Management Speak: Jindal Steel & Power (Outperformer) - Volume ramping up
Our recent visit to JSPL's steel and power plants in India has increased our confidence on the company producing higher steel volumes of 6.4mt (up 50% yoy) in FY19E in India. We believe volume ramp up at Angul will also lower cost of production. Key takeaways of the visit:
Steel volumes ramping up well at Angul: JSPL’s crude steel capacity increased to 5mtpa at its Angul steel plant after it commissioned 2.5mtpa Basic oxygen furnace (BOF) in December 2017. We are impressed by the fast ramp up in BOF as it operated at an average capacity utilization of 43% (produced ~90kt from BOF) in January 2018. The other furnace, New oxygen furnace (NOF), at the Angul plant produced ~40kt of crude steel (total ~130kt at 31% capacity utilization) during this period. JSPL plans to produce ~200kt in February and 300kt by April 2018 from its Angul plant. We estimate the plant to produce ~3.4mt in FY19E and 4.3mt in FY20E. With ramp up in volumes, we expect operating cost/t to reduce by ~Rs2,500/t by FY20E.
Steel plant at Raipur operating at ~90% capacity utilization: JSPL’s 3.6mtpa crude steel capacity operated at ~90% capacity utilization in January producing ~270kt of crude steel. Overall, the company produced ~400kt of crude steel in January 2018 (4.8mtpa run rate), which gives us confidence that it would meet our crude steel volume estimate of 6.4mt (74% CU) in FY19E and 7.3mt (85% CU) in FY20E.
Operates 50% of power plants at Jindal Power (JPL): JSPL’s subsidiary, JPL, having 3,400MW power plant currently operates only 1,700MW (250*2+600*2) .The 1,700MW operates at an average plant load factor (PLF) of 93%. It is awaiting more power purchase agreements (PPA) to start its other power units.
Valuation & view- Reiterate Outperformer with TP of Rs315
Higher spreads, growth in steel volumes (28% CAGR) and lower costs will result in consolidated EBITDA CAGR of 34% over FY17-20E, in our view. With the company deleveraging from FY19E, we estimate net debt/EBITDA will reduce from 10.4x in FY17 to 3.7x in FY20E. Our SoTP-based target price of Rs315 is derived from Rs218/sh valuation for its steel business (6.5x FY20E EV/EBITDA) and from DCF-based value of Rs97/sh for its power subsidiary (JPL). 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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