Jindal Steel & Power's Q3FY19 results (Outperformer) - All eyes on volume ramp up

Q3FY19 result highlights - Higher steel realisations offset volume decline

Jindal Steel and Power (JSPL) surprised positively with consol PBT of Rs136m v/s our expectation of loss of ~Rs2.2bn. This was due to better-than-expected operating results with consol EBITDA of Rs20.8b, though down 6% qoq but 10% higher than IDFCe. The beat in performance was on account of better than expected  steel realisations in India operations which inturn was due to improved product mix and booking of large material before prices fall in Dec 2018. Due to tax provision, it reported loss of Rs872m against Adj. PAT of Rs237m in Q2FY19.

• JSPL’s standalone reported better than expected EBITDA of Rs14.8b, up 2% qoq (IDFCe: Rs12.9b). Higher derived steel realisation (up 4% qoq to Rs55,330/t) more than offset lower volumes (down 6% qoq to 1.2mt) and higher CoP. As a result, EBITDA/t stood at Rs12,334, up 9% qoq.
• Jindal Shadeed reported EBITDA of Rs2.3bn, down 28% qoq due to lower prices. Sales volumes stood at 0.45mt (vs 0.47mt in Q2FY19).
• Jindal Power (JPL) reported EBITDA of Rs2.7bn, down 10% qoq. Higher volume (up 8% qoq to 2,609m units) was offset by higher coal costs. As a result, EBITDA/unit was down 16% qoq to Rs1.05.

Key Positives: Higher realisations, Jan’19 production run rate at 6mtpa; net debt (excl forex impact) reduced to Rs392bn from Rs416bn at Q2

Key Negatives: Lower volumes, higher operating costs

Impact on financials: Reduce EBITDA by 5.7% and 7.7% in FY19E and FY20E respectively to factor in lower volumes & steel prices and higher coal cost; Introduce FY21 estimates

Valuation & view- Reiterate Outperformer with revised TP of Rs239

JSPL’s focus remains on volume growth, cost control and deleveraging.  The monetisation of Oman plant will help in improving liquidity. We expect margins to moderate in Q4FY19 due to lower steel prices but   higher volume and lower RM cost will offset it in absolute terms, thereby increasing EBITDA on a sequential basis. We expect net debt to reduce to ~Rs371bn by FY20e from Rs392bn at Q3FY19-end. We value steel business at 6.0x EV/EBITDA FY20E. With cut in earnings, we revise our SoTP-based target price to Rs239 (earlier Rs282) wherein steel business contributes Rs160/sh and power contributes Rs79/sh (DCF based). We believe risk-reward is favourable at CMP. Reiterate Outperformer.