JSPL: Reduction in net debt expected to drive re-rating, say analysts

Rising volumes, expanded capacities, operating leverage, better realisation and debt reduction to aid earnings

It is no secret that improving demand and realisations are boosting prospects of steel players. But, for Jindal Steel & Power (JSPL), additional benefits are accruing from completed expansions and operating leverage, which — along with efforts on backward integration and debt reduction — are keeping sentiment firm. Not surprising, the stock, which has trebled from April lows, added 5.6 per cent on Tuesday.

For the September quarter (Q2; results declared last Friday), JSPL’s domestic steel volumes surged 23 per cent sequentially and 29 per cent year-on-year (YoY) to 1.93 million tonne (mt). With blended realisations rising by Rs 1,200 sequentially to Rs 42,833 a tonne, soft raw material costs, coupled with operating efficiencies, boosted JSPL’s Ebitda per tonne by about 15 per cent sequentially and 40 per cent YoY to Rs 13,247. This was better than its larger peers, such as JSW Steel, which posted Ebitda per tonne (domestic operations) of Rs 10,136, according to analysts.

While the improvement in operating performance has impressed, improving realisations during the current quarter bode well. Long products used in construction activities are seeing demand improvement and better realisations after the end of the monsoon season. JSPL's portfolio has a significant portion of long products, too. With rising demand, expanded capacities, and significant export orders, Motilal Oswal Securities (MOSL) estimates volume growth to remain strong at 20 per cent.

JSPL is also backward integrating and had won an iron ore mine in February. It is already benefitting from iron ore inventories at its Sarda mines, which have seen some temporary supply disruption. JSPL is confident of securing authorities’ approval for the restart of transportation of iron ore at Sarda mines in the next few days, say analysts. Moreover, the company is eyeing some mines in the ongoing auctions, and Gare Palma IV/1 coal block win, if it happens, will significantly turn around the profitability of JSPL, say analysts.

JSPL is walking its talk on debt reduction, too. Q2 closed with net debt of Rs 28,910 crore, down from Rs 35,919 crore at the end of March 2020. The completion of the first tranche of Oman divestment (by transfer of 48.99 per cent stake) has reduced debt by Rs 5,363 crore, and JSPL expects to complete the divestment in the ongoing quarter. Improving cash flows will aid faster debt reduction. Kotak Institutional Equities expects net debt to reduce to Rs 26,600 crore by the end of FY21 (net debt to Ebitda and net debt/equity at 2.8x and 0.8x, respectively, compared to 4.6x and 1.1x in FY20).

The reduction in net debt is expected to drive re-rating, say analysts at MOSL who have raised their FY21 and FY22 Ebitda estimates by 11 per cent and 5 per cent, respectively.