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MOSL: JINDAL STEEL & POWER (Buy)-Angul progressing well on production

Jindal Steel & Power: Angul progressing well on production; Focus on deleveraging, valuations attractive

(JSP IN, Mkt Cap USD2.4b, CMP INR170, TP INR287, 69% Upside, Buy)

 

We visited Jindal Steel and Power's (JSP) Angul plant. Key highlights:

• Increase in the production run-rate at Angul in 4QFY19 offers visibility of ~22% volume growth for the standalone company in FY20.
• Coal gasification and DRI units, too, have restarted operations. Moreover, the third battery of the 500ktpa coke oven unit is in the advance stage of commercial production, which will substitute coke imports, and thus, reduce costs. FCF generation is improving.
• Management remains focused on monetization of assets in the global venture and deleveraging. The stock trades attractively at a cash P/E of 3.6x. Power business, too, can secure PPAs, with DISCOMs now starting to invite bids. Maintain Buy. 

Key takeaways from our visit:

Coal gasification plant (CGP)

• We note that operations at this plant were halted in Jun’17, immediately after the commissioning of the blast furnace. However, gas production has restarted here in March after ~20 months. Two of the seven units are operating at ~90% utilization.
• Ramp-up at CGP is dependent on DRI production. For running the DRI plant at full capacity, production at 5-6 units of CGP will have to be ramped up.
• JSP is dependent on imported, e-auction and linkage coal for gasification. Such coal may be smoldered (given that it is received 60 days post production) and has higher volatile matter, leading to increased costs. Cost of gas production stands at USD10/mmbtu.
• In contrast, if coal were made available from its erstwhile captive mine (de-allocated in 2014), the receiving time (post production) would be ~12 hours and cost of gas production would have been USD3-4/mmbtu.