Coal block allocation, higher margins may cut costs to drive JSPL growth

Jindal Steel and Power (JSPL) outperformed its peers on the bourses, gaining over 46 per cent since its lows in September. The gains come at a time when the operating environment remains challenging. Steel players are witnessing demand pressure, which is impacting realisations and in turn profitability. 

JSPL, however, continues to stand out as expansions at its Angul plant are driving volumes, helping it gain economies of scale and higher margins.

The quarter gone by saw the company report volume growth of 3.9 per cent year-on-year, even as domestic operations of other steel majors — JSW Steel, SAIL, and Tata Steel — saw a decline in volumes. 

Despite pressure on steel realisations, JSPL reported less decline in per tonne profitability (down 16.3 per cent year-on-year). 

In comparison, Tata Steel, SAIL, and JSW Steel saw per tonne profitability slip 40-80 per cent year-on-year. Analysts say that JSPL’s higher proportion of value-added products arrested the decline in per tonne profitability.

In addition, the company has emerged as the top bidder for Gare Palma IV/1 coal blocks in Chhattisgarh. Analysts feel that being the previous allottee of the mine, JSPL would be familiar with its geology and coal grade. 

This will help it ramp up the mines faster while keeping costs to a minimum. Further at the full-mine capacity of about 6 million tonne per annum, analysts at Edelweiss Research see a reduction in coal procurement cost of at least Rs 500 crore per year, aiding margins. 

This, coupled with ongoing volume ramp-up, could prove to be a double bonanza for JSPL. 

 Coal security will also be beneficial for the power segment of the company as JSPL can be sure of costs while signing any power purchase agreement. 

 Meanwhile, with better profitability and cash flows, analysts remain positive on the company’s ability to repay its debt. 

Analysts at Prabhudas Lilladher Research say that JSPL has reduced its debt by 21 per cent over the last three-and-a-half years on the back of lean capex, improved earnings and a strong control on working capital. 

They see a 10 per cent debt reduction over the next couple of years without factoring in benefits from new PPAs and recently won Garepalma IV/1 coal block. 

It is not surprising then that most analysts maintain a positive view on the stock.