Jindal Steel & Power's Q4FY19 results (Outperformer) - On course to strengthen Balance sheet
Q4FY19 result – lower debt; volume growth offset by lower prices
- Jindal Steel and power (JSPL IN) reported lower-than-expected consol EBITDA of Rs18.4bn (IDFCe: Rs21.3bn), down 11% qoq. This was due to lower-than-expected steel realisation and losses in overseas operations.
- JSPL’s standalone operations reported EBITDA of Rs14.34bn (vs IDFCe: Rs15.4bn), down 3% qoq despite 21% qoq higher steel volumes (1.45mt). This was due to fall in steel realisations (down by ~Rs2,800/t). Adverse effect of lower realisations was offset to some extent by lower RM and other operating costs, as benefits of operating leverage kicks in. As a result, it reported EBITDA/t of Rs9,931/t, down 19% qoq.
- During the quarter, JSPL tries to strengthen its balance sheet by impairing loss-making Australian assets, writing off earlier penalties paid on coal (all are non-cash in nature). JSPL has impaired mining rights by Rs12.86bn in its Australian subsidiaries. It also charged off Rs13.6bn paid to government as differential duty on coal.
- Reported net-debt down Rs10.2bn qoq to Rs391bn at Q4FY19-end. During FY19, it reduced net debt by Rs34bn.
Key Positives: Higher volumes, net debt reduction, lower CoP guidance for Angul plant by Rs1,500-2,000/t in FY20 from Q4FY19 levels; strengthening balance sheet; positive outlook on power PPA
Key Negatives: Lower realisations, loss at overseas subsidiaries, suspension of Australia mine
Impact on financials: Reduce EBITDA by 4.8% and 4.3% in FY20E and FY21E respectively to factor in lower EBITDA from Oman business & EBITDA losses from overseas subsidiaries
Valuation & view- Reiterate Outperformer with revised TP of Rs249
JSPL’s FY20 earnings hinges on volume growth (25% yoy to 6.5mt in FY20) and thus deleveraging of balance sheet (expect net debt to reduce from Rs391bn in FY19 to Rs356bn in FY20). 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 value JSPL’s steel business at 6.0x FY20E EV/EBITDA at Rs176/sh and the power business at Rs73/sh (DCF-based). We have factored in FY20E EBITDA/t of Rs10,056/t in steel (Rs11,692 in FY19 and Rs9,931/t in Q4FY19). 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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