JSPL: Steeling up on foreign buys

Recent acquisitions may increase interest outgo but will help secure crucial inputs, providing predictability over costs

Jindal Steel and Power (JSPL)’s moves to buy iron ore and coking coal mining assets may result in higher debt as it will also have to spend on exploration and expansion of these, but importantly, those will help secure key raw materials like iron ore and coal that go into steel making. The company already has mines with significant reserves that support most of its existing capacities. The recent acquisitions, including the 52 per cent stake in Gujarat NRE Coking Coal (the Australian subsidiary of Kolkata-based Gujarat NRE Coke) and securing of exploration licences for iron-ore mining in some African countries, would help improve availability and ensure integration.

Though recent reports suggest the coal ministry has set up a probe panel to review the status of JSPL’s two coal blocks in Chhattisgarh, analysts are not worried, as these are still not operational and have lesser reserves. Analysts had earlier assigned a value of Rs 20-30 a share.

Put together, the acquisitions and that too at attractive valuations are long-term positives. This week, JSPL and other steel makers raised prices. Though demand is muted in India, this would prop up margins, given that input costs remain benign.

"We reiterate our accumulate rating on better earnings quality, judicious capital allocation and attractive valuations. In the near term, share buyback (of Rs 1,000 crore) would lend support to the stock,” says Kamlesh Bagmar, who tracks the company at Prabhudas Lilladher.

"If you look at the valuations of these mines such as the one they recently bought (Gujarat NRE Coking Coal), they have bought it at very cheap valuations. Even if one does not read too much into the integration, these investments could give decent returns," says Rakesh Arora who tracks the company at Macquarie Capital Securities.

The company imports 1.5 million tonnes (mt) of coking coal and its requirements in the coming years will only rise, with more capacity going on the stream. A majority stake in Australia-based Gujarat NRE Coking Coal could help to a great extent in terms of securing coal supply and eliminate price risk.

Notably, Gujarat NRE Coking Coal has 650 mt of coal reserves, whereas its output is 1.5 mt. JSPL expects Gujarat NRE Coking Coal to ramp up the output to five mt by FY16; good, considering that part of it will be reflected in JSPL’s consolidated financials. Iron ore mines in Africa have a similar story to tell.

JSPL has 5.5 mt capacity in India and two mt in Oman. It intends to rise its total capacity to 11.5 mt an annum by FY16. Of this, two mt of sponge iron capacity at Angul will be fully commissioned by October. More, the pelletisation facility of 4.5 mt at Barbil will be commissioned by November. In Oman, it is expecting to commission two mt capacity by November. Part of the iron ore needs will be met from the African mines. In this context, the acquisitions are the corner-stone to growth plans.

"One should also look at the acquisition of these iron ore and coal mines from the fact that in India it’s difficult to get mines. There are no fresh allocations," says Arora.

While there have been some fears about funding and JSPL’s relatively high debt, it should not be an issue. “Funding should not be an issue. JSPL makes a quarterly cash profit of Rs 1,000 crore; and this year, the capital expenditure will peak. The company will turn cash positive. So, there is cash and further room for raising funds, specially in the light of debt to equity coming at comfortable levels," says Bagmar.

The net debt-to-equity is 1.1 times and the interest cover is about four times. With the cash flows from the operations expected to rise because of capacity going on stream and commissioning of the three units (600 Mw each) of its 2,400-Mw power plant in the current financial year, expect the debt-equity ratio to inch lower in two years.