steel and Power Limited trading at its lowest valuations in last decade, positive news from any of its business segments can be a booster for the stock of the company. Deferment of the steel project by a year and regulatory issues faced by the power division has led caused the stock to trade at a discount.

In the steel segment, delays in the commencement of the Angul project have led to an increase in the cost of the project. The company expects the project to start by September 2013. Sourcing of iron ore at low cost (as was done erstwhile) has been difficult for the company since the iron ore mining sector has come under the government's scanner. Another booster for the company will be the signing of Utkal coal mine lease by the district government.

Falling merchant power rates has hurt the company's profitability as nearly 90% of the production was sold in the spot market. Merchant tariffs have fallen from an average of Rs 5.5/ kwh to Rs 3.5 per kwh. Even the issue of regulator capping the margins of power companies has led to a substantial discounting in the valuations of the company. With power rates expected to improve over the coming months and the uncertainty over the coal blocks getting clarity, margins of the power division is expected to improve.

The share price of the company has seen a fall of 10% in last one year underperforming the broader index, Sensex, which grew by 25%. With high backward integration, strong growth volumes from its new plants and improving realisations, the cheaply valued steel player looks attractive.