Initiating coverage: Jindal Steel and Power (Outperformer) - At the cusp of a turnaround
Jindal Steel and Power (JSPL), is on the verge of a turnaround (after 4 years of losses), and will report profits FY19E onwards on the back of 28% CAGR in steel volumes over FY17-20E, in our view. We believe firm steel prices, improving operating performance in steel business and positive Free Cash Flow (FCF) generation from Jindal Power (JPL – 96.4% subsidiary) and Jindal Shadeed (JSPL’s 100% Middle East subsidiary) will propel consolidated EBITDA to 34% CAGR over FY17-20E. We value the consolidated entity at Rs315/share on sum of the parts (SoTP) basis - while the steel business is valued at Rs218/sh (6.5x FY20E EV/EBITDA), JPL is valued on a DCF basis at Rs97/share. We initiate coverage with an Outperformer rating.
Turnaround in FY19E on low capex and high utilisation: JSPL is at the fag end of its capex cycle. With the successful commissioning of the company’s 2.5mtpa Basic Oxygen Furnace (BOF) at Angul (Odisha), JSPL’s crude steel capacity has risen to 8.6mtpa. Higher volumes from enhanced capacity along with our estimate of firm steel prices and positive FCF will result in superior financial performance. We expect JSPL to report consolidated net profit of Rs8.8bn in FY19E and increase further to Rs20.4bn in FY20E from Rs25.4bn loss in FY17. Monetising assets and raising equity further turn the tide for JSPL.
Deleveraging to start from FY19E onwards: Superior operating performance (34% consolidated EBITDA CAGR over FY17-20E) coupled with minimal capex will help JSPL deleverage from FY19E onwards. We expect consolidated net debt to reduce from Rs 453bn (Rs470/sh) in FY17 to Rs 384bn (Rs399/sh) in FY20E.
Initiate with Outperformer; target price of Rs315: JSPL’s turnaround in FY19E will come on the back of volume growth and lower operating costs in the steel business, in our view. With the company deleveraging from FY19E onwards, we estimate net debt/EBITDA will reduce from 10.4x in FY17 to 3.7x in FY20E. Our SoTP-based target price is derived from Rs218/sh valuation of the company’s steel business (6.5x FY20E EV/EBITDA) and from DCF-based value of Rs97/sh for the power subsidiary (JPL).
Key risks to our view are a delay in ramp up of steel volumes at Angul and adverse court judgements against JSPL in coal block allocation cases and indirect ownership of Sarda mines.
Jindal Steel & Power is engaged in the manufacture of rails, parallel flange beams and columns, plates and coils, angles and columns, rebars, wire rods, fabricated secions, speedfloor, semi-finished products, power, minerals and sponge iron.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.