Jindal Steel & Power's Q2FY19 results (Outperformer) - Volume led growth

Q2FY19 result highlights- in-line operational results

Jindal Steel and Power (JSPL) reported higher than expected operating results with EBITDA of Rs22.1bn (9% higher than IDFCe), down 3% qoq but up 61% yoy. The beat in performance was primarily on account of absence of forex provisioning at its Australia operation in P&L (now set off in BS) which is non-operational. Consol PBT, at Rs911m, was down 65% qoq on account of higher interest costs (Rs10.86bn, up 11.6% qoq). EBITDA ex-Jindal Power (JPL), stood at Rs19.1bn, down 3% qoq and up 85% yoy. 

• JSPL’s standalone reported in-line EBITDA of Rs14.5bn, down 12% qoq. EBITDA/t stood at Rs11,344, down 18% qoq. The higher volume (up 8% qoq/54% yoy to 1.28mt) was offset by lower derived steel realisation (down 4% qoq to Rs 53,215/t). The benefits of operating leverage also kicks in with other expenditure coming down by ~5% qoq to Rs15,827/t. It reported PBT of Rs1.94bn, down 58% qoq.
• Jindal Shadeed (100% subs at Oman) reported lower than expected EBITDA of Rs3.2bn (IDFCe: Rs4.1bn), down 29% qoq due to lower rebar-scrap spreads and higher maintenance costs.
• Jindal Power (JPL) reported in-line EBITDA of Rs3.0bn, down 4% qoq. The lower volume (down 12% qoq to 2,427m units) due to scarcity of coal was offset by higher realisation (up 7% qoq to Rs3.8/unit). EBITDA/unit improved 9% qoq to Rs1.24.
• JSPL reported exceptional gain of Rs2.55bn on account of early redemption of privately placed debentures (Rs4.72bn) partly offset by write off of project expenses incurred in earlier years (Rs2.17bn).

Key Positives: Higher volume, lower operating cost, deleveraging on

Key Negatives: Lower steel prices and lower power volume at JPL

Impact on financials: Reduce EBITDA by 1% and 2% in FY19E and FY20E respectively to factor in higher costs

Valuation & view- Reiterate Outperformer with revised TP of Rs282

JSPL’s volume led growth remains on track. We expect steel margins to be under pressure in H2FY19 with fall in steel prices. We factor in 37% standalone EBITDA CAGR over FY18-20E to Rs74.0bn (EBITDA/t of Rs10,654 in FY20e). We expect net debt to reduce to ~Rs366bn by FY20e from Rs416bn at Q2FY19-end. We have reduced valuation multiple for Steel business and value at 6.0x EV/EBITDA FY20E (earlier 6.5x). As a result, we revise our SoTP-based target price of Rs282 (earlier Rs343) wherein steel business contributes Rs202/sh (earlier Rs262) and power contributes Rs80/sh (DCF based). Reiterate Outperformer.