Jindal Steel & Power - Strong execution in a weak environment - ICICI Securities

Jindal Steel and Power's (JSPL) Q1FY21 earnings were better-than-expectations with adjusted EBITDA at Rs22.6bn against Rs20.1bn expected. While standalone operations (EBITDA surprise of 14% ex gains from insurance) explain majority beat, the trends in topline and RM costs were in-line with expectations. The key surprise was lower other expenses, which do not allow the beat to be extrapolated to peers. Around 80% QoQ increase in pellet sales also helped. Thus, the standalone print made light of what was supposed to be a tough quarter with EBITDA/te nearly flat, as realisations dropped ~11% QoQ. Jindal Power also surprised (22% beat), driven by lower coal costs, while Oman spread contraction QoQ was sharper than expected. In what was expected to be the worst quarter of FY21, JSPL could manage to delever by ~Rs14bn. Oman asset sales will accelerate deleveraging. We maintain BUY with a target price of Rs213 (FY22E P/B of 0.62x).

- The EBITDA surprise is more of a reset; gross margin charted a story which was expected. In a deep cyclical, any material EBITDA/te surprise is a cause for concern from an investment standpoint. However, Q1FY21 surprise can lead to an EBITDA reset if sustainable, because of lower other expenses, and can hopefully pull up the historical EBITDA/te band a bit up. The EBITDA surprise was not driven by gross margin expansion as gross margins declined 21% QoQ. So, the cheat sheet of past 20 years EBITDA/te will not be synchronous with this EBITDA jump. Hence, we will ignore the otherwise 'warning signs' that this beat would have forecasted from our EBITDA/te framework (Chart 1) and will continue to focus on P/BV metric as a reliable indicator of value.

- Deleveraging is progressing better than expected. Q1FY21 witnessed ~Rs14bn of reduction in debt, in what was scheduled to be one of the worst quarters in the recent history. Sales of Jindal Shadeed (JIS) - owner of Oman steel plant will accelerate the deleveraging process. However, even ex-Oman sales, it appears JSPL is enroute to achieve ~Rs40bn of debt reduction over FY21E - thus, attributing ~Rs40/share to equity valuations.

- JPL and operations need to be tended to. Russell Vale and Wongawilli mines in Australia are still closed. Mozambique shows promise in achieving positive EBITDA for the second successive quarter. Yet, there are still inadequate cashflows in overseas operations to cover debt (ex-Oman). Also, it's becoming more and more apparent that the unutilised power assets will be difficult to be brought onstream given the increasing availability of cheap renewable energy. This, along with hydro power investments (can it be sold?), is a big drag for future RoE expectations and limits JSPL's valuation potential. We pivot our future RoE expectations at ~7.5% to justify ~0.62x P/B on FY22E. We maintain BUY with a target price of Rs213/share.

Shares of JINDAL STEEL & POWER LTD. was last trading in BSE at Rs.173.3 as compared to the previous close of Rs. 178.7. The total number of shares traded during the day was 2554194 in over 15469 trades.

The stock hit an intraday high of Rs. 181.25 and intraday low of 168.75. The net turnover during the day was Rs. 452390895.

Source : Equity Bulls

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