Jindal Steel & Power's Q2FY20 results (Outperformer) - Volume growth in a weak environment; deleveraging on

Q2FY20 result – in-line operating results

• Jindal Steel and Power (JSPL IN) reported in-line consolidated EBITDA of Rs16.4bn, down 24% qoq.
• Jindal Steel and Power (JSPL IN)’s domestic presence and minimum exposure to automotive sector helped JSPL to record 5% yoy growth in sales volumes to 1.33mt in Q2FY20 (compared to volume de-growth of 6-10% yoy of peers). Though, steel realisation could have fallen by Rs2,000-2,5000/t qoq, derived blended realisation (net sales/volume) was flat qoq at Rs49,420/t. This could be due to higher sale of other related products like pig iron, pellets etc.
• As a result, it recorded EBITDA/t of Rs9,437, though down 16% qoq but better than most of domestic peers. It reported Standalone EBITDA of Rs12.6bn (IDFCe: Rs13.0bn), down 22% qoq.
• JPL recorded EBITDA of Rs3.0bn, down 17% qoq (flat yoy) due to lower volumes at 2,271m units (down 24% qoq/6% yoy) which was in turn due to lower availability of coal and expiry of 200MW PPA in Aug-19. EBITDA/unit was Rs1.32 v/s Rs1.21 in Q1FY20.
• Interest cost at Rs10.3bn, down 7% qoq. Reported net-debt down Rs11.2bn qoq to Rs365bn at Q2FY20-end. 

Key Positives: net debt reduction, lower interest cost, volume growth amid weak demand

Key Negatives: fall in steel prices

Impact on financials: No change

Valuation & view- Reiterate OP with unchanged TP of Rs234

Notwithstanding the weak demand environment, JSPL managed to achieve EBITDA/t of Rs10,300+ in H1FY20 on back of favourable product mix, cost efficiencies and operating leverage. JSPL has repaid long-term debt of Rs21.7bn during H1FY20 and additionally, reduced working capital debt by Rs9.8bn. Raising of long-term debt of Rs4.1bn during H1FY20 indicates its ability to raise new debt in case of shortfall in operating cashflows putting to rest all concerns of default. As a result, we continue to expect JSPL to deleverage its balance sheet by Rs81.5bn over FY19-21E to Rs310bn (Rs80/sh). Start of operations at Gare Palma coal block (assuming it received it) could further increase its EBITDA by ~Rs8.5bn (not factored in our estimate). A favourable judgement (from Supreme Court) on lifting ~12mt iron ore inventory from Sarda mines is a key trigger (not factored benefit of ~Rs20/sh). We value the steel business at 5.0x FY20E EV/EBITDA at Rs162/sh and 3,400MW power business at Rs72/sh (DCF basis), giving us a SoTP-based target price of Rs234/sh. We reiterate Outperformer rating on the stock.