Jindal Steel & Power - Net debt to remain comfortable as 6mtpa Angul expansion commences - ICICI Securities

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 Q4FY21 (chart 1) stood at Rs193bn, with Rs63bn of net debt reduction in Q4FY21, along with Rs24bn of prepayment. JSPL announced 6mtpa expansion in Angul (from 6mtpa to 12mtpa) for a total capex of Rs 180bn (US$400/te). 2/3rd of the capex is driven towards growth projects while 1/3rd are driven towards counter cyclical margin expansion. Even with the current capex plan, leverage will be extremely comfortable (0.56x ND/EBITDA FY23E); on completion RoE profile can further improve. We maintain HOLD with a revised target of Rs 472 (Rs 458 earlier).

- Standalone results a tad lower than expected. Q4FY21 standalone results were a tad lower than expected, a trend which was accentuated by lower external pellet sales (0.29mnte against 0.4mnte QoQ). The increase in long product prices has been lower than flat product prices, part of which was to be countered by increasing pellet realisations. JSPL standalone performance can further lag that of flat product majors given lesser incline of long product prices, and benefits of low cost iron ore from Sarada mines coming to an end. Sharp increase in iron ore prices may lead to continued disappointment on JSPL margins vis-à-vis integrated peers going forward.

- JPL divestment continue to face queries on the possibility of simplification. Most of the queries were on i) possibility of elimination of RPS and the ICDs from the deal structure ii) the timeliness of the divestment given the recent (Gare Palma IV/1) coal block win and impending improvement of power sector profitability and iii) deep dive into ESG rationale. Management clarified that given separate set of lenders (in JSPL and JPL), modification of the deal structure without increasing upfront equity contribution is difficult. Management also clarified the process of arriving at valuation post extensive bids from various domestic and international players - the bids have been factored into the deal structuring and valuation. Management reiterated i) efforts are being made on divesting overseas coal assets to further improve ESG score and ii) domestic steel manufacturing is where the strategic focus will be.

- 6mtpa Angul expansion will hardly stretch the balance sheet. Even with Rs 180bn expansion plans, we expect to see Rs 70bn as the upper bound of net debt given the currently assumed glide path of prices, and a Net Debt to EBITDA of 0.56x for FY23E. Management will continue to endeavor to make JSPL a zero net-debt company and all future expansions will be guided by an outer cap of 1.5x Net Debt to EBITDA. Capex intensity for Angul appears low due to i) not commensurate downstream expansion ii) brownfield addition with inhouse civil structural, fabrication works. Increase in pellet capacity to 21mtpa (from 9mtpa at present) along with a slurry pipeline will help in further cost support and can significantly increase RoE.

Shares of JINDAL STEEL & POWER LTD. was last trading in BSE at Rs.417.15 as compared to the previous close of Rs. 456.7. The total number of shares traded during the day was 2659967 in over 37876 trades.

The stock hit an intraday high of Rs. 466 and intraday low of 388.6. The net turnover during the day was Rs. 1118129759.

Source : Equity Bulls

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