Company update: Jindal Steel & Power (Outperformer) - Deleveraging continues…
Our positive stance on JSPL is based on: (1) Likely ramp up in steel volumes, fuelled by restart of 1.8mtpa DRI plant at Angul, (2) higher equity value from deleveraging through internal cash flows and asset monetisation, and (3) likely triggers from (a) award of new PPAs, improving utilisation at the power plant, (b) court approval to lift iron ore inventory (~12mt) at Sarda mines. We reiterate Outperformer rating on JSPL with a revised target price of Rs254.
Restart of 1.8mtpa DRI plant boosts confidence in volume ramp up: After the successful ramp up of its 3.25mtpa blast furnace at Angul, Odisha, JSPL has restarted its 1.8mtpa DRI plant in Mar 2019 to cater to the increasing requirements of metallics. We see JSPL closing FY19 with a run rate of ~6.5mtpa and see the possibility of the company surpassing its guidance of 6.5mt of crude steel production in FY20E (we estimate 6.8mt in FY20E). We expect JSPL to sell 5.15mt (up 37% yoy) in FY19E (Q4FY19E: 1.48mt, up 23% qoq) and 6.45mt (up 25% yoy) in FY20E.
Deleveraging on, increasing equity value by ~Rs85/sh by FY21E: As at Q3FY19-end, JSPL had a net debt of ~Rs401bn (Rs395/sh), which is expected to deleverage further via internal cash flows and monetisation of overseas assets. While the company expects cash inflows of ~US$200m through monetisation of Oman assets in Apr 2019, we await clarity on details before incorporating it in our estimates. JSPL’s net debt could reduce to Rs362bn (Rs356/sh) by FY20-end and to Rs313bn (Rs309/sh) by FY21-end, given its limited capex.
Reiterate Outperformer with revised TP of Rs254: We remain confident on JSPL’s volume ramp up and deleveraging plans. Its power subsidiary, Jindal Power, can positively surprise in FY20, if it wins a sizeable chunk of power PPAs (Gujarat government has floated tenders for 3,000MW PPA). The stock price could see a trigger from a positive court order (matter is subjudice) lifting its 12mt iron ore inventory at Sarda mines in Odisha. We have cut our FY20E interest cost by ~5% (assuming lower debt), resulting in our SoTP-based target price to increase Rs254 (earlier Rs239). We value JSPL’s steel business at 6.0x FY20E EV/EBITDA at Rs175/sh and the power business at Rs79/sh (DCF-based). We have factored in ~6% lower EBITDA/t in FY20E at Rs10,050/t (Rs10,700 in Q4FY19E and Rs12,334/t in Q3FY19). We believe the risk-reward is still favourable at the CMP.
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.
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