Jindal Steel & Power's Q1FY20 results (Outperformer) - Operating efficienciesin play; deleveraging on
Q1FY20 result – Cost reduction offsets lower prices
- Jindal Steel and power (JSPL IN)’s Q1FY20 result highlights the potential of operating efficiencies which can be generated in course of ramping up the steel plant. It reported better-than-expected consol EBITDA of Rs21.7bn (IDFCe: Rs18.4bn), up 18% qoq. This was primarily due to much lower CoP (down ~Rs2,100/t qoq) in steel business in India.
- JSPL’s standalone operations reported EBITDA of Rs16.1bn (vs IDFCe: Rs13.7bn), up 12% qoq. This was due to reduction in CoP by ~Rs2,100/t qoq (~50% of it was due to operating efficiencies while the remaining due to lower raw material cost) offsetting 2% fall in steel realisations (down ~Rs700/t qoq). Steel sales volume, at 1.43mt, though down 3% qoq but up 20% yoy, defying the weakness in the market. As a result, it reported EBITDA/t of Rs11,245/t, up 13% qoq.
- JPL’s EBITDA improved 35% qoq (15% yoy) to Rs3.6bn due to higher volumes (up 14% qoq/8% yoy) to 2,982m units and lower coal costs. EBITDA/unit was Rs1.21 v/s Rs1.02 in Q4FY19
- Reported net-debt down Rs14.6bn qoq to Rs376bn at Q1FY20-end.
Key Positives: Cost reduction, higher volumes, net debt reduction, proposed monetisation of Botswana coal mines
Key Negatives: Lower steel prices, high interest cost despite debt reduction
Impact on financials: Reduce FY20 EBITDA by 3% to factor in lower prices and volumes, partially offset by lower CoP.
Valuation & view- Reiterate OP with unchanged TP of Rs249
The ramping up of Angul plant (sales volume growth of 18% yoy to 6mt in FY20e) helps JSPL in reducing its production cost, thereby offsetting the impact of lower steel prices to a certain extent. Despite factoring in lower steel prices (down 11% yoy in FY20e), we arrive EBITDA/t of Rs10,861/t in steel (Rs11,796 in FY19 and Rs11,245/t in Q1FY20) in FY20e and Rs10,553 in FY21e. This will help in deleveraging its balance sheet (expect net debt to reduce from Rs391bn in FY19 to Rs356bn by FY20e and Rs312bn in FY21e). Its power subsidiary, Jindal Power, can positively surprise in FY20, if it wins a sizeable chunk of power PPAs (L1 bidder for 515MW 3-year power purchase agreement, floated by PFC in April 2019). The stock price could see a trigger from a positive court order (matter is sub-judice) lifting its 12mt iron ore inventory at Sarda mines in Odisha. We rollover our valuation to FY21 earnings. We value JSPL’s steel business at 5.0x FY21E EV/EBITDA at Rs176/sh and the power business at Rs73/sh (DCF-based). Reiterate Outperformer.
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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