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Jindal Steel & Power - Realisation driven earnings boost fails to improve risk reward - ICICI Securities

Posted On: 2021-01-21 22:26:28 (Time Zone: Arizona, USA)

Jindal Steel & Power (JSPL) stands out in the Indian metals space by virtue of its clear intent to deleverage and execution towards that end. Reported net debt for Q3FY21 (chart 1) stood at Rs256bn, with Rs33bn of net debt reduction in Q3FY21. We feel JSPL may reach its stated net debt target of Rs 150bn before FY23E, possibly by FY22E end. Jindal Power (JPL) has been seeing a gradual increase in power purchase agreements (PPAs) with 38% of the capacity tied up. The key risk in our view is the elevated steel spread in the sector. Q3FY21 EBITDA was ~ Rs 21500/te (chart 2) all time high and set to witness another Rs 5000-6000/te increase in Q4FY21. We maintain REDUCE with a revised target of Rs 279/share (Rs 245/share earlier)

- Steel business EBITDA/te surprised on RM decline; JPL disappointed on one time provision. JSPL reported higher than expected standalone EBITDA of Rs39.1bn against Rs31bn expected (volumes were disclosed earlier and are up 12% YoY being down 3% QoQ). EBITDA /te at Rs 20,900/te (including granshots) was up from Rs 12,615/te QoQ. (Some insurance benefits in Q2 as well). This QoQ EBITDA expansion was helped by Rs 2500/te decline in RM costs. Consolidated EBITDA ex Oman came at Rs42.6bn against Rs34.5bn expected. JPL EBITDA was lower than expected at Rs 3bn despite higher production and higher topline, due to one-time expense and provision of Rs 3.3bn. PLF has moved to 56% in Q3FY21 after stagnating at ~30-35% for long.

- ~15% steel price hikes in Dec 20; low cost iron ore inventory help accelerate the deleveraging. As earnings take support from elevated pricing and spreads, Net Debt can settle at < Rs 100bn for FY23E. Cyclical all-time high spreads and reducing cycle duration doesn't allow us to base our investment thesis on the same.

- PPA profile of JPL - 38% of the capacity tied up. 1,290MW capacity is tied up from 3,400MW power plant in Tamnar. JPL has been declared L-1 bidder under Pilot Scheme-II tender by PFC Consulting. 105MW of the same will be serviced from Tamnar-I (1,000MW) while 315MW will be serviced from Tamnar-II. PPA for 1,125MW will therefore be serviced from Tamnar-II (first 1,200MW).

- Maintain REDUCE. After clocking negative RoE for the past 5 years, the strength of the cycle places JSPL in good stead to report ~ 19% RoE for FY21/22E. FCF generated can lead to Net debt reduce to Rs 90-100bn by FY23E end. The cyclically (all-time) high EBITDA/te, and the shortening cycle duration dictates our REDUCE rating. We have revised our earnings to factor in the series of price hikes seen in steel sector in Dec, '20 (went up by 15%). We also revise up our target price to Rs 279/share (0.63x FY23E P/B) against Rs 245/share earlier at 0.7x FY23E P/B.

Shares of JINDAL STEEL & POWER LTD. was last trading in BSE at Rs.301.1 as compared to the previous close of Rs. 304.95. The total number of shares traded during the day was 696785 in over 7340 trades.

The stock hit an intraday high of Rs. 310.45 and intraday low of 295.55. The net turnover during the day was Rs. 211807902.

Source: Equity Bulls

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