Jindal Steel & Power's Q3FY20 results (Outperformer) - Volume growth, costcontrol and deleveraging on

Q3FY20 result highlights – in-line operating results

• Jindal Steel and Power (JSPL IN) reported in-line consolidated EBITDA of Rs18.2bn, up 11% qoq
• JSPL standalone recorded EBITDA of Rs13.5bn, up 8% qoq on the back of ~21% qoq higher volumes (1.61mt) led by restocking demand and higher exports (300,000t+).
• The company benefitted from lower coking coal prices and operating leverage at Angul plant. As a result, lower realisation (down by ~Rs3,500/t) was partly offset and EBITDA/t stood at Rs8,398, down Rs1,039/t qoq.
• JPL recorded EBITDA of Rs2.57bn, down 14% qoq (6% yoy) due to lower volumes at 1,900m units (down 16% qoq/27% yoy) which was due to lower merchant power demand and absence of 200MW PPA with Tamil Nadu Govt. EBITDA/unit was at Rs1.35 vs Rs1.32 in Q2FY20.
• Jindal Shadeed reported EBITDA of Rs2.4bn, up 108% qoq on the back of 55% qoq higher volumes (0.57mt) and improving rebar-scrap spreads. As a result, it reported EBITDA/t of US$58, up 33% qoq.
• Interest cost at Rs10.0bn, down 3% qoq/4% yoy. Reported net-debt was down Rs10.2bn qoq to Rs355bn at Q3FY20-end.  During 9MFY20, it reduced net debt by Rs36.3bn.

Key Positives: volume growth, net debt reduction, lower cost

Key Negatives: fall in steel prices

Impact on financials: lower FY20e EBITDA by 5%, FY21e by 2%

Valuation & view- Reiterate OP with increased TP of Rs289

The increase in steel prices since November 2019 is likely to improve steel profitability by ~23% qoq (expect EBITDA/t of Rs10,300) in Q4FY20 and company may report consol profits. We expect a favourable judgement on lifting of ~12 mt iron ore fines inventory at Sarda mines and as a result factor it in our FY21 numbers (benefits included in other income). The purchase of iron ore from Sarda mines (Sarda can reopen the mines by April 2020) will help in saving on freight cost and increase JSPL’s pellet plant utilisation. The above two development not only insulates JSPL from higher iron ore prices to a major extent in FY21 & FY22 but will help in deleveraging its balance sheet faster. Possibility of entering in commercial coal mining could be the next trigger. Besides factoring in benefits of usage of iron ore inventories, we increase the EV/EBITDA multiple of steel business from 5.0x to 5.5x and arrive at a SoTP-based target price of Rs289 (earlier Rs234). We value the steel business at 5.5x FY21E EV/EBITDA at Rs219/sh and 3,400MW power business at Rs70/sh (DCF basis).