Jindal Steel & Power Limited

Powering growth-Buy:

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1.Jindal Steel & Power Limited (JSPL) is rapidly expanding into the power sector through its subsidiary Jindal Power Limited (JPL). The latter currently boasts of 1,000 MW of power generation capacity and has further entered into MoUs to set up a 2,520 MW plant in Chhattisgarh and a 2,640 MW plant in Jharkhand. This expansion into the power segment will not only drive overall growth in the future but will also provide a cushion from the cyclicity of the steel business.

2.Though the Company witnessed a phenomenal growth in revenues on the back of increase in the sales volume and prices during 2008, its iron & steel segment is expected to come under pressure from the sluggish demand and the sharp fall in prices. Consequently, JSPL is increasingly focusing towards value-added products, which should help restrict the fall in the average realisation. The Company also has aggressive expansion plans for the long term, which includes setting up a 12.5 mtpa steel plant in Orissa and an 11 mtpa steel plant in Jharkhand, along with captive power plants.

3.We have valued JSPL by using the Sum-of-the-Parts (SOTP) method. We have used the DCF methodology to value the standalone company,assuming a WACC of 13% and a terminal growth rate of 5%. Additionally, we have valued JPL at two times its estimated book value at the end of Q2'09. Our SOTP-based valuation of Rs. 995 suggests an upside potential of 18.6% from the current market price of Rs. 839.1. Hence, we give a Buy rating on the stock.

Sterlite Industries:

Sterling valuation-Buy:

1.Sterlite Industries Limited (SIL) through its subsidiary, Sterlite Energy Limited (SEL), is aggressively expanding in to the power sector to take advantage of the scarce power supply situation in India. It is setting up a 2,400 MW (4X600 MW) power plant in Jharsuguda, with the first unit expected to be commissioned by the end of 2009. Further, it has won a tender to set up a 1,980 MW (3X660 MW) power plant in Talwandi Sabo,Punjab. In all, SEL has long-term plans to reach 10,000 MW of power generation capacity. Thus, we believe that power will be a major revenue driver for the Company in the future and should cushion it from the cyclicity of the metals business.

3.The Company is primarily involved in the production of zinc, aluminium, and copper. SILs metal business is expected to be under pressure with metal prices plunging more than 50% from their highs. Moreover, with advanced economies entering into a recession and emerging economies slowing down, demand for metals is expected to remain subdued in the coming quarters. Consequently, we do not expect any major recovery in metal prices in the near future.

4.We have valued SEL by using the Sum-of-the-Parts (SOTP) method. We have valued Hindustan Zinc, BALCO, and Sterlite Industries (standalone business) by using the DCF methodology. SEL and Vedanta Aluminium Ltd.Have been valued based on their estimated book values. Based on our valuation, we have arrived at a target price of Rs. 375 for the SIL stock,which provides a potential upside of 42.2% from the current market price.Hence, we give a Buy rating on the stock.