Company update: Jindal Steel & Power (Outperformer) - Investment theme remains intact
JSPL stands out within our steel universe coverage on projected earnings growth over FY19-21E. The company will continue to post volume growth and deleverage its balance sheet, albeit with a drag, notwithstanding the weak macro environment. JSPL’s earnings could bottom out in Q2FY20 and we estimate a pick-up in volumes Q3FY20 onwards, fuelled by government’s measures to improve liquidity. Meanwhile, accruing benefits from lower raw material (RM) costs should propel earnings Q3FY20 onwards. Also, we rule out term loan payment default risk in FY20. On replacement cost basis, we estimate JSPL’s fair equity value at Rs525/sh (implying enough underutilised assets), making it one of the best plays during times of economic recovery. We see favourable risk-reward and reiterate Outperformer rating on JSPL with an FY21E SoTP target price of Rs234.
- 16% volume CAGR over FY19-21E to 6.8mt: JSPL is poised to achieve volume growth at a CAGR of 16% over FY19-21E to 6.8mt. We expect demand improvement from Q3FY20 onwards led by infra and construction segment. We estimate 13% volume growth in FY20E to 5.75mt.
- Balance sheet deleveraging on; net-debt to reduce by Rs81.1bn (Rs81/sh) over FY19-21E: We do not see any risk of default and believe JSPL will be able to meet its debt obligations through internal cashflows, undrawn credit facilities and asset divestments in FY20 and FY21. We estimate Rs81.1bn debt reduction over FY19-21E to Rs310.2bn.
Reiterate Outperformer with a target price of Rs234: Notwithstanding the economic slowdown in H1FY20, we believe the deleveraging and volume growth story in JSPL will continue. Our estimate of 13% yoy volume growth in FY20E to 5.8mt (cut from 6mt to factor in weak volumes in Q2FY20E), stems from our expectation of improving demand in H2FY20. We have cut our FY20E EBITDA by 6% to factor in lower volumes from the steel and power businesses and lower margin from the Oman business. Even then, we expect 11% EBITDA CAGR over FY19-21E to Rs101.6bn in FY21E. We have factored in income tax rate cut which has led to PAT increase by 9% in FY21E. While the current market price partially factors in risk of default by JSPL, we are of the view the company will be able to meet its debt repayment obligations. A favourable judgement (from Supreme Court) on lifting ~12mt iron ore inventory from Sarda mines is a key near-term trigger (not factored benefit of Rs20-22/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 an SoTP-based revised target price of Rs234/sh (earlier Rs249). We reiterate Outperformer rating on the stock.
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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