Improvement in Q1 raises hope for JSPL

Expected turnaround in power business to boost prospects further

Jindal Steel & Power (JSPL)’s performance in the June quarter showed a sequential improvement, which, if sustained, could provide trigger for the stock. While the steel segment showed significant recovery, the power business, too, showed some sequential improvement. Its operating profit of Rs 984 crore (Rs 888 crore in the March quarter) was more than sufficient to meet finance costs of Rs 852 crore (Rs 859 crore).

Notably, the steel business did well with realisations getting a boost from the implementation of Minimum Import Price by the government in February, despite domestic steel production declining due to maintenance shutdown in plants at Angul and Raigarh. Realisations at Rs 37,730 a tonne improved six per cent year-on-year (y-o-y) and 19 per cent sequentially. Hence, earnings before interest, taxes, depreciation and amortisation (Ebitda) per tonne crossed the $100-mark for domestic operations. Notably, the Oman business also saw Ebitda surge to $33.5 million ($15 million in the fourth quarter of FY16), aided by higher global steel prices and the start of the 1.4 million tonnes per annum rebar mill. These trends are seen sustaining and, thus, most analysts remain positive on JSPL’s steel segments.

The power segment’s profitability hinges on power purchase agreements (PPA) as merchant (open-market/spot) rates remain sluggish. The segment’s Ebitda rose 53 per cent sequentially to Rs 182 crore as off-take under a Kerala PPA started, but on a y-o-y basis, it remained flat. The generation at 2,171 million units increased 16 per cent y-o-y but was eight per cent down sequentially.

JSPL’s 2,8000 Mw capacity operated at 35 per cent due to lack of PPAs. At present, it has tied up for 870 Mw of PPAs, out of which 170 Mw is applicable from October 2017. Nevertheless, it is eyeing new agreements with Uttar Pradesh and Bihar, and the Railways, which are likely to be confirmed in October 2016. If these come through, they can provide a major boost. Analysts at Kotak Institutional Equities say that the power segment’s earnings will improve gradually, but expect meaningful uptick to play out only by the end of FY19. Ravi Uppal, JSPL’s managing director and CEO, though remains optimistic and expects to operate 2,350 Mw capacity by November 2016 and 2,650 Mw by January 2017 as new PPAs get tied up.

Thus, an improvement in the power segment can lead to better cash flows for JSPL. Since JSPL is not planning any fresh expenditure and debt is unlikely to increase, any progress on asset monetisation and lender negotiations will also be positive. This should help the company return to profits at the net level — JSPL reported a net loss of Rs 1,240 crore (half of it due to Rs 626 crore of exceptional items) in Q1.

After the announcement of the results, while analysts at Credit Suisse have given ‘outperform’ ratings with a target price of Rs 110, others such as those at Kotak remain watchful with ratings under review. The stock closed at Rs 85 on Friday, down 1.7 per cent from the previous close.